Amy Monahan (University of Minnesota Law School) has written a concise, non-technical, informative report on the legal limits on public pension reform. It is available here. Several observations are of note.

First, state law (of contract or property) imposes severe constraints on pension reforms, especially reforms that would retroactively revise present or future employees’ entitlements. State constitutional protections, as well as the Contract Clause of the U.S. Constitution, also limit legislatures’ maneuvering room. Second, and perhaps for that reason (as well as sheer fear of employee unions), pension reforms to date have been decidedly Mickey Mouse (e.g., downward revisions of COLAs).  A few seek to curtail pension obligations for future employees; none deal with legacy costs in any serious fashion. Third, even the most modest pension reform will become the stuff of litigation. And because the legal tests are murky, no one knows what the law will permit until the courts have ruled.

Sensible people will be torn. On the one hand, it seems way harsh, and constitutionally problematic, to abrogate bargained-for and vested entitlements. On the other hand, you’re talking about unfunded obligations of several trillion dollars. And you’re talking about a massive generational transfer: the debts owed to past state and local employees can be paid, if at all, only by imposing the costs on current citizens and taxpayers—by taxing them more, or by withholding the stuff that their taxes are supposed to buy: education, roads, prisons, police protection. Or maybe we can expropriate someone else: bondholders, for example.

In Wall Street parlance, we know the screwers: politicians and public sector unions, who colluded to create all those obligations without regard to long-term costs. The game that’s on now revolves around the question, who’ll be the screwee?