Monday, December 10, 2012

Defending and Protecting Public Employees’ Pensions against the Legislative Siege


Eric M. Madiar (2012), Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate, states: “Pension benefits are under siege for two reasons: opportunity and political motives (p. 179)… [Legislators] frame [the] larger discussion of whether the law provides states with a means to achieve a particular objective: the unilateral reduction of public pension benefits to avoid painful tax increases, service cuts, or both (p. 180)…

“In Illinois, New York and Arizona… by joining a pension system, public employees obtain absolute ‘vested’ rights in the pension plan, including later benefit increases added during their service. These rights cannot be unilaterally changed by the legislature under any circumstances, but the rights may be modified via legitimate contract principles (an offer, new consideration, and voluntary employee acceptance) (p. 182)…

“The application of the Contract Clause and unmistakability doctrine [or ‘the means to determine the reasonableness of employee reliance interests or the reasonableness of legislative changes’ (p. 184)] to the lawsuits in Colorado, Minnesota, and New Hampshire best illustrate how different state legal protections either facilitate or defeat reform efforts. [These] cases also raise the question whether cutting benefits is a reasonable and necessary means to protect the pension system when, for decades, the state failed properly to fund the system [as in the case of Illinois]…

“[Nonetheless, there are those among us who want to abandon] “the fundamental principle that the rules of the game for contracting parties are not to be changed midstream… This is especially hard to comprehend when public employees have diligently and faithfully paid their contributions while their government employers have failed to pay their required share. Indeed, for decades, states have treated pension systems as a credit card to pay for government services and avoid tax increases or service cuts (p. 194)...

Why? “For lawmakers, it is simply politically more palatable to unilaterally cut pension benefits for public employees and retirees than to raise taxes, cut services, or both… The adoption of the contractual approach by Colorado and New Hampshire, however, make it more likely that pension reform efforts will be found unconstitutional” (p. 194).


(Eric M. Madiar (2012). Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants? ABA Journal of Labor & Employment Law, V. 27, no. 2, 179-194. Retrieved December 7, 2012 from http://www.americanbar.org/content/dam/aba/publishing/aba_journal_labor_employment_law/jlel_v27n2.authcheckdam.pdf


Douglas L. Greenfield and Susan G. Lahne (2012) found that “the vast majority of state courts, relying on either state law or the Contract Clause of the U.S. Constitution, treat pensions provided to public employees as enforceable contracts protected from later unilateral reduction, even if imposed through legislative enactments (p. 2) (See E. Madiar, Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants?, ABA Journal of Labor & Employment Law, V. 27, no. 2 179, 181-185 (2012) (summarizing and categorizing state courts’ varying treatments of public pensions).

In jurisdictions that find that a public employee’s pension contract rights arise… either when the employee first was hired or joined the pension plan, or at some point during the employee’s public service, courts have generally held that, once these rights come into effect, the employee is protected with respect to both past service and future service. 

“In these jurisdictions, thus, public employees are considered to have a contractual right to continuance, throughout their employment, of substantially the same pension terms as in effect when their protected pension rights came into effect, and this protection covers both the pension credited to them when the rights first arose and the additional pension that may be credited to them for future service throughout their public service career (p. 4)…

Most states, therefore, cannot readily reduce their existing pension obligations to their employees in an effort to solve a fiscal crisis, and until recently few even tried (p. 6)…

“It is reasonable to conclude that government employers desire and intend to treat their complex, articulated pension programs in toto [in entirety] as an important aspect of their contractual obligations to each of their employees covered under the program (p. 11-12) (See Madiar, ABA Journal of Labor & Employment Law at 194, n. 111 (citing Lauderdale v. Eugene Water & Elec. Bd., 177 P.3d 13, 19-21 (Or. Ct. App. 2008)).

“Pension plans, unlike other forms of compensation, are designed as complex systems intended to be funded consistently over time and to produce life-long replacement income to be provided over time to employees after retirement. Stability is an important facet of all pension plans, and this is particularly true of government pension programs, which tend to be larger, more long-term, and more complex in terms and scope than private-sector plans (p. 12)…

(A footnote referring to the aforementioned states,] “In this regard, the reduction of the governments’ promises, as part of these employment agreements, to maintain these long-term, complex funding and payment programs, to promises of “deferred compensation,” (see Monahan, 97 Iowa L. Rev. at 1043), understates the actual nature of the states’ substantial undertaking. The state courts have obviously understood that more than merely future compensation payments are involved in the commitment that governments took on as enforceable contractual pension obligations” (p. 12).

“…[I]t is virtually unheard of for a government to declare to new hires that the current government pension program is only a temporary feature, available to the new employees only until the government employer exercises its unilateral and unfettered right to reduce or eliminate the pension benefits at any time in the future (p. 13).

“If the courts had initially mistaken the legislative intent underlying these pension programs, and governments had not intended that they create binding contractual rights, governmental entities surely would instead have taken concrete steps, all these many decades, to correct the courts’ errors and to establish that they intended to have the freedom to revise such arrangements at will, as well as to ensure that newly-hired employees understood the precariousness of the current pension arrangements (p. 13)…

“[A]n implied contract in fact was formed between a government employer and its employees regarding the promised pension benefits and that the implied contract extended to continuing, for the duration of the employee’s employment, the terms of the pension system in effect when the contract was formed (p. 13)…

“[Though] each state has its own standards for determining whether, and to what extent, unilateral legislative modifications of existing contract rights may be made, and this is particularly true with respect to government pension promises to public employees, (p. 14)… (In this regard, it is worth noting the inequity inherent in cutting pensions promised to state and local public servants based on alleged underfunding that was substantially caused, in many cases, by funding “holidays” that government employers awarded themselves) (p. 14).

“… [T]he government sector has not heretofore and need not now mirror the private sector model. Most government functions require large stable workforces that will provide continuity for the foreseeable future. The employees of governments are also taxpayers to the same governments and consumers of the government services that they themselves provide. A government contractually-based pension program, designed to be a permanent feature of the employment relationship and intended to provide definitely determinable replacement income to the government’s long-term workforce in retirement, is both sustainable and desirable on both economic and policy grounds (p. 14-15)...

“[It is true any] attempt to denigrate the validity of decades of judicial precedents about the binding nature of legislation establishing pension commitments to government employees and to motivate state courts to overturn long-settled premises about these commitments would impose its own, unjustifiable costs. The states and their instrumentalities have promised pension benefits to their employees; those employees have relied on those long-standing promises; and as a result the citizens of the states have benefited from the services provided by those employees.

“[In short,] there is no sound public policy reason to conclude that these promises – based on the reasonable expectations of the contracting parties – should not be fully protected by the laws prohibiting or limiting the impairment of contracts” (p. 15-16).


Greenfield, Douglas L., Lahne, Susan G. (2012). How Much Can States Change Existing Retirement Policy? In Defense of State Judicial Decisions Protecting Public Employees’ Pensions. National Council of State Legislatures Legislative Summit, 1-16. Retrieved December 9, 2012 from http://www.ncsl.org/documents/fiscal/DGreenfield_Presentation.pdf

Illinois Pension Reform Is without Legal and Moral Justification:
http://teacherpoetmusicianglenbrown.blogspot.com/2012/05/sb-1673-is-without-legal-and-moral.html

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