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Miami

Cypen & Cypen
SPECIAL SUPPLEMENT

for
MAY 18, 2011

Stephen H. Cypen, Esq., Editor

CRS PUBLISHES LEGAL OVERVIEW OF STATE
AND LOCAL PENSION PLANS AND
FISCAL “DISTRESS;” NCPERS RESPONDS

 

On March 31, 2011, Congressional Research Service released State and Local Pension Plans and Fiscal Distress: A Legal Overview. By letter dated May 2, 2011, Hank Kim, Esq., Executive Director & Counsel, responded in behalf of National Conference on Public Employee Retirement Systems. Except for omission of footnotes, the following represent verbatim portions of the two documents. 

A.      CRS Report 

Controversy has arisen over the funded status of many state and local government pension plans.  It has been reported that several of these plans have not fully funded their future obligations and they could face substantial future shortfalls.  While there is considerable debate over the extent and the possible causes of these shortfalls, some estimates have placed the combined unfunded liabilities anywhere from hundreds of billions of dollars to over $3 trillion.  Governments facing investment losses combined with lower revenues are looking at ways to address these shortfalls and protect their fiscal stability.  State governors and legislators in several states have proposed and enacted various modifications to their pension plans. There have been calls for modification of federal, state, and local laws affecting these pension plans and the benefits provided to participants and beneficiaries.  This report provides an overview of how public pension plans are regulated at the federal and state level, discusses selected legal issues that may arise in attempting to remedy or prevent publicpension plan underfunding by modifying public pension plan benefits, and addresses possible federal regulation of state and local public pension plans. 

Public pension plans, also referred to as governmental plans, are generally plans that provide retirement or deferred income to employees of the U.S. government, a state government or its political subdivision, or any agency or instrumentality of those governments. According to a 2010 GAO report, approximately 20 million employees and over 7 million retirees and survivors are covered by state and local government pension plans, typically through a traditional defined-benefit plan, Recently, questions have been raised about the funded status of many public pension plans, as it has been reported that many of these plans are facing substantial future funding shortfalls.  Concerns have been raised that these liabilities could jeopardize the fiscal stability of state and local governments. 

While there is considerable debate over the cause and the extent of public pension plan underfunding, some of the estimates have placed the combined unfunded liabilities anywhere from hundreds of billions of dollars, to over $3 trillion.  In an effort to address these issues, legislators and others have argued to reform public pension plans and the benefits they offer.  In 2010 alone, over 20 states introduced or passed legislation aimed to reduce or otherwise modify pension plan benefits for current or future retirees, and more proposals have been introduced this year.  This report provides an overview of how public pension plans are regulated at the federal and state level. It discusses selected legal issues that may arise in attempting to remedy or prevent public pension plan underfunding, in particular, by changing plan benefits.  This report will also briefly address possible federal regulation of state and local public pension plans.

          B.      NCPERS Response

The National Conference on Public Employee Retirement Systems (NCPERS), has read and reviewed your recent report entitled State and Local Pension Plans and Fiscal Distress: A Legal Overview. NCPERS, as the largest trade association for public sector pension funds, feels compelled to respond to the March 31 report because in our view it does not present a balanced, objective or accurate assessment of the hard fought and constitutionally protected legal rights to retirement security for public employees.  We respectfully request CRS to review our comments, reconsider the conclusions reached, and issue a revised report. 

First, the report's summary begins with a flawed objective and presupposes that the “remedy” to the assumed “fiscal distress” should be the reduction of retirement benefits.  In other words, from the outset, the report starts by asking the wrong questions.  It is thus no surprise that the report’s conclusions do not present a dispassionate analysis. 

According to the summary, the report discusses “selected” legal issues that may arise “in attempting to remedy or prevent public pension plan underfunding by modifying public pension plan benefits”.  By assuming that plans are universally underfunded, the analysis starts from the predetermined outcome that benefits should be reduced for current employees and/or retirees.  The summary and its introduction entirely ignore the abundant examples of well funded plans.  The report further ignores that in the unfortunate instances where plans are underfunded, often the reason for the underfunding is the refusal by thegovernmental plan sponsor to make required contributions into the retirement system. 

Similarly, the introduction of the report paints a bleak picture of a perceived pension funding “distress”.  It does so by giving unwarranted credibility to a biased “financial economics” agenda.  A reader of the report would not fully appreciate that the authorities cited in the report’s introduction have been widely criticized for their agenda driven analysis.  Having begun with the faulty premise that pension liabilities are generally undervalued and pension accounting is problematic, it is thus no surprise that the report assumes that pension benefits need to be reduced notwithstanding the promises made to retirees. The report simply does not imagine, let alone consider, any other means to “remedy or prevent public pension plan underfunding.” 

It should be recognized that the report contains an implicit bias that exemption from ERISA protections for state and governmental retirement plans is a bad thing.  Following the introduction, the report attempts to summarize the ERISA statutory regime.  ERISA, however, is largely irrelevant to the state law protections for public pension benefits. 

In its attempt to survey state law, the report paints a picture of weaker, vaguer protections for public employee pension benefits than is the case.  One of the reasons why the report understates state legal protections is that the report places inappropriate emphasis on federal case law, which generally provides weaker protection than state law.  For example, the report devotes substantial attention to reviewing “substantial impairment” analysis applied under the Contract Clause of the United States Constitution.  In many instances, the federal authorities cited by the report are not even pension cases, but generic federal Contract Clause cases dating back to the 1930’s.  It may be easier for the Congressional Research Service to summarize federal law and widely available U.S. Supreme Court jurisprudence, but the inability or unwillingness to drill down into specific state-by-state protections results in a flawed, or at best incomplete, report. 

The report almost effectively ignores other legal protections for state pension rights, other than anti-impairment of contract protections, including due process, takings, equal protection and estoppel principles.  For example, legal protections for "property rights" is mentioned in passing in only a single footnote, note 31. Accordingly, the report undercounts the number of states that have explicit constitutional protection in the state constitution protecting public pension benefits.  These protections also commonly exist as a matter of state statute or common law. 

The report incorrectly assumes that state statutes that establish retirement plans should explicitly address whether a “contract” is created.  Again, this would make the job of a Congressional researcher easier, but it is not material.  It is more important to recognize the applicable legal protections on a state-by-state basis, which the report fails to do. 

While it is true that private sector retirement plans have a “guarantor” in the PBGC, it is inaccurate to make the blanket statement that public plans have no guarantor. Ultimately, the governmental tax payer is the guarantor. We do note that the report does acknowledge that “states generally have constitutional or statutory provisions that dictate how pension plans are to be funded, protected, managed, or governed.”  It is NCPERS’ view that these protections should be enhanced rather than undermined or minimized, in order to maintain the promise of retirement security for our nation’s public servants. 

Thank you for your time and attention to this very important matter.  NCPERS stands ready to assist CRS with any project related to public pensions.  Please contact me at 202-624-1456 or hank@NCPERS.org if you have any questions.  We look forward to your reply.

In the circumstances, we strongly urge CRS to reconsider its conclusions and issue a revised report. 

 

 

Copyright, 1996-2011, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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