Legal constraints on state pension cuts open to debate, research shows

Budget-strapped states are hampered in their efforts to trim pension benefits for current workers by a “morass” of legal provisions that wind up putting most of the burden on new employees, according to an issue brief by the Center for State and Local Government Excellence.

Research conducted for the state and local government center by Alicia H. Munnell and Laura Quinby of the Center for Retirement Research at Boston College found that most states could change future benefits for current workers, although it would require legislative action and court rulings and would be “extremely difficult” in many states.

Only three states — Alaska, Illinois and New York — are limited by their constitutions from reducing benefits for current employees.

“Everyone said that benefits in the public sector couldn't be touched,” Ms. Munnell said in an interview. “I was very surprised that very few states had these provisions in their constitutions.”

Instead, most states rely on a contracts-based approach, which prohibits a state from passing a law that impairs existing public or private contracts. Some states, including California, have sought to reinterpret contract law to allow changes to achieve an important public purpose or to prevent disadvantaging one group of workers, according to the issue brief.

Ms. Munnell said reducing benefits for newly hired or future workers could lead to a two-tiered system that discourages new entrants, while projected savings from future cuts do little to address current budget woes.

“Not being able to touch future benefits for current employees is too rigid a constraint,” she said. “It ties the hands of the sponsors too much. They need that flexibility.”

Ms. Munnell expects to see more states attempt to change pension benefits for current workers, particularly after court decisions about related legislation passed in New Jersey and Rhode Island are issued later this year.