Litigating for the Future of Public Pensions

Abstract

It is nearly impossible in the United States today to go long without reading a headline about some aspect of the American public pension crisis or about some State undertaking public pension reform. Public pensions are horribly unfunded, millions of public employees are being forced to make greater contributions to their pensions, retirees are being forced to take benefit cuts, retirement ages and service requirements are being increased, and the list goes on and on. These headlines involve all level of American government, from the recent move to require new federal employees to contribute more to their pensions, to the significant underfunding of state and local public pension funds across the country, to the sad spectacle of the Detroit municipal bankruptcy where the plight of public pensions plays a leading role in that drama. The underfunding of public pension plans has led not only to a number of bankruptcy proceedings, but has also led various states to reduce promised pension payouts to retired plan members or to increase pension contribution requirements for active employees.

As a result, government officials, employees, and retirees are in the midst of litigating for the future of American public pensions. This article focuses on all three levels of American government (federal, state, and local), and reviews the current status of pension litigation at each level. Although pension litigation does not exist as of the writing of this article at the federal level, there has been a large swath of litigation involving state and local pensions over the last few years, with diverse outcomes. After discussing the federal employee pension system in the United States, the article then considers one state’s (Wisconsin) recent experience with pension reform legislation and litigation, and one city’s experience (Detroit) with the municipal bankruptcy process to illustrate emerging trends in public pension litigation that are currently playing out throughout the United States.

The start of a solution lies with harmonizing and standardizing the existing hodge-podge of American public pension law. Although ERISA is far from perfect in regulating private-sector pension plans in the United States, it nevertheless has provided uniform standards for management and administration of occupational retirement plans. In order to replicate that same consistency, this article proposes a hybrid approach which seeks to avoid some of the federalism pitfalls of previous public pension reform proposals. By applying ERISA only to federal pension plans, and by permitting the states to adopt uniform, state-wide pension legislation, public pension plans can take advantage of a reliable and stringent pension framework which will make future underfunding and fiduciary lapses less likely.

Keywords: public pensions, ERISA, contract clause, home rule amendments, Detroit bankruptcy, Wisconsin pension litigation, federal employee pensions