Balkinization   |
Balkinization
Balkinization Symposiums: A Continuing List                                                                E-mail: Jack Balkin: jackbalkin at yahoo.com Bruce Ackerman bruce.ackerman at yale.edu Ian Ayres ian.ayres at yale.edu Corey Brettschneider corey_brettschneider at brown.edu Mary Dudziak mary.l.dudziak at emory.edu Joey Fishkin joey.fishkin at gmail.com Heather Gerken heather.gerken at yale.edu Abbe Gluck abbe.gluck at yale.edu Mark Graber mgraber at law.umaryland.edu Stephen Griffin sgriffin at tulane.edu Jonathan Hafetz jonathan.hafetz at shu.edu Jeremy Kessler jkessler at law.columbia.edu Andrew Koppelman akoppelman at law.northwestern.edu Marty Lederman msl46 at law.georgetown.edu Sanford Levinson slevinson at law.utexas.edu David Luban david.luban at gmail.com Gerard Magliocca gmaglioc at iupui.edu Jason Mazzone mazzonej at illinois.edu Linda McClain lmcclain at bu.edu John Mikhail mikhail at law.georgetown.edu Frank Pasquale pasquale.frank at gmail.com Nate Persily npersily at gmail.com Michael Stokes Paulsen michaelstokespaulsen at gmail.com Deborah Pearlstein dpearlst at yu.edu Rick Pildes rick.pildes at nyu.edu David Pozen dpozen at law.columbia.edu Richard Primus raprimus at umich.edu K. Sabeel Rahmansabeel.rahman at brooklaw.edu Alice Ristroph alice.ristroph at shu.edu Neil Siegel siegel at law.duke.edu David Super david.super at law.georgetown.edu Brian Tamanaha btamanaha at wulaw.wustl.edu Nelson Tebbe nelson.tebbe at brooklaw.edu Mark Tushnet mtushnet at law.harvard.edu Adam Winkler winkler at ucla.edu Compendium of posts on Hobby Lobby and related cases The Anti-Torture Memos: Balkinization Posts on Torture, Interrogation, Detention, War Powers, and OLC The Anti-Torture Memos (arranged by topic) Recent Posts Pension Underfunding is Just a Form of Debt
|
Tuesday, June 06, 2023
Pension Underfunding is Just a Form of Debt
Guest Blogger
For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023). Amy Monahan State and local finance has an enormous impact on the lives
of nearly all Americans, yet is too often ignored in favor of splashier or more
digestible areas of public life. I was therefore delighted to see David
Schleicher’s new book, In a Bad State: Responding to State and Local Budget
Crises, take a sustained look at both the complex world of state and local
finance, and how federal actors might think through whether and how to respond
to state and local fiscal crises. I will begin with a few disclaimers. First, there were so
many interesting issues raised by this book that I had a difficult time
limiting myself to a length appropriate for this online symposium. I have
therefore chosen to highlight just one of many potential discussion points,
which I hope will be of broad interest to readers. Second (and maybe in
contradiction to my first disclaimer regarding broad interest), I am going to
focus my comments on In a Bad State’s treatment of distressed state and
local employee pension plans (referred to as “public pensions” for the sake of simplicity). For the uninitiated, most state and local employees receive
retirement benefits in the form of a traditional pension plan that pays a
participant a specified benefit amount every month beginning at retirement and
continuing for the rest of the participant’s life (or surviving spouse’s life).
These plans play a significant role in retirement security for state and local
workers, particularly for the quarter of state and local employees who do not
participate in federal social security. Ideally, public pension plans are
funded in advance as benefits are accrued, with contributions set aside in a
trust that can be used to pay out benefits once a participant retires. According
to the Boston College Center for Retirement Research, such plans were on average only 76% funded
in 2021. But this average figure obscures significant differences at the
individual plan level. Some plans are fully funded, while others have a funded
ratio of only 20%. In dollars, the total amount of unfunded pension liability
at the state and local level was estimated to be $1.45 trillion in 2022. While the existence of significant unfunded pension
liabilities at the state and local level is by now widely known within policy
circles, In a Bad State powerfully explains why such underfunding is so
common and why it is a particularly problematic type of debt. As Schleicher explains, there are both structural and
political explanations for widespread pension underfunding. Shortchanging
public pensions has been a convenient method for states and cities to avoid
balanced budget requirements because, nonsensically, such shortfalls do not
count as debt for purposes of either balanced budget requirements or state
constitutional debt limits. This sets up an enormous incentive for politicians
who are facing budgetary pressure to avoid tradeoffs by simply putting a little
(or a lot) less than is due into the pension trust year after year. After all,
the effect of that underfunding in most cases won’t be felt for decades. The end result is policymakers in many jurisdictions succumb
to a rather irresistible temptation to systematically underfund these plans.
And while such underfunding is clearly a form of debt, Schleicher points out
that it is fundamentally different from most other municipal debt. Generally,
states and cities borrow money for infrastructure investments. This makes
sense. If you are going to build a bridge, several generations will benefit
from the investment and should therefore share in its costs. Pension debt,
however, violates these norms of intergenerational fairness, by requiring
future generations to pay for yesterday’s services. As Schleicher explains, “[h]eavily
underfunded pensions mean today’s taxpayers are paying for two school systems –
today’s and yesterday’s,” which then crowds out other governmental services. Where a public pension plan has been underfunded for years
or decades, the annual contributions that are required grow larger and larger,
eventually exerting real pressure on state and local budgets. And while
politicians could simply ignore these increased funding needs, underfunding
typically gets to a point where it becomes politically salient, and public
employees begin to exert significant pressure to ensure plans can continue to
pay benefits for the foreseeable future. The result is that this pension debt
that was allowed to accrue year after year often leads to public employees,
bondholders, and taxpayers fighting over limited resources. While the book is focused on offering a framework for
federal policymakers to analyze the tradeoffs involved in federal assistance to
states and municipalities in crisis, it does devote chapters to how such crises
might be prevented in the first place – including some proposals related to
pension underfunding. Of the solutions offered, I think the most powerful is
the proposal to reform state constitutional debt limitations to include pension
underfunding within the definition of debt. I am intrigued by this idea because
it both addresses the political and structural incentives to underfund pensions
and because it results in paying compensation expenses when they are accrued
rather than allowing them to be shifted to future taxpayers. Imagine how
quickly pension funding behavior would change if politicians had to receive
voter approval to make less than the required annual pension contribution. To make this theoretically sound idea a reality, however,
would require addressing many fine details. The state would need to specify in
detail how pension debt is to be calculated for state constitutional purposes.
As states like to do with any number of budgetary matters, it would be easy to
use gimmicks to claim that there was not pension debt even when a plan was
significantly underfunded, for example, by using outrageous investment return
or actuarial assumptions, or flawed funding methods. And the level of detail
necessary to prevent such gimmicks would be highly unusual to commit to a state
constitution. Such details are more naturally found in statute, creating the
possibility that future legislatures may simply change those rules when faced
with difficult fiscal choices. In addition, there would need to be a plan for existing
unfunded pension liabilities. Perhaps existing pension liabilities could be
grandfathered and not considered debt for constitutional purposes. But this
solution fails to address a significant source of potential state and local
distress. Maybe a grace period could be specified that allows a state to pay
down legacy pension debt over a specified number of years, with any amounts
that are not repaid treated as unconstitutional debt. And last but not least, there are the mechanics of
implementing the jurisprudential change even if we could agree on the details.
Presumably an amendment to the state constitution would be required, or a refinement
of existing precedent, neither of which are easy lifts. Another potential avenue to achieve a similar result, which
is not discussed in In a Bad State, is using federal tax law to impose
external discipline on state and local pension funding. While In a Bad State
discusses the role of federal tax policy in municipal bond markets, in my
view it misses an opportunity to discuss how federal tax policy might also be
used to address the proclivity of state policymakers to underfund public
pensions. In the 1970s, in response to highly publicized private employer
pension defaults, Congress imposed funding standards and a federal insurance
program for defined benefit pension plans through the federal tax code and the
Employee Retirement Income Security Act (ERISA), but chose to exempt state and
local plans from such requirements. The exemption was justified in part on the
premise that public plans were not at risk for default because states held the
power to tax and therefore could not run out of money to pay benefits. But this
position was somewhat controversial, and as a compromise Congress included in ERISA
a requirement to study the issue of state and local plans. In the fifty years
since, nothing has changed. The federal government provides a tax exemption to
public pension plans but does not require those plans to satisfy any funding
requirements or standards. Now that we have a better idea of the funding
challenges faced by state and local plans, perhaps the best federal
intervention would be to revisit the funding exemption for public plans. As with the proposed state constitutional change, many
details would need to be addressed in crafting federal legislation. But one
advantage of this approach is that the federal government has already done a
lot of the heavy lifting in developing funding standards for private employer
plans. There are of course still difficult choices that would need to be made –
such as the desirability of including public plans in the federal pension
insurance program – but many technical details are already well known by the
stakeholders involved. While still not easy, the federal path to controlling
state and local pension debt may be a more realistic and more efficient option
than state-level constitutional reforms. And In a Bad State makes clear
why the federal government has a particular interest in avoiding the fiscal
distress that can result from systemic underfunding of state and local pension
plans. In focusing on its treatment of public pensions, I haven’t
been able to highlight the many other contributions of In a Bad State,
which is a great read for anyone interested in state and local finance. While
it bills itself as a framework for analyzing federal intervention, it provides
a wonderful history of state and local fiscal crises and a clear-eyed look at
the challenges and tradeoffs. In a Bad State concludes with what is in
my view the very crux of the matter. One of the primary reasons fiscal crises
are allowed to develop is that “most voters know little and care less about
state politics.” We would all be better off if someone could devise a solution
to that fundamental problem. Amy Monahan is Distinguished McKnight University
Professor and Melvin C. Steen Professor of Law at the University of Minnesota
Law School. Her email is monahan@umn.edu.
|
Books by Balkinization Bloggers Linda C. McClain and Aziza Ahmed, The Routledge Companion to Gender and COVID-19 (Routledge, 2024) David Pozen, The Constitution of the War on Drugs (Oxford University Press, 2024) Jack M. Balkin, Memory and Authority: The Uses of History in Constitutional Interpretation (Yale University Press, 2024) Mark A. Graber, Punish Treason, Reward Loyalty: The Forgotten Goals of Constitutional Reform after the Civil War (University of Kansas Press, 2023) Jack M. Balkin, What Roe v. Wade Should Have Said: The Nation's Top Legal Experts Rewrite America's Most Controversial Decision - Revised Edition (NYU Press, 2023) Andrew Koppelman, Burning Down the House: How Libertarian Philosophy Was Corrupted by Delusion and Greed (St. Martin’s Press, 2022) Gerard N. Magliocca, Washington's Heir: The Life of Justice Bushrod Washington (Oxford University Press, 2022) Joseph Fishkin and William E. Forbath, The Anti-Oligarchy Constitution: Reconstructing the Economic Foundations of American Democracy (Harvard University Press, 2022) Mark Tushnet and Bojan Bugaric, Power to the People: Constitutionalism in the Age of Populism (Oxford University Press 2021). Mark Philip Bradley and Mary L. Dudziak, eds., Making the Forever War: Marilyn B. Young on the Culture and Politics of American Militarism Culture and Politics in the Cold War and Beyond (University of Massachusetts Press, 2021). Jack M. Balkin, What Obergefell v. Hodges Should Have Said: The Nation's Top Legal Experts Rewrite America's Same-Sex Marriage Decision (Yale University Press, 2020) Frank Pasquale, New Laws of Robotics: Defending Human Expertise in the Age of AI (Belknap Press, 2020) Jack M. Balkin, The Cycles of Constitutional Time (Oxford University Press, 2020) Mark Tushnet, Taking Back the Constitution: Activist Judges and the Next Age of American Law (Yale University Press 2020). Andrew Koppelman, Gay Rights vs. Religious Liberty?: The Unnecessary Conflict (Oxford University Press, 2020) Ezekiel J Emanuel and Abbe R. Gluck, The Trillion Dollar Revolution: How the Affordable Care Act Transformed Politics, Law, and Health Care in America (PublicAffairs, 2020) Linda C. McClain, Who's the Bigot?: Learning from Conflicts over Marriage and Civil Rights Law (Oxford University Press, 2020) Sanford Levinson and Jack M. Balkin, Democracy and Dysfunction (University of Chicago Press, 2019) Sanford Levinson, Written in Stone: Public Monuments in Changing Societies (Duke University Press 2018) Mark A. Graber, Sanford Levinson, and Mark Tushnet, eds., Constitutional Democracy in Crisis? (Oxford University Press 2018) Gerard Magliocca, The Heart of the Constitution: How the Bill of Rights became the Bill of Rights (Oxford University Press, 2018) Cynthia Levinson and Sanford Levinson, Fault Lines in the Constitution: The Framers, Their Fights, and the Flaws that Affect Us Today (Peachtree Publishers, 2017) Brian Z. Tamanaha, A Realistic Theory of Law (Cambridge University Press 2017) Sanford Levinson, Nullification and Secession in Modern Constitutional Thought (University Press of Kansas 2016) Sanford Levinson, An Argument Open to All: Reading The Federalist in the 21st Century (Yale University Press 2015) Stephen M. Griffin, Broken Trust: Dysfunctional Government and Constitutional Reform (University Press of Kansas, 2015) Frank Pasquale, The Black Box Society: The Secret Algorithms That Control Money and Information (Harvard University Press, 2015) Bruce Ackerman, We the People, Volume 3: The Civil Rights Revolution (Harvard University Press, 2014) Balkinization Symposium on We the People, Volume 3: The Civil Rights Revolution Joseph Fishkin, Bottlenecks: A New Theory of Equal Opportunity (Oxford University Press, 2014) Mark A. Graber, A New Introduction to American Constitutionalism (Oxford University Press, 2013) John Mikhail, Elements of Moral Cognition: Rawls' Linguistic Analogy and the Cognitive Science of Moral and Legal Judgment (Cambridge University Press, 2013) Gerard N. Magliocca, American Founding Son: John Bingham and the Invention of the Fourteenth Amendment (New York University Press, 2013) Stephen M. Griffin, Long Wars and the Constitution (Harvard University Press, 2013) Andrew Koppelman, The Tough Luck Constitution and the Assault on Health Care Reform (Oxford University Press, 2013) James E. Fleming and Linda C. McClain, Ordered Liberty: Rights, Responsibilities, and Virtues (Harvard University Press, 2013) Balkinization Symposium on Ordered Liberty: Rights, Responsibilities, and Virtues Andrew Koppelman, Defending American Religious Neutrality (Harvard University Press, 2013) Brian Z. Tamanaha, Failing Law Schools (University of Chicago Press, 2012) Sanford Levinson, Framed: America's 51 Constitutions and the Crisis of Governance (Oxford University Press, 2012) Linda C. McClain and Joanna L. Grossman, Gender Equality: Dimensions of Women's Equal Citizenship (Cambridge University Press, 2012) Mary Dudziak, War Time: An Idea, Its History, Its Consequences (Oxford University Press, 2012) Jack M. Balkin, Living Originalism (Harvard University Press, 2011) Jason Mazzone, Copyfraud and Other Abuses of Intellectual Property Law (Stanford University Press, 2011) Richard W. Garnett and Andrew Koppelman, First Amendment Stories, (Foundation Press 2011) Jack M. Balkin, Constitutional Redemption: Political Faith in an Unjust World (Harvard University Press, 2011) Gerard Magliocca, The Tragedy of William Jennings Bryan: Constitutional Law and the Politics of Backlash (Yale University Press, 2011) Bernard Harcourt, The Illusion of Free Markets: Punishment and the Myth of Natural Order (Harvard University Press, 2010) Bruce Ackerman, The Decline and Fall of the American Republic (Harvard University Press, 2010) Balkinization Symposium on The Decline and Fall of the American Republic Ian Ayres. Carrots and Sticks: Unlock the Power of Incentives to Get Things Done (Bantam Books, 2010) Mark Tushnet, Why the Constitution Matters (Yale University Press 2010) Ian Ayres and Barry Nalebuff: Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio (Basic Books, 2010) Jack M. Balkin, The Laws of Change: I Ching and the Philosophy of Life (2d Edition, Sybil Creek Press 2009) Brian Z. Tamanaha, Beyond the Formalist-Realist Divide: The Role of Politics in Judging (Princeton University Press 2009) Andrew Koppelman and Tobias Barrington Wolff, A Right to Discriminate?: How the Case of Boy Scouts of America v. James Dale Warped the Law of Free Association (Yale University Press 2009) Jack M. Balkin and Reva B. Siegel, The Constitution in 2020 (Oxford University Press 2009) Heather K. Gerken, The Democracy Index: Why Our Election System Is Failing and How to Fix It (Princeton University Press 2009) Mary Dudziak, Exporting American Dreams: Thurgood Marshall's African Journey (Oxford University Press 2008) David Luban, Legal Ethics and Human Dignity (Cambridge Univ. Press 2007) Ian Ayres, Super Crunchers: Why Thinking-By-Numbers is the New Way to be Smart (Bantam 2007) Jack M. Balkin, James Grimmelmann, Eddan Katz, Nimrod Kozlovski, Shlomit Wagman and Tal Zarsky, eds., Cybercrime: Digital Cops in a Networked Environment (N.Y.U. Press 2007) Jack M. Balkin and Beth Simone Noveck, The State of Play: Law, Games, and Virtual Worlds (N.Y.U. Press 2006) Andrew Koppelman, Same Sex, Different States: When Same-Sex Marriages Cross State Lines (Yale University Press 2006) Brian Tamanaha, Law as a Means to an End (Cambridge University Press 2006) Sanford Levinson, Our Undemocratic Constitution (Oxford University Press 2006) Mark Graber, Dred Scott and the Problem of Constitutional Evil (Cambridge University Press 2006) Jack M. Balkin, ed., What Roe v. Wade Should Have Said (N.Y.U. Press 2005) Sanford Levinson, ed., Torture: A Collection (Oxford University Press 2004) Balkin.com homepage Bibliography Conlaw.net Cultural Software Writings Opeds The Information Society Project BrownvBoard.com Useful Links Syllabi and Exams |