Earlier this year, attorneys at Williams & Jensen conducted a comprehensive 50-state review of state constitutional protections for public pension benefits.
By: Joshua Campbell, Williams & Jensen
States provide protections for public pension benefits through layers of regulatory, statutory, and state constitutional means. Of these three, state constitutions are unique because—like their federal counterpart—they are harder to amend and thus serve as a kind of foundational layer of protection. Additionally, these state constitutions matter because state, not federal, law governs public pensions.1
Earlier this year, attorneys at Williams & Jensen conducted a comprehensive 50-state review of state constitutional protections for public pension benefits. This article highlights some of the commonalities seen across states. A few common traits found in state constitutions are the use of contract principles, property principles, and the California Rule.
Originally, states treated pension benefits as gratuities. However, in the 1950s and '60s, states started holding that public pensions created contractual rights. Today, a total of 41 state constitutions incorporate contract principals to varying degrees in protecting public pension benefits. Within this, some states limit contractual protections to only vested rights. Depending on the state, rights may vest upon reaching a certain age or years of service, or some combination thereof.
Louisiana, Michigan, and New York explicitly state in their constitutions that membership in a retirement system is a contractual relationship. However, most states protect benefits as contract rights through a two-step process: the state constitution has a contracts clause similar or identical to the contract clause of the U.S. Constitution, and that state's case law interprets the clause to apply to public pension benefits. Alternatively, in the absence of their own state constitution contract clause, some states' courts simply interpret the U.S. Constitution's contract clause to protect pension benefits.
California was one of the first states to shift from treating pension benefits as gratuities to contractual rights. As such, many other states adopted what became known as the California Rule, which is a specific way of applying contractual rights to protect pension benefits. Under the California Rule, an employee has a contractual right to public pension benefits starting on their first day of employment and there may not be detrimental changes to these benefits unless accompanied by comparable new advantages. State courts often answer this question using the U.S. Supreme Court's three-part contract clause analysis. This analysis asks: (1) does a contractual relationship exist; (2) does a change in the law impair that contractual relationship; and (3) if so, is the impairment substantial? If the answer to all three is affirmative, generally the proposed change to the pension plan is prohibited. However, the new law may still survive contract clause scrutiny if it is justified as reasonable and necessary to serve an important public purpose.
Under this rule, pension systems are still often modified for the purpose of keeping the pension system flexible to permit adjustments in accord with changing conditions and maintaining the integrity of the system. In other words, pensions may be modified to protect actuarial soundness of the fund. Of course, these modifications must still be accompanied by a comparable new advantage to the members. Furthermore, some states clarify that a member's vested rights only extend as far as the work the member performed. Today, 11 states use the California Rule, however some apply their own variation.
Beyond contract principles, some states take a myriad of approaches. Texas's constitution contains a provision specifically protecting against impairment or reduction of accrued pension benefits. Arkansas and Indiana treat noncontributory pension benefits as mere gratuities, although this may not apply to contributary funds. New Jersey and New Mexico treat pension benefits as property rights protected under due process. Meanwhile, Connecticut, Massachusetts, Maine, Vermont, Iowa, and the District of Columbia largely lack any state constitutional protections whatsoever but instead rely on statutes and regulations to protect pension benefits.
Employing a variety of approaches, state constitutions play an important role in providing a foundational safeguard for public pension benefits. These state constitutions, along with each state's statutes and regulations, comprise the legal tapestry that protects pension benefits for public sector workers across the country.
Joshua Campbell is a senior associate at the Washington, D.C., law and lobbying firm Williams & Jensen, where he works with the firm's public pension clients on issues related to plan qualification, investments, and pending legislative proposals at the federal and state level. Prior to joining W&J, Joshua was a judicial law clerk for a circuit court judge in Maryland. Joshua has a B.S. in Business Management and Philosophy from Palm Beach Atlantic University and earned his J.D. from The Catholic University of America. He is a member of the District of Columbia bar.
Endnotes:
1 Recognizing, of course, that state and local governmental retirement plans must meet the qualification requirements of Section 401(a) of the federal Internal Revenue Code.