2012] STATUTES AS CONTRACTS? 1031
Despite balanced-budget requirements,1 nearly every state in this
country carries significant off-balance-sheet debt in the form of
underfunded public employee pension liabilities.2 The aggregate amount of
this debt is estimated to be $3 trillion, with some estimates as high as $5
trillion.3 While liabilities vary significantly from state to state, several states
have unfunded liabilities of hundreds of billions of dollars.4 The amount of
money necessary to fully fund state and local employees’ pension benefits is
staggering, particularly at a time when the general economy is struggling
and state revenues are down.5 To put it in perspective, if one assumes an
unfunded liability of $3 trillion, every household in the United States would
need to contribute $27,000 to achieve full funding.6 Thus, in order to fully
fund state pension plans over the next thirty years, financial economists
estimate that contributions to such plans would need to increase by a factor
of 2.5, an amount equal to 14.2% of state revenues.7 And in some states an
even greater percentage of state revenue would be necessary.8
Against this background, it is not surprising that many states are
exploring options that will decrease their retirement plans’ unfunded
1. For an overview of state balanced-budget requirements, see NAT’L CONFERENCE OF
STATE LEGISLATURES, NCSL FISCAL BRIEF: STATE BALANCED BUDGET PROVISIONS (2010),
available at http://www.ncsl.org/documents/fiscal/StateBalancedBudgetProvisions2010.pdf.
2. For an overview of states’ unfunded pension liability, see ALICIA H. MUNNELL ET AL.,
CTR. FOR RET. RESEARCH AT BOS. COLL., THE FUNDING OF STATE AND LOCAL PENSIONS IN 2010
(2011), available at http://crr.bc.edu/images/stories/slp_17_508.pdf.
3. Robert Novy-Marx & Joshua Rauh, The Crisis in Local Government Pensions in the United
States, in GROWING OLD: PAYING FOR RETIREMENT AND INSTITUTIONAL MONEY MANAGEMENT
AFTER THE FINANCIAL CRISIS 47, 48 (Yasuyuki Fuchita et al. eds., 2011).
4. See BRYAN LEONARD, STATE BUDGET SOLUTIONS, JUST HOW BIG ARE PUBLIC PENSION
LIABILITIES? (2011), available at http://www.statebudgetsolutions.org/doclib/20110304_
StatePensionLiabilityMarch4.pdf (summarizing the results of several diff erent estimates of
public pension liabilities, which put California’s unfunded liability anywhere from roughly $60
billion to $398 billion); see also HOWARD BORNSTEIN ET AL., STANFO RD INST. FOR ECON. POLICY
RESEARCH, GOING FOR BROKE: REFORMING CALIFORNIA’S PUBLIC EMPLOYEE PENSION SYSTEMS
(2010), available at http://siepr.stanford.edu/system/files/shared/G oingforBroke_pb.pdf
(estimating California’s unfunded pension liabilities at half a trillion dollars).
5. See, e.g., LUCY DADAY AN & DONALD J. BOYD, NELSON A. ROCKEFELLER INST. OF GOV’T,
NO. 83, TAX REVENUES FINISHED 2010 STRONG; GROWTH CONTINUES IN EARLY 2011 3–5 (2011),
available at http://www.rockinst.org/pdf/government_finance/state_revenue_report/2011-04-
19-SRR_83%20rev.pdf (finding that while state revenues were increasing in 2010, the majority
of states had revenue levels in 2010 that were equal to or lower than revenues in 2007).
6. Novy-Marx & Rauh, supra note 3, at 72.
7. Robert Novy-Marx & Joshua D. Rauh, The Revenue Demands of Public Employee Pension
Promises 1 (Simon School Working Paper No. FR 11-21, June 2011), available at http://www.
8. See id. at 40 tbl.5 (estimating that California, for example, would need to contri bute
17.7% of tax revenue to public employee pension funds over the next thirty years to fully fund
the state’s plans).