Notes From Babel

Taking the Offensive Against Unfunded Pension Liabilities

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In his piece entitled Dodging the Pension Disaster, Josh Barro claims:

Short of defaulting on these debts, the only way states can eliminate unfunded pension liabilities is to fund them.

Not true.  There are several strategies available:

  • Under Stone v. Mississippi (1879), a state legislature does not have the power to bind the decisions of the people and future legislatures.  A legislative act that threatens the public health and morals thus may be invalidated.  Debt obligations incurred in favor of public unions, then, might be struck down as void ab initio under this rationale.
  • Some state constitutions make retroactive compensation, gifts, and debt obligations without a referendum void ab initioI’ve written at length about those limitations under California’s Constitution.
  • Bankruptcy may be an option (though certainly a disfavored one).
  • Under the logic of a recent California Court of Appeal, pensions are not a “debt.”  Instead, to avoid the effect of the state constitutional limits on incurring debts without a referendum, the court reclassified pension liabilities as “an actuarial estimate projecting the impact of a change in a benefit plan.”  If that rationale is upheld by the state Supreme Court, it suggests the projected “unfunded liability” does not constitute any present legally cognizable right or expectation of pensioners to that amount.  Thus, under the Fifth Amendment’s Takings Clause, state and local governments might be able to unilaterally cash-out pensions, offering “just compensation” in the amount of their present value.  (Credit to Tim Sandefur for this idea.)

Practically speaking, bringing any one or more of the above to bear upon public unions will help to bring them to the bargaining table.  Unions are running up against economic reality, constitutional and legal doctrine, and political will.   The hope is that once they appreciate this, they might be willing to negotiate more practicable retirement and benefits packages than the ones they secured while the economy was booming and voters weren’t looking.

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