Litigating for the Future of Public Pensions in the

United StatesProfessor Paul M. Secunda

Marquette University Law School

Overview of American Employer-Sponsored Pension System

ERISA: Employee Retiree Income Security Act of 1974◦Statutory Scheme for Private Sector

Retirement Plans◦Does Not Apply to Government Plans

Overview of American Employer-Sponsored Pension System

A pension plan subject to ERISA “must design, structure, and fund its plan in accordance with federal rules” whereas public pension plans “are largely free to structure their pension plans as they see fit and are not subject to any funding requirements other than what state law might impose.” Amy Monahan & Renita Thrukal (2013)

Overview of American Employer-Sponsored Pension System

Defined Contribution Plans

Places all investment-related risk for retirement on the employee.

Defined Benefit Plans Burden is on the employer to contribute funds

to the plan to ensure the plan is

fully funded.

Public Sector Employees Have MUCH Broader Access to DB

Plans

Federal, State, and LocalPension issues exist at every

level of the United States government.◦Federal – Overview of System and

Current Trends Involving Pension Reform

◦State – Madison Teachers Inc. v. Walker (WI) as an Example of Potential Challenges to Public Pension Reform

◦Local – Detroit Municipal Bankruptcy Case Study and the Partial Results of Chapter 9 Bankruptcy on Municipal Pensions

Federal Pension System:A Complex Structure

Civil Service Retirement Act of 1920 (CSRA)◦Employees Hired Before 1984

Federal Employee’s Retirement System Act of 1986 (FERS)◦Employees Hired After 1984

Thrift Savings Plan◦401(k)-type Plan for FERS Employees

Social Security Benefits◦For only FERS Employees

Federal Pension System:Recent Changes to Employee Contributions

Funding Crisis: Civil Service Retirement and Disability Fund (CSRDF) (joint trust fund for federal defined benefit plans)◦2011 - $761.5 billion unfunded actuarial

liabilityBipartisan Budget Act of 2013

◦ Increased contribution rates of new employees from 0.8% (pre-2013 hires) or 3.1% (2013 hires) to 4.4% of income for new hires.

Will these actions be taken further by Congressional action? Will litigation result?

State Pension LitigationMadison Teachers Inc. v. Walker

Litigation that stems from Acts 10 and 32, 2011 labor and pension reforms in WI

Issue: Can pension reforms require increased pension contributions from Milwaukee laborers?

State Pension Litigation

Three Types of Claims Can Possibly Be Brought By Milwaukee Laborers:1. Violation of Wisconsin Constitutional Home Rule Amendment

II. Violation of the Contract Clause of the Wisconsin Constitution

III. Violation of the Due Process or Takings Clause of the Wisconsin Constitution

State Pension LitigationThe Home Rule Amendment

◦Trial court found that reforms violated the Home Rule Amendment by interfering with Milwaukee’s “local affairs”. The law was declared null and void under this argument.

The Wisconsin Contract Clause◦Court applied a three-part test and

found that the contracts clause barred applying the proposed reforms to City of Milwaukee workers.

State Pension Litigation:Three Part Contracts Clause Analysis

1. Was there a contractual impairment? Yes, the reforms impaired the city

employees contractual rights to have the city pay their pension contributions.

2. Was the impairment substantial? Yes, the impairment was not foreseeable

and therefore substantial.

3. Was the substantial impairment justified?

No, rising costs to the city nor future effects to taxpayers permitted the contractual impairment.

State Pension LitigationThe Wisconsin Due Process Clause

◦The court found that there had not been a deprivation of a property interest without due process of law that was arbitrary or irrational

Why did the plaintiffs in Madison Teachers not bring a takings clause claim?◦Rises and falls on contract clause analysis, so

perhaps not worth brining as separate claimCase has been heard by the WI Supreme

Court, in Nov. 2013, with a decision expected Summer 2014.

Local Pension Litigation:The Detroit Bankruptcy Litigation

Detroit Filed for Bankruptcy in the Summer of 2013, the Largest Municipal Bankruptcy Filing in

American History

Local Pension Litigation

Main IssueTo what degree could the

bankruptcy court cut back on pension benefits owed to employees and retirees given specific provisions in the Michigan State Constitution providing protections against diminishment of pension rights?

Local Pension Litigation:Overview of American Bankruptcy Law

Chapter 11Pension claims

receive some priority among

creditors under a corporate

reorganization.

Chapter 9Pension claims

receive no priority (unsecured claims) under a Chapter 9

municipal bankruptcy code.

Pension Claims That Enjoy a Priority Are Satisfied First Among the Various Creditor Claims and so Detroit City Employees Could Lose

Substantial Pension Benefits

Local Pension Litigation:The Detroit Bankruptcy Litigation - Timeline

Pre-Bankruptcy Filing◦City employees argued that Chapter 9

bankruptcy had to be stopped before it interfered with state constitutional rights.

◦Initially a stay was ordered by MI state trial court, however, the state court of appeals stayed this decision.

◦This allowed the Chapter 9 bankruptcy proceedings to proceed in bankruptcy court.

Local Pension Litigation:The Detroit Bankruptcy Litigation - Timeline

Bankruptcy judge found that he had jurisdiction over all Detroit assets, including pension funds.

Judge concluded that Michigan’s constitution did not prevent pension obligations from being subject to bankruptcy process.

Essentially means pension obligations were contractual in nature and subject to adjustment under the Bankruptcy Code. Controversial given nature of pensions as deferred compensation.

Claims also received no priority under Chapter 9 – treated as unsecured claims.

Local Pension Litigation:The Detroit Bankruptcy – End Results

Many employees and retirees have engaged in informal mediation with the city and have reached agreements.

Awaiting a vote by city employees and retirees on the deal.

Agreements must then be presented to the judge as part of approving the plan of adjustment for the bankruptcy.

Other creditors may still gum up works.

Proposed Reforms:Federal Pension Plans

Expanding ERISA Coverage to Federal Pension Plans

1. No federalism issues.2. Provides another path to re-

stabilize these pensions, without needing a taxpayer bailout.

3. Provides for minimum funding standards for federal pension plans.

Proposed Reforms:State and Local Pension Plans

Construction of a New, More Comprehensive Uniform Public Pension Law for State and Local

Pension Plans

Require states to have one public pension system for the entire state.

◦ This provides economies of scales, more sophisticated investment advisors, etc.

Pension plan must contain ERISA-like provisions.

◦ reporting and disclosure requirements, fiduciary requirements, remedial provisions, etc…

Proposed Reforms:State and Local Pension Plans

Model Law (cont’d) Include specific provisions which

ERISA does not have that specifically focus on the needs of public employees and employers.

◦ Social security issues◦ Tax deduction issues◦ Early retirement for police and

firefighter issues

Conclusions

There is a need to harmonize and standardize the hodge-podge of American public pension law.

Enacting these proposed reforms will provide the necessary uniform standards

which will help prevent public pension underfunding in the future.

Thank you!