May 10, 2012 04:50 AM UTC

Musings on Justus v. State by A. Moncrief: "Reasonable Expectations."

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• by: PolDancer

It is with great respect for the Denver District Court and Judge Hyatt that I offer a few opinions, make a few observations, and raise a few questions regarding Judge Hyatt’s June 29, 2011decision in the case Justus v. State.  I have excerpted key passages from the Hyatt decision and comment on them below.  (I intend to comment on additional passages from the decision in the future.)

(From the Hyatt Decision, page 4) – ” . . . the latest COLA changes do not impair the parties’ reasonable expectations.”

(Hyatt Decision, page 8) – “Plaintiffs could not have had a reasonable expectation that the COLA formula that happened to be in place at the date of their retirement would be unchangeable for the rest of their lives.”

I don’t intend to be combative, but the 3.5 percent COLA formula (non-DPS) did not “happen to be in place.”  It was deliberately placed in the law by the Colorado General Assembly and Governor Bill Owens to provide a fixed, automatic COLA that would be paid for life to fully-vested PERA members.  As has been noted by Colorado PERA, the changes enacted by HB 00-1458 (including the fixed, automatic COLA) were incentives for early retirement . . . to encourage the departure of older, more expensive employees.

The Hyatt decision mentions the “reasonable expectations” of PERA members frequently, and thus these expectations appear to be central to the case.  Below, I point out that plaintiffs in the case and all other Colorado PERA members and retirees are not alone in holding the expectation that the 3.5 percent COLA would be unchangeable for the rest of their lives.

I will now demonstrate how such a “reasonable expectation” was conceived, born, nurtured and raised to maturity.

First, the organization Colorado PERA itself had the “expectation” that fully-vested retiree COLA benefits are fixed and automatic.  Colorado PERA’s communicated this to PERA members in writing:

Colorado PERA: Retirees “will receive an automatic increase of 3.5 percent in their monthly retirement benefit to help keep up with the cost of living.”

Colorado PERA: “If you began PERA membership on or before June 30, 2005, you will receive an annual increase of 3.5 percent.”

Greg Smith, PERA’s General Counsel seems to have had a reasonable expectation that fully-vested PERA pension COLA benefits are a fixed, contractual obligation of PERA plan sponsors.  One can logically arrive at this conclusion after reading Mr. Smith’s statement published in the Denver Post: “The attorney general’s opinion seems clear that fully vested employees – those retired or with enough years of service to retire – cannot see any benefits reduced, including cost-of-living adjustments.”  (Link: http://www.denverpost.com/news…

If PERA’s General Counsel has this reasonable expectation, why should fully-vested PERA members and retirees not also have this reasonable expectation?

Meredith Williams, Colorado PERA Executive Director, seems to have held similar expectations:  “The AG’s opinion states that when a PERA member retires and begins receiving pension benefits such member’s pension rights have fully vested and such pension benefits may not be reduced.”

Expectations of a fixed, automatic COLA have historically been made explicit in Colorado PERA’s annual financial reports:

From December 31, 2001 PERA CAFR:

“The annual increase for PERA benefit recipients was fixed at 3.5% compounded annually.”

From the June 30, 2000 Colorado PERA CAFR:

“In addition, beginning March 1, 2000, the annual increase for PERA benefits will be 3.5 percent compounded annually, and it will no longer be tied to the Consumer Price Index.”

From December 31, 2000 PERA CAFR:

“The Board agreed to support legislation designed to encourage earlier retirement and reduce the state’s costs, provided that this legislation would also change PERA’s post-retirement adjustment to an automatic increase of 3.5 percent compounded annually and increase the contribution to PERA’s Health Care Trust Fund once PERA is fully funded.  Since House Bill 00-1458 included these provisions, the Board supported this bill.”

“Beginning in March 2001, the annual increase for PERA benefit recipients will be 3.5 percent compounded annually.”

“The Governor’s office initiated HB 00-1458 to make early retirement more feasible and to achieve cost reductions, and the PERA Board of Trustees supported the bill.  PERA’s Board supported HB 1458 after it received assurance that this legislation would not affect the actuarial soundness of the PERA plan.”

Who provided this assurance?  PERA’s actuaries?  (It is not the responsibility of PERA members and retirees to hire an actuary.)

It is Colorado PERA’s responsibility to hire professional public pension actuaries.  It appears that these actuaries also held the expectation that the COLA was fixed, and automatic for fully-vested PERA retirees:

Expectations of PERA’s actuaries from the December 31, 2000 PERA CAFR:

“Benefits are assumed to increase at a rate of 3.5 percent after payments begin.”

(Here PERA actuaries’ clearly state their expectation that the 3.5% COLA is fixed and automatic going forward.  Financial statements of the pension were prepared based upon this expectation.)

Again, expectations of PERA’s actuaries from the December 31, 2001 PERA CAFR:  

(Actuarial section of the CAFR): “Benefits are assumed to increase at a rate of 3.5% after payments begin.”

Further, PERA administrators have noted the fixed nature of the statutory COLA in testimony before legislative committees:

From the document:

PUBLIC EMPLOYEES RETIREMENT ASSOCIATION (PERA) FY 2010-11 JOINT BUDGET COMMITTEE HEARING AGENDA, December 17, 2009

“PERA Response:

Cost of Living Adjustments for beneficiaries of the PERA Trust Fund are governed by statute. House Bill 2000-1458 changed the COLA from an indexed COLA based upon the lower of the national Consumer Price Index-W or 3.5 percent to fixed 3.5 percent.”  (Note the use of the word “fixed.”)”

Members of the Colorado General Assembly also hold the expectation that the 3.5 percent COLA is fixed and automatic, and that a legislative diminishment of the COLA would constitute a breach of contract.

Representative DelGrosso (in February):  “I voted against SB 1, not because I didn’t think we needed to fix PERA, I agreed with that part of it, but I voted against Senate Bill 1 because it did adjust some of the COLAs, and it did adjust that for folks that were already retired and people that were about ready to retire,” said DelGrosso. “And to me, I felt like that was violating the contract that those people got into.”

From the SB 10-001 debate:

Representative Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”

Representative Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.”

Representative Gerou: in committee, said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.

Representative DelGrosso: said that it is “tough” for him to tell people that he is going to break their contract.

Senator Harvey: “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.”

Senator Spence: “The bill places an unfair burden on retirees.”

Senator Scheffel: “We are breaching our promises to existing retirees.”

Senator Lundberg: “This bill is a deal that was cut before this body met.”

If members of the Colorado General Assembly (who have a much greater grasp of Colorado statutory construction than the typical PERA member) have such “reasonable expectations” that the COLA is fixed, and automatic why should PERA active members and retirees not also hold that belief?

A Colorado State Treasurer’s commission has considered PERA pension reforms and concluded that the COLA was fixed and automatic:

Mike Coffman’s “Commission to Strengthen PERA”:  “For those Coloradans already collecting benefits from PERA, their retirement funds must be protected.  The Commission may not make any recommendations that materially affect current retirees.”

If pension administrators, state legislators, actuaries, and a State Treasurer’s commission have expectations that the 3.5 percent compounded COLA was fixed, automatic, “guaranteed,” and a contractual obligation of Colorado PERA plan sponsors why should PERA retirees (and in particular those who retired on this basis) not also hold such expectations?

After hearing the expectations of these state officials why should PERA members who sent PERA money from their 401Ks to purchase service credit based on the guarantee of a fixed, automatic 3.5% COLA not have reasonable expectations that the COLA was a legal

obligation of the state?  

In all likelihood this expectation of a 3.5 percent fixed, automatic COLA has been a factor in the underwriting of Colorado state and local debt obligations, and establishing the credit worthiness of such obligations.  An investor in these bonds should expect an accurate prospectus.

It appears that “reasonable expectations” that the statutory PERA pension COLA was fixed and unchangeable for the rest of a PERA retiree’s life are widespread.

In fact, it appears that all parties with an interest in the question at the time had a reasonable expectation that the COLA was fixed and unchangeable for the rest of a PERA retiree’s life.

As I mentioned above PERA, and elected officials supported HB 00-1458 (the bill that enacted the fixed, automatic 3.5 percent COLA) in part because it was assumed to reduce state costs.

From the PERA document “2000 PERA legislation, updated May 4, 2000 (on the web)”

“The bill was initiated by the Owen’s administration and includes some features to make it more attractive for some long-term employees to leave state service and retire.”

From a news article at the time: https://www.cu.edu/sg/messages…

“HB 1458 would create early retirement incentives for participants in the Public Employees’ Retirement Association defined benefits plan.”

Noting this motivation on the part of PERA and the sponsors of HB 00-1458, is it fair to current PERA retirees, who have fully-vested pension rights, for the General Assembly and PERA to have induced them to retire in order to achieve the goals of saving the state money to later renege on that contract?

The expectation of a guaranteed, fixed, automatic pension COLA held by these PERA retirees was sufficiently strong to induce them to alter the course of their lives . . .to leave their careers.

Now that these PERA members have accepted the Legislature’s offer and retired based on the expectation that they would receive a fixed, automatic 3.5% COLA in their retirement years is it fair for the General Assembly to retroactively change the terms of the contract?

Did Governor Owens, PERA, or the General Assembly plan to dupe PERA members into retiring by offering a fixed, automatic 3.5 percent COLA, intending to later renege on that obligation?