Litigating for the Future of
Public Pensions in the United
States
Professor Paul M. Secunda
Marquette University Law School
Overview of American EmployerSponsored 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 EmployerSponsored 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 EmployerSponsored Pension System
Defined Contribution
Plans
Places all investmentrelated 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 Local

Pension 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 liability

Bipartisan 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 Litigation


Madison 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 Litigation

The 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 Litigation

The 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 claim

Case 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 Issue
 To 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 11
Pension claims receive
some priority among
creditors under a
corporate
reorganization.
Chapter 9
Pension 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
1.
2.
3.
Expanding ERISA Coverage to Federal
Pension Plans
No federalism issues.
Provides another path to re-stabilize
these pensions, without needing a
taxpayer bailout.
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!