Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, January 30, 2012

Article on State Pension Plans

PensionDebra Brubaker Burns (2012 J.D. Candidate, University of California, Hastings College of the Law) recently published her article entitled, Too Big to Fail and Too Big to Pay: States, Their Public-Pension Bills, and the Constitution, 39 Hastings Const. L.Q. 253 (2011). The Introduction to the article is below:

Faced with the most severe budget crises since the Great Depression, many state officials and lawmakers within the United States are desperately trying to pay their bills and balance their budgets. States are anticipating significant budget deficits for the next few years, while tax receipts are slowly recovering from the steep economic downturn in 2008, unemployment rates remain high, and federal stimulus money is running out. Among the states’ mounting stacks of unpaid bills are their aggregate unfunded pension liabilities totaling from an estimated $452 billion to over $2.54 trillion,depending on what accounting discount rate is used.

State pension plans cover twenty-four million active and retired workers, about eight percent of the United States population of 309 million in 2010. When financial markets plunged in 2008, so did the assets in states’ pension systems. Beyond the current pension funding gap, some financial analysts and state officials see pension bills increasing at a rate that is unsustainable in the long run. Assuming no significant changes to the already promised pension benefits to state workers, seven states would have insufficient funds to pay those obligations past the year 2020, even with an optimistic eight-percent return on the assets of state pension systems. According to Finance Professor Joshua D. Rauh, an additional twenty states would run out of funds to cover already accrued pension benefits past 2025.This suggests that substantial contributions will be needed over the next fifteen years to pay for legacy liabilities. Meanwhile, a number of governors are trying to curtail pension and other benefits for new state employees, while financial analysts are recommending increased taxes and more severe budget cutting as necessary to bring states’ long-term obligations such as pensions in line with revenue.

The subject of a state defaulting or repudiating any type of debt has received relatively little attention in the legal literature because until recently, the legal issues concerning state defaults on debt, or in particular defaults on state pension funds, were considered too remote to attract the attention of legal scholars. Yet in recent months, more than a few economists, reporters, academicians,lawyers, and politicians are arguing about legal solutions for pension liabilities that are too big to pay, including possible federal bailouts for states that are deemed “too big to fail.”

This note presents the legal limitations that many states face if they were to default on or repudiate any of their pension obligations, and analyzes two proposed solutions to the states’ expanding pension liabilities. Section I provides general background on state pension programs and their current financial condition. Section II analyze show courts within the last few decades have interpreted states’pension obligations, paying particular attention to legal requirements under the Contract Clauses of the federal and state constitutions. Section III describes a modest proposal for a federal government bailout of state pensions through federally subsidized debt obligation bonds conditioned upon states moving from defined-benefit to defined-contribution pensions. Section IV analyzes the more radical and controversial proposal that Congress institute bankruptcy for states, using similar procedures and restrictions found in the bankruptcy code for municipalities. The conclusion suggests that courts would likely find constitutional the two proposed solutions—conditional pension obligations bonds and bankruptcy for states—although each has legal as well as practical and political issues.


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