Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Press Release

In spite of the protections that exist, no public retirement system is completely immune to impairment if the money runs out, says Cleveland Fed researcher

Millions of people’s retirements depend on the benefits state and local governments have promised them. At the same time, most state and local government pension funds don’t have the assets they need to cover their liabilities. O. Emre Ergungor, a senior economic advisor at the Federal Reserve Bank of Cleveland, examines how a hypothetical severe fiscal crisis at the state level could impact the state’s pension holders. He considers an extreme case in which the restructuring of all state obligations is necessary for a sustained recovery (much like the current events in Puerto Rico). Drawing on legal precedents and the experience of Arkansas after its default in 1933, Ergungor concludes that in spite of the protections that exist, no public retirement system is completely immune to impairment if the money runs out.

As of March 2017, state and local government pension funds had about 60 percent of the assets they need to cover their liabilities, with the unfunded liability at nearly $1.9 trillion. According to Ergungor, the majority of states either offer explicit protections for past and maybe future benefits in their state constitutions, or they define these benefits as a contract or property, which protects the beneficiaries under the Contract Clause or the Takings Clause of the US Constitution. But Ergungor says his analysis shows these protections might not be strong enough to protect retirees in the event a state defaults.

Examining the default of the state of Arkansas on its highway bonds in 1933, Ergungor says the state attempted to invoke its sovereign immunity and impose losses on bondholders. In the end, the approach did not succeed. “Despite our constitutional framework, bondholders were able to exert control on the state’s ability to allocate its limited resources to vital matters such as infrastructure spending and education,” says Ergungor.

“The important lesson is that in the absence of a dedicated judicial process for preserving the governmental functions of a state in debt renegotiations, sovereignty may offer meager protection for the interests of the general public and public employees,” says Ergungor. “In the event of a severe state fiscal crisis, all parties may have to share the burden of putting the state’s fiscal house in order.”

Read When States Default: Lessons from Law and History

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479