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Can Public Pension Benefits Be Taken Away?

Can Public Pension Benefits Be Taken Away?

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August 25, 2010

The Colorado, Minnesota and South Dakota lawmakers are hoping that the courts will agree that the current financial turmoil facing states imperils public pension systems as never before and calls for a new approach. If legislatures are not permitted to cut retirement costs now, the argument goes, the ability of the public pension systems to pay future benefits will be jeopardized.

“If we don’t reduce these automatic pension increases, the entire fund is poised to go bankrupt,” Republican Josh Penry, minority leader of the Colorado state Senate, told the Denver Post. “Think United [Airlines]. Think GM. That didn’t work out well for the company or the retirees.”

Attorneys for the states say in court filings that limiting cost-of-living increases was justified, and actuarily necessary. “There can be no dispute that preserving the solvency of PERA [The Colorado Public Employees’ Retirement Association] is a legitimate governmental interest,” Colorado officials argue. Minnesota’s pension legislation “was reasonable and necessary to maintain and restore the financial stability of Minnesota’s public pension plans,” say the state’s pleadings.

Although Colorado lawmakers and state pension officials blame much of the retirement fund’s current financial troubles on investment losses suffered during the 2007-09 recession — the median decline for funds nationally was 25 percent in 2008 — the truth is that Colorado lawmakers failed to make their annually required contributions to state pension funds in good times and bad. They also boosted retiree benefits without considering future costs.

Colorado’s pension fund was fully funded in 2000. Eight years later, before the recession hit, Colorado fell to 70-percent funded and was heading down further, according to a report released in February by the Pew Center on the States, which publishes Stateline. Most pension specialists recommend a funding level of 80 percent or higher.

Minnesota lawmakers also slid on their pension fund payments. Their pension system’s funding level dropped from 101 percent in 1999 to 81 percent in 2008.

“The Legislature was cutting off funds and starving the pension system,” says Stephen Pincus, a Pittsburgh attorney representing the retirees in all three states. “They shouldn’t now be able to cry there’s no money in the pension system. They had a large hand in creating the crisis.”

South Dakota offers a twist. The state Legislature has been one of the best in the nation at financing its public employee pension system over the years; it was 97-percent funded in 2000 and 2008, according to the Pew report. Lawmakers even increased benefits two years ago. The state retirement system investments did lose more than 20 percent in value in 2008, but gained as much in fiscal 2010.

Pincus says that makes South Dakota’s targeting of current employees and retirees suspect. “There’s no crisis in South Dakota,” he says. “They had one bad year. So they’re going to shore up their pension fund by cutting benefits to those who already receive them?”

Rob Wylie, executive director of the South Dakota retirement system, counters that when the funding level fell to 76 percent after the 2008 losses, it triggered for the first time a state law requiring the pension system to take immediate steps to return the funding level to 100 percent. Savings gained from reducing benefits for newly hired employees would have taken too many years for the system to catch up, Wylie says. So after consulting with retirees the pension board chose to ask lawmakers to trim the cost-of-living increase.

“We could have reversed the increase in the funding formula we approved in 2008,” says Wylie. “But the retiree groups said can you find another way to slow the growth in costs without decreasing the formula? So we did.”

Asked why states are taking the risky strategy of aiming at current retirees, Robert Klausner, a Florida attorney who specializes in public pension law, says many state officials believe they have less to lose in the courtroom by challenging pension protections than taking no action at all. “The belief is that if the employer [the state] prevails, it will have been worth the political risk,” Klausner says. “And if they lose, they will be no worse off than before.” Klausner adds that legislatures are taking the politically-difficult step and letting the courts be the “bad guy” if they overturn the law. Retired judges are among the plaintiffs in Colorado and South Dakota.

The first case to be heard is the one in Minnesota, where a September 15 hearing is scheduled on a motion for summary judgment that will be filed by the state. Colorado’s Supreme Court already has sided once with retirees, saying in a 1961 ruling, “Whether it be in the field of sports or in the halls of the legislature it is not consonant with American traditions of fairness and justice to change the ground rules in the middle of the game.”

Meredith Williams, executive director of the Colorado retirement system, says he is confident the state can prove that the system’s current and future financial stress will compel the court to allow the cost-of-living rollback. “PERA has been upfront about the challenges we face,” he says.