Public pension plans are authorized by the municipal or state government that offers the plan to its public employees. This means there is a wide range of variation about the specifics of public pensions from state to state. With thousands of state and local public plans in the United States, the question of how public pension benefits are legally protected is an interesting one. In this post, we take a look at the different ways pension benefits are protected for public employees and retirees.
There are three main legal approaches to public pension benefits:
- A constitutional approach
- A contract rights approach
- A property rights approach
Seven states include protections for public pension benefits in their state constitutions. The two states with the strongest constitutional protections are Illinois and New York. They protect both past and future accrued benefits. Alaska also protects both past and future benefits, but courts have interpreted this less strongly than in Illinois and New York. Arizona, Hawaii, and Michigan protect past accrued benefits, while Louisiana constitutionally protects accrued past benefits once a public employee is vested in the pension plan.
The majority of states have adopted a contract rights approach toward public pension benefits. Courts in these states view pensions as part of the contract between the government and the public employee when they begin their employment. Therefore, any cuts to pension benefits would likely be interpreted as a violation of this contract and contracts are protected by the federal constitution. As with most legal matters, there is some variation in this approach. State courts have interpreted the contractual protections of pension benefits differently, but in general, it is not possible for states to cut pension benefits for active and retired public employees because that violates the employee’s employment contract.
Connecticut, Maine, New Mexico, Ohio, Wisconsin, and Wyoming have chosen to follow a property rights approach. Courts in these states view pension benefits as the property of the public employee and they cannot be impaired. In practice, the property rights approach has much of the same effect as the contract rights approach.
Indiana and Texas still follow what is called a “gratuity approach.” This approach used to be the most common legal approach to pension benefits before most states moved to either a constitutional, contract, or property rights approach. The gratuity approach views pension benefits as a “free” benefit that the state gives to employees as a part of their employment. This means benefits can be changed at anytime. However, in Indiana, this approach only applies to compulsory or mandatory plans; it does not apply to plans in which employees choose to participate. In Texas, this approach only applies to state-administered pension plans; local plans are protected by the state constitution.
Finally, Minnesota is unique in following a “promissory estoppel theory” regarding public pension benefits. This is “the protection of a promise even where no contract has been explicitly stated.” This works much the same as a contract rights approach in practice.
With thousands of public pension plans across the country, there are many different approaches to benefit levels, employee and employer contributions, and legal protections for accrued benefits. Over the years, states have adopted different legal interpretations for protecting the earned pension benefits of active public employees and retirees. When anti-pension ideologues like Chuck Reed and John Arnold begin attack public pensions, it’s important to know what legal protections exist.
