National debates over judges tend to focus on nominees to the United States Supreme Court and federal courts of appeals. But state court judges, who outnumber federal judges more than 10 to 1, are no less important, as they wield tremendous power to shape law and public policy at the state and local level. Indeed, four state supreme courts in the past six months alone have weighed in on the most pressing political and economic issue on the state level: public pension reform. A fifth decision, from Georgia, is likely this year, and similar cases in other states remain pending.
A recent study by the Pew Charitable Trusts estimates that state-run retirement systems were underfunded by $968 billion in 2013; adding localities, that number exceeds $1 trillion. These massive costs threaten the national economy by hobbling state credit ratings, increasing tax burdens on cash-strapped families, and creating uncertainty among public employees planning for retirement. Too often, the ultimate say on how to respond to this crisis falls in the lap of a handful of lawyers sitting on state appellate courts, many of whom are not directly accountable to the people. By one count, litigation has arisen in more than 40 states in the last eight years.
Is it up to the courts to oversee the public retirement system?
Each time, the script starts roughly the same. An economic emergency prompts a state or local legislature to reform a public pension plan, such as by altering the formula for calculating cost-of-living adjustments (or COLAs). Then, public employee unions sue, arguing that the reform impairs contracts, denies due process, or otherwise violates the federal or state Constitution. From there, the plot in each state varies. COLA adjustments, for example, have been upheld in New Mexico, New Hampshire and Colorado, among other states, while similar reforms have been struck down in Illinois, Arizona and Oregon (in part).
A common thread in these cases is a divide in judicial philosophy over whether courts have the duty and institutional capacity to oversee a complex public retirement system. This is not a new debate. Framers of modern state constitutions learned one of two opposite lessons from the Great Depression and World War II. Some states, like New York and later Illinois, concluded that pension benefits would never be secure if legislatures could raid state coffers in times of economic need, and thus enacted Pension Protection Clauses to empower courts to police changes to public pension plans. Other states, like New Jersey, concluded that legislatures needed maximum flexibility to respond to economic crises as they arose, and thus declined to enshrine pension rights in the state constitution.
Legislatures should be free to experiment with innovative ways to reduce pension cost
Experience has shown the wisdom of the latter approach. Illinois’s Pension Protection Clause has not prevented the state’s funding ratio from plummeting beneath 40% in 2013—the worst in the country. But in Orwellian fashion, the state supreme court recently invoked the Clause to prevent the legislature from implementing modest reforms to shore up this anemic pension system. While New York’s plans are better funded, that has been accomplished courtesy of the nation’s most onerous state and local tax burdens. If anything, the state constitution has prevented the legislature from exploring less heavy-handed solutions.
Legislatures should be free to experiment with innovative ways to reduce pension costs, such as Kansas’s recent enactment of a cash balance plan that incorporates some elements of private-sector 401(k) plans. Courts, by contrast, lack the tools to make such calibrated judgments on how best to ensure a secure retirement for state employees. Nor do courts have the capacity to make continual tradeoffs between pension obligations and other pressing budgetary priorities, such as investment in education. Courts applying Pension Protection or Contract Clauses can only freeze in place a status quo from an earlier era without regard to evolving economic realities.
The trillion-dollar question
How can state legislatures, and ultimately the people, wrest control of public pension reform from the courts? For starters, states should adopt constitutional amendments that clarify the separation of powers between the legislative and judicial branches. These pension reform amendments could help ensure that legislatures make the principal policy decisions affecting the solvency of state pension systems. Courts, meanwhile, could be assigned the more modest role of protecting vested benefits, that is, benefits fully earned by employees prior to the date of an enacted reform.
Governors and voters should also press state judicial nominees to make their position on public pension reform clear. Nominees should explain whether and why courts are better equipped than legislatures to determine the best structure for public pension plans and to prevent the plans from running dry. That, in a nutshell, is the trillion-dollar question.
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