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Judges in two states allow pension benefit cuts

Friday, Jul 1, 2011

* Two state judges, one in Colorado, the other in Minnesota, have ruled that certain cuts to pension benefits are constitutional in those states. First up, Colorado

Under the legislation, employee/employer contributions were modified, new contributions for working retirees were created, the age and service requirements of certain groups of employees before they are eligible to receive retirement benefits was increased, and a cap was put on cost of living increases for retirees.

At issue in this case were Sections 19 and 20 of the bill, modifying the cost of living adjustments.

Depending on the sub class, the adjustments were modified from an annual increase of 3.25 percent or 3.5 percent to an annual increase to be calculated under a different formula and capped at 2 percent.

The plaintiffs in the case argued that the two sections of the bill were in violation of the Contract Clause of the Colorado Constitution and the Contract, Takings and Substantive Due Process Clauses of the U.S. Constitution.

“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,” Denver District Court Judge Robert S. Hyatt wrote.

What that means is the judge ruled that COLAs could be cut, but not the actual pension benefits.

* Minnesota

Statutes regulating benefit formulas do not constitute contracts that require negotiating, ruled Ramsey County District Court Judge Gregg Johnson. He said the benefit adjustments amounted to a reasonable response to a fiscal threat that jeopardized the long-term interests of retirees.

At issue were cost of living adjustments that occurred automatically for retired state employees drawing pensions. The changes affect the state’s three largest retirement funds. One is for teachers, another covers state employees and the third covers local municipal workers.

The pension funds differ, but under the changes, current employees and employers will have to pay more into the fund while retirees will receive smaller annual increases in their payouts. For retired teachers, payouts will be frozen for two years, starting next year.

* COLA cuts are picking up steam elsewhere as well

Several states, including New Jersey in a move this week, have cut back on cost-of-living adjustments for retirees in an effort to shore up the finances of public-employee retirement systems. Cost-of-living adjustments are annual increases to retirement benefits that are essentially designed to keep pace with inflation.

The cases in Minnesota and Colorado have been closely watched by lawmakers across the country as they contemplate similar changes in their own states. Unlike changes to benefits for new workers, which can take decades to deliver savings to state and local governments, rolling back cost-of-living adjustments can yield immediate savings.

While each state has different legal protections for public-worker pension benefits, the rulings “will really have an impact on what other state legislatures choose to do,'’ said Amy Monahan, a professor at the University of Minnesota law school who has studied legal issues of public pensions. “Even if the rulings are not direct precedent, legislatures will now say, ‘We might as well try it.’ “

Stephen Pincus, a Pittsburgh attorney representing the retirees who filed the lawsuits, said his clients were “contemplating filing an appeal.”

* However, Minnesota doesn’t even mention pensions in its constitution. And Colorado’s constitution has nothing that even comes close to Illinois’ language

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

So, if you’re a state employee or a retiree here, don’t freak out yet.

- Posted by Rich Miller        

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