CHICAGO — Attorneys for state retirees in Colorado and Minnesota are weighing whether to appeal court decisions last week dismissing litigation that challenged legislative cuts to pension cost-of-living hikes but fear that such rulings will “embolden” other cash-strapped states eying ways to ease pension costs.
Judges in both states issued separate rulings on the same day tossing the cases on summary judgment. Retirees in both states filed lawsuits last year challenging the enactment of legislation limiting the inflation adjustments to their base pension payments.
The dispute in both cases centered on whether retirees are entitled to future increases in their pension annuities based on the formula in place at the time of their retirement or whether their states can legally alter the formula used to calculate future benefits.
Retirees argued that such a move violates both state and federal laws governing contractual obligations. Both courts rejected retirees’ arguments that the same protections afforded in many states to earned base pension benefits also apply to cost-of-living adjustments even if they were benefits in place upon their retirement.
“We are disappointed and disturbed that the courts found that the retirees do not have a right to a specific COLA formula,” said Stephen Pincus, an attorney with Stember Feinstein Doyle & Payne LLC, which is representing the retirees in both lawsuits and one pending in South Dakota.
“The statutes granting the COLAs contain the same mandatory language as the statutes granting their base benefits, which both the Colorado and Minnesota Supreme Courts have previously found to be enforceable contracts,” he added. The firm is considering an appeal in both cases.
Elected officials, pension fund managers, and participants in the public pension sector have closely followed the cases as states eye ways to ease the strains of mounting pension-related expenses and growing unfunded liabilities on their budgets. New Jersey recently enacted legislation suspending COLA increases to save money.
The ability of states to alter direct pension and pension-related benefits varies by state, depending on statutes and how courts have interpreted the application of contract laws.
Many states afford strong protections to base benefits — especially those already accrued by current employees and retirees — but are less clear on benefits like COLAs.
The rulings affect only Colorado and Minnesota retirees and do not establish statewide legal precedent because they were issued at the trial court level. The rulings also are not the only ones decided on the COLA issue. Courts in California and West Virginia have upheld retirees’ right to receive the COLA benefit based on the formula in place when they retired.
Still, the retirees’ lawyers worry that lawmakers across the country will read more into them. “I think it’s probably going to embolden other states to act,” said Pincus’ partner, attorney William Payne.
In the sweeping Colorado legislation, lawmakers altered the formula used to calculate the annual COLA increases and capped them at 2%, down from past increases of 3.25% to 3.5%. The legislation also increased the age and service years for some employees to earn benefits and altered contributions levels. State lawyers argued that lawmakers acted within their right because COLAs do not enjoy the same contractual protections afforded to base pension benefits.
Denver District Court Judge Robert Hyatt agreed. “While plaintiffs unarguably have a contractual right to their PERA pension itself, they do not have a contractual right to the specific COLA formula in place at their respective retirement, for life without change,” he wrote in his ruling.
“This ruling will help place the PERA retirement fund on a sounder fiscal footing,” Colorado Attorney General John Suthers said in a statement.
In 2009, Minnesota lawmakers said they needed to take action to counter the impact of investment losses in a way that would benefit all stakeholders and the public interest. The legislation lowered annual increases to a range of 0% to 2%, and in most cases those limits remain in place until the pension system achieves a 90% funded ratio.
The package also increased employee contributions and, in some cases, raised the state’s contribution. The changes are expected to save the pension system $2 billion over the next five years. The Public Employees Retirement Association’s rate was 70% funded at the close of fiscal 2009. The ratios of the various funds last year ranged from a low of 54% to a high of 70%.
Ramsey County District Court Judge Gregg Johnson sided with the state in dismissing the case. He found that the retirees had failed to meet their burden to show that the state’s action was unconstitutional beyond a reasonable doubt. He also agreed with the state’s argument that its action was reasonable because it helped shore up the pension system.
“The Legislature appropriately and responsibly took a multitude of steps not in the state’s self interest but in the collective interest of all members,’’ according to the ruling.q
Court documents are available at www.stemberfeinstein.com/cms/legal-case-updates