State and Local Pension Plans and Fiscal Distress: A Legal Overview

Source: Jennifer Staman, Congressional Research Service, R41736, March 31, 2011

Controversy has arisen over the funded status of many state and local government pension plans. It has been reported that several of these plans have not fully funded their future obligations and they could face substantial future shortfalls. While there is considerable debate over the extent and the possible causes of these shortfalls, some estimates have placed the combined unfunded liabilities anywhere from hundreds of billions of dollars to over $3 trillion. Governments facing investment losses combined with lower revenues are looking at ways to address these shortfalls and protect their fiscal stability. State governors and legislators in several states have proposed and enacted various modifications to their pension plans. There have been calls for modification of federal, state, and local laws affecting these pension plans and the benefits provided to participants and beneficiaries. This report provides an overview of how public pension plans are regulated at the federal and state level, discusses selected legal issues that may arise in attempting to remedy or prevent public pension plan underfunding by modifying public pension plan benefits, and addresses possible federal regulation of state and local public pension plans.

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