Public Pension Reform and the Takings Clause

Of the many current issues facing state and local governments, perhaps one of the most pressing is public pension reform. According to the U.S. Census Bureau, there are nearly 4,000 public pension systems in the United States, the vast majority (3,742) of which are administered by local governments. As of 2014, these systems had more than 19,000,000 members and more than 9,000,000 beneficiaries receiving periodic payments. But many of these systems are in serious financial trouble, collectively facing unfunded liabilities that, by some estimates, equal approximately $4.7 trillion. In light of these shortfalls, many states have enacted a variety of reform measures to stave off fiscal collapse, and these reforms have drawn numerous legal challenges from public sector employees and retirees. One of the challenges often asserted by these plaintiffs is that changes to public pension plans violate the Takings Clause of the federal constitution or one of its state constitutional counterparts. Despite the frequency with which they are raised, however, these claims seldom receive engaged analysis by the courts, and they have been given a sort of second class treatment by most legal scholars. On one level, this treatment is not all that surprising. Because most public pension plans are deemed to create contract rights in their participants, the Contracts Clause seems the more obvious provision under which to analyze pension plan changes. As a result, takings challenges are often overshadowed by challenges brought under the Contracts Clause, with many courts and commentators viewing them as largely duplicative. Additionally, even when takings challenges are treated independently, the number of troublesome issues and the general messiness of takings doctrine make meaningful analysis difficult. Even so, I contend that the short shrift given to the Takings Clause in this context is unwarranted. As an initial matter, the notion that public pension plans create contracts between government employers and employees is not universally accepted. A handful of states explicitly reject that approach, holding instead that such plans create property interests. In these “property states,” the Contracts Clause clearly provides no protection against plan changes but the Takings Clause might. Far from being duplicative, in these jurisdictions, takings claims form the most viable constitutional challenge to reform. But the Takings Clause has significance even in the majority of states that accept the contract view. As interpreted by the Supreme Court, the Contracts Clause would only prohibit impairments to those plans that were not “reasonable and necessary to serve an important public purpose.” No such justification attends a Takings Clause analysis, however, which focuses on the effects of a regulation rather than its purposes. Indeed, the Supreme Court has held that a focus on the government’s purpose or motive “has no proper place in our takings jurisprudence.” As such, it is possible that a law might be upheld under the Contracts Clause but nevertheless amount to an unconstitutional taking. Again, rather than merely duplicating the Contracts Clause, in the right case, a takings challenge could achieve an entirely different result. And, given that fact, it is all the more important to consider the issues that a takings claim would raise. This Article seeks to fill the gap left open by previous judicial and scholarly treatment and begin a more robust conversation about the role of the Takings Clause in public pension reform litigation. In service of that larger objective, this Article has two primary goals. The first, advanced in Parts I and II, is to make the case for taking the Takings Clause seriously in this context. Because a takings claim depends upon the existence of a cognizable property right, Part I addresses the legal status of public pension benefits. Although a small number of states view such benefits as gratuities, most states regard them as creating either contract or property rights in plan participants. As such, public pension benefits are subject to certain constitutional protections — namely, those afforded by the Contracts Clause, the Due Process Clause, or the Takings Clause. Part II addresses the particular significance of the Takings Clause, distinguishing it from the other two provisions and demonstrating its potential value for plan participants under both the “property view” and the “contract view” of public pensions. The second goal, more modest but equally important, is to consider (although not necessarily resolve) some of the legal issues that any serious evaluation of a takings claim must confront. Part III begins this consideration, focusing on how courts might go about determining whether a particular reform measure effects a taking of property in the first instance. This task requires fitting challenges to public pension reform within the Supreme Court’s analytical framework for regulatory takings, which in turn necessitates a choice about the appropriate test to apply. Assuming that a reform measure is deemed to effect a taking, Part IV turns to the constitutional requirements of “public use” and “just compensation,” with particular emphasis on the thorny questions raised by the latter.