States Pushed By Recession To Revisit Pension Benefits

According to, many state legislators are beginning to challenge whether states can legally reduce pension benefits for current and future retirees. With unfunded liabilities growing and current costs rising, such actions are being discussed and adopted in several states to help rein in costs.

A session on modifying pension benefits was heavily attended by lawmakers at the recent annual meeting of the National Conference of State Legislatures.  In addition, the organization provided a summary of actions taken by states this year to reduce the increasing cost of retirement benefits.  These actions include increasing the amount employees contribute, raising the retirement age, and adjusting benefit formulas.

Colorado, Minnesota and South Dakota already voted earlier this year to limit cost-of-living increases approved for current and future retirees, but these actions are not without controversy.  Retirees in each of these states have filed lawsuits asking judges to restore annual benefit increases.

History is on the employees’ side. State statutes, constitutions and case law consistently define a public pension as a contract between the state and its employees that cannot be impaired. For example, Alaska’s state constitution makes it clear that “membership in employee retirement systems of the state or its political subdivisions shall constitute a contractual relationship. Accrued benefits of these systems may not be diminished or impaired.” Eight other states protect workers in their constitutions. They are Arizona, Hawaii, Illinois, Louisiana, Michigan, New Mexico, New York and Texas.

In states without constitutional guarantees — Colorado, Minnesota and South Dakota fall into this category —  statutes and court cases consider retirement benefits an unbreakable contract between the state and workers. That same protection is in the contract clause of the U.S. Constitution, which says: “No state shall … pass any … law impairing the obligations of contracts.”

Courts have determined that cost-of-living increases, which keep pension income on pace with inflation, are part of a worker’s benefits that cannot be diminished.

The Colorado, Minnesota and South Dakota lawmakers are hoping that the courts will agree that the current financial turmoil facing states imperils public pension systems as never before and calls for a new approach. If legislatures are not permitted to cut retirement costs now, the argument goes, the ability of the public pension systems to pay future benefits will be jeopardized.

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