Study Shows Way to Minimize the Pension Problem

Research, Forthcoming Book from UMD Smith Expert Explore US Constitution's Contract Clause and Public Pensions

COLLEGE PARK, Md., July 23, 2025 /PRNewswire/ -- Economic uncertainty, a shrinking workforce and retirees who live longer have strained public pensions in the United States. Many of the approximately 5,000 state and local plans are in jeopardy, with unfunded obligations totaling more than $1 trillion. As governments push to modify pension contracts and shore up troubled retirement systems, the courts have been tasked with resolving the resulting employee lawsuits. That's where expertise from business law professor  T. Leigh Anenson at the University of Maryland's Robert H. Smith School of Business comes in.

"Pensions are in debt paralysis mode now," says Anenson, a business law professor. "Governments are cutting their budgets to keep pensions afloat, so it's a public problem.

Everyone's taxes might go up, and they might receive fewer public services because their states must manage these pensions."

Despite extensive research in economics and finance measuring the massive unfunded liabilities of government pension funds, the legal aspects have remained unexplored. Anenson has been blazing a trail by investigating the complex relationship between contract law and government pensions and offering a framework for pension reform.

Her forthcoming book with Cambridge University Press, "The Public Pension Crisis: Contractual Rights and Constitutional Limits," comprises more than a decade of her scholarly research.  That includes her latest research, "Public Pension Contract Minimalism" in American Business Law Journal, that critically examines the U.S. Constitution's Contract Clause and similar state constitutional contract clauses' role in pension reform.

To deal with struggling pensions, states began changing their pension laws, Anenson says. "They did different types of things — cut benefits, eliminated cost of living allowances, changed the formula to reduce benefits, made employees contribute more to shore up these failing plans."

But employees challenged these changes under the Contract Clause of the U.S. Constitution and individual state constitution contract clauses, contending that those originally promised pension benefits cannot change. Anenson has studied this surge in litigation over the last 10 years, including several recent landmark state supreme court decisions.

"My motivation in writing the book and this article was to furnish an analytical lens for comprehending these contemporary constitutional controversies. I want to provide clarity and a way forward by mapping the law and offering recommendations for courts to do better in construing constitutional Contract Clauses and pension statutes that makes sense to both employees and employers," she says.

In the paper, Anenson and her co-author Hannah Weiser of Bentley University, provide a timely response to the pressing problem of public pension reform. They offer a unified contract theory with practical implications — contract minimalism, which concentrates on the duration of pension contracts. They say public and private pension law should be treated the same way, which often isn't the case now.

Anenson suggests that the public sector, like the private sector, should consider the pensions of at-will workers as a daily contract, which means employees get a proportionate share of benefits for the time they work, with certain safeguards.

Right now, there is no consistency in public pension benefits, she says. Some states mandate that pension benefits become a contract on your first day on the job. Others say it's not a contract until you retire. Some provide contract protection in the middle of an employee's career — when you vest under the terms of your pension, usually five or seven years. Some states will only protect accrued benefits, meaning benefits an employee has already worked for. "Governments can change the pension, but employees keep what they've worked for to date," she says.

A lot of states that are in trouble protect pension benefits prospectively, Anenson says. "California and several states that follow California law grant contract protection on the first day of employment, and if your pension benefits go up during your career, you get that, too. Absent certain circumstances, government employers cannot reduce pension benefits, even though they can cut every other employee benefit under the law and even fire you. But they can't touch your pension."

Combining legal scholarship with practical policy insights, Anenson seeks to eliminate this kind of public pension exceptionalism. "This article analyzes the issue of contract duration and argues for the protection of accrued benefits as a matter of fairness and coherence with other law," Anenson says. "It's consistent with state contract and employment law if you're employed at-will. It aligns with federal private-sector pension law. The daily contract concept balances the needs of government employers facing growing budget deficits and employee retirement security. It gives employees some protection but also allows employers the flexibility to change the plan in a way that protects all interests, including the public."

Protecting pension benefits early and incrementally is a fair middle ground, say Anenson and her co-author. "In the present post-pandemic era of hard choices, contract minimalism provides an equilibrium between the over- and under-protection of pension benefits."

About the University of Maryland's Robert H. Smith School of Business
The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

Contact: Greg Muraski, gmurask@umd.edu

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SOURCE University of Maryland's Robert H. Smith School of Business