May 25, 2012 03:39 AM UTC

Musings on the Colorado PERA Answer Brief: The Flavors of COLA, by A. Moncrief

• 0 Comments
• by: PolDancer

OK, here’s the deal.  Prior to 1994, Colorado PERA’s pension COLA was “ad hoc.”  It read like this: “COLA increases shall be made only on approval of the General Assembly.”  In March of 1994, the Colorado PERA COLA became “automatic,” the discretion of the General Assembly to diminish the COLA benefit for vested PERA members was removed from Colorado law.

In 2004, the General Assembly “grandfathered” in past PERA members at the 3.5 percent COLA level.  Going forward, new PERA members were to receive a COLA of the lesser of 3 percent or CPI.  Attention PERA and General Assembly!  This is how one reforms a public pension.  You have done it in the past.  It is called “prospective,” “legal,” pension reform.  Nearly every state in the nation is taking this prospective, legal approach to reforming their public pensions.  We have done it before, we can do it again!

Here’s an important question.  In 2004, the General Assembly grandfathered in current PERA members at the 3.5 percent COLA level.  If the Colorado PERA COLA was not an “automatic,” “guaranteed” COLA, then why would the Legislature bother with grandfathering?  Answer: They would not have bothered.  They would have simply reduced the COLA across the board as state legislatures in the U.S. do if their state has an “ad hoc” COLA.

I am struck by the fact that PERA’s Answer Brief and the other briefs from the defendants never use the terms “automatic COLA” and “ad hoc COLA.”  It’s as if the defendants want to court to be ignorant of the basic structure of public defined benefit pension plans.

Colorado PERA’s retiree COLA is an “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.)  Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself.

Here is an AARP survey of public pension COLAs in the US (predates the PERA COLA theft).  As with all other such surveys, this survey identifies Colorado’s COLA as “automatic.”  It identifies the Colorado COLA as automatic to distinguish it from an “ad hoc” COLA.

http://assets.aarp.org/www.aar…

Once a COLA has been fixed in statute as an “automatic” COLA it cannot be diminished by a legislative body without impairing the contractual rights of the PERA members who have paid into the pension after the conversion, and the contractual rights of PERA members who have entered contracts for the purchase of PERA service credit based on the “automatic,” fixed, guaranteed COLA rate.  The cost of the purchased service credit was determined based on this guaranteed 3.5 percent COLA.  Despite PERA’s wishes, it is not legally or morally possible for an “automatic” COLA to retroactively metamorphose into an “ad hoc” COLA.

Recognizing the distinction between “ad hoc” COLAs and “automatic” COLAs would facilitate the defendant’s understanding of the breach of contract that has occurred.  “Ad hoc” COLAs may legally be adjusted by a legislative body.  “Automatic” COLAs may not legally be diminished by a legislative body.

From an issue of GRS Insight is published by Gabriel, Ro¬eder, Smith & Company.

At this link:

http://www.vermonttreasurer.go…

“Under most state laws, accrued benefits may not be reduced once vested.  As a result, efforts to control costs by changing benefits usually involves: changing ad hoc cost-of-living ad-justments (i.e., non-guaranteed COLAs); changing benefits for newly hired employees; or changing benefits for current employees in some manner.”

“In other cases, the COLAs are ad hoc and granted by a decision of the plan’s board of trustees. Because ad hoc COLAs are not part of the guaranteed benefit, they may be reduced or eliminated as circumstances warrant.”