The Impact of Law on the State Pension Crisis

While some state and municipal pension plans have funds sufficient to meet obligations to retirees without imposing onerous obligations on current and future taxpayers, underfunding of plans in other states has reached crisis proportions, raising the possibility of default on pension obligations, cuts in public services, steep tax increases, or some combination of the three. The substantial differential in pension funding might be attributed to divergent political pressures, different responses to uncertainty about investment returns, or other factors. This article examines the role of law and legal structures in the adequacy of pension funding. Our examination of pension funding law in 10 states – five with the best funded plans and five with the worst funded plans – highlights the role of legal structures in the financial health of state pension plans. First, the timing of the state law commitment to actuarial principles correlates with the current level of plan funding; those states that made pension promises before considering the actuarial implications of those promises continue to face an uphill struggle decades later. Second, state constitutional mandates – if enforced by the state judiciary -- correlate positively with adequate pension funding. Third, pension funding is generally better in states whose statutes provide non-constitutional institutional buffers between pensions and the rough-and tumble of ordinary politics. Fourth, the provision of statutory mechanisms for retirement systems to enforce government obligations to contribution is strongly correlated with the health of state pension plans.