February 14, 2013 11:19 AM UTC
A Public Pension Lawyer on Contractual Public Pension Rights.
- by: PolDancer
For those who have not yet heard, the State of Colorado is trying to break its contracts. Why is this news to so many people? I’m not aware of many other instances in which the State of Colorado has tried to break its contracts. This is not a commonplace. So, I’m surprised that the attempt has received so little attention from the Colorado press. Colorado is trying to break its contracts with retirees in the state pension system, Colorado PERA. This is quite peculiar given that Colorado is a wealthy state with very low state taxes. Why not just pay the state’s debt? Is that not what we teach our children? Pay your debts? Going forward, let’s make a point to teach our children, AND our politicians this important lesson. Although Colorado has the 15th highest per capita income in the nation and (almost) the lowest state taxes per capita (49th?), Colorado officials do not want to pay the state’s debt. Therefore, in 2010, the Colorado Legislature (at the direction of the state’s pension administrator, Colorado PERA) passed a bill to push a large part of the state’s PERA-related debt onto elderly pensioners in the state. Now that you’re up to speed we can get to the subject of this article.
Lawyers love to talk. As we have seen, attorneys for public pension systems are particularly communicative. Like all lawyers, public pension lawyers in the United States periodically congregate and discuss issues that affect their work . . . issues like the contractual rights of the members of U.S. public pension systems. Today, I will address some of the advice that certain public pension lawyers give to other public pension lawyers about the contractual rights of the members of public pensions.
In this article I provide a few excerpts from (and comments on) an “outline” of public pension contractual rights written by a public pension lawyer entitled: “Constitutional Issues When Altering Public Pension Benefits.” This “outline” was written by an attorney, Nicholas Joseph Marcucci, who is Deputy Chief Counsel at the Pennsylvania State Employees' Retirement System. He is an Emeritus Board Member at the National Association of Public Pension Attorneys (NAPPA), alongside our own Colorado PERA Executive Director, Gregory W. Smith. Marcucci’s legal “outline” was, apparently, presented at the 2010 NAPPA Legal Education Conference (June 23, 2010.) Perhaps Greg Smith was present at this conference?
Colorado PERA’s Executive Director Greg Smith was Colorado PERA’s lead attorney when Colorado PERA retiree pension contracts were broken (three years ago) in the bill, SB10-001. Colorado PERA has an office full of other lawyers, and contracts for a few more outside private sector lawyers for good measure. (Heads up outside lawyers . . . clearly, Colorado PERA has little respect for its contractual obligations. Get cash.)
NAPPA makes the Marcucci “outline” available to the public on its website. To access the complete Marcucci “outline” of constitutional public pension rights (a Word document) paste the following into Google: “Constitutional Issues When Altering Public Pension Benefits Marcucci.”
In this article I do not summarize the Marcucci document, I merely comment on those portions that I find interesting or relevant to the Colorado Legislature’s ongoing attempt to escape its own public pension contractual obligations.
From the Marcucci “outline”:
“Does your jurisdiction have an anti-gratuity clause in its constitution? If so, then almost by default there needs to be a contract component to pension benefits.”
(My comment: As we have observed earlier, the Colorado Constitution does indeed have “an anti-gratuity clause.” Over the last couple of years, I’ve wondered how any court might possibly conclude that Colorado PERA pension COLA benefits are non-contractual pension benefits. Such a conclusion would require that PERA COLA benefits necessarily be gifts from the State of Colorado to PERA retirees rather than deferred compensation, that is, the COLA would be a “gratuity” prohibited by the Colorado Constitution.
According to the Colorado Constitution, the Colorado PERA pension COLA benefit is inescapably earned, deferred compensation. If the Colorado PERA COLA benefit were a “gratuity” (that is, if it had the discretionary nature of a “gift”) it would be unconstitutional under Article 5, Section 34 of the Colorado Constitution. This section of the Colorado Constitution prohibits the Colorado General Assembly from using public funds “for benevolent purposes to any person.” Throughout the history of Colorado PERA, if any pension benefit (“base pension benefit” or “pension COLA benefit”) has been paid to a PERA retiree as a “discretionary,” “benevolent” grant to that PERA retiree . . . then, that payment has been unconstitutional under Article 5, Section 34.)
From the Marcucci “outline”:
“United States Trust Co. emphasizes that the impairment must be both reasonable and necessary. A State cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money on other public policy goals.”
(My comment: To elaborate, in 1977 the U.S. Supreme Court (in U.S. Trust Co, 431 U.S.) clarified that state attempts to impair their own contracts, ESPECIALLY FINANCIAL OBLIGATIONS, were subject to greater scrutiny and very little deference because the STATE'S SELF-INTEREST IS AT STAKE. As the court bluntly stated:
“A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all . . . Thus, a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors." For the last ten years, the Colorado Legislature has underfunded its contractual Colorado PERA obligations, giving the Legislature “extra money” to spend “without raising taxes.” The Colorado Legislature has essentially used the Colorado PERA trust funds as a “credit card.”)
From the Marcucci “outline”:
“In most states there is a fairly clear demarcation between the gratuity theory and the contract theory and a seminal case or two where the courts make the change. Police Pension and Relief Board of the City and County of Denver, et al. v. McPhail, 39 Colo. 330, 338 P.2d 694 (1959); and, Police Pension and Relief Board of City and County of Denver, et al., v. Bills, et al.”
(My comment: It’s noteworthy that Marcucci highlights our Colorado Bills and McPhail public pension contract cases as “seminal” cases that constituted a “fairly clear demarcation between gratuity theory and contract theory.”)
From the Marcucci “outline”:
“For instance, if pension benefits are ‘deferred compensation for current service,’ they might be more difficult to change than if they are ‘retirement pay’ or ‘additional compensation.’”
“Even a reservation of rights clause, however, may not allow the reduction of already accrued benefits if the jurisdiction adopts the position that pensions are deferred compensation currently earned. To do so would be tantamount to retroactively decreasing salaries and trying to recoup money already paid in paychecks (or to decide not the pay the current paycheck that is two-weeks deferred under the payroll system.)”
(My comment: In the McPhail case, the Colorado Supreme Court found that public pension benefits constitute deferred compensation: “The fireman and policeman accepts less take home pay in order to provide a generous retirement system. The benefits thus provided are definitely a part and an important part of his compensation.”)
From the Marcucci “outline”:
“The Cliff Vesting Legacy. Many of the early cases arose in situations involving employees with 20 or 25 year cliff vesting. Police Pension and Relief Board of City and County of Denver, et al., v. Bills, et al., 148 Colo. 383, 366 P.2d 581 (1961).”
“Cliff vesting pension benefits present a different situation from accrual based pension benefits. Accrual based pension benefits make the connection between benefits being earned each year concurrent with the performance of service and making member contributions more apparent. The ability to change future accrual rates, so long as already accrued benefits are left intact, seems more commonsensical and palatable.”
“Courts seem more resistant to allowing changes where cliff vesting is involved and more apt to find a constitutionally enforceable implied promise that if at the time of commencement of work an employee worked X years, then Y benefits would be received.”
“PRACTICE TIP. When examining precedent and deciding cases, the courts do not seem to pay much attention to the distinction between cliff vesting and accrual based benefit structures and have uncritically grafted cliff vesting doctrines to accrual based fact patterns.”
(My comment: Marcucci addresses the idea of “cliff vesting” and again cites the Colorado case, Bills. Interestingly, he observes that courts are less likely to permit breach of public pension contracts in cases involving “cliff vesting.” Changes to future accrual rates seem “more commonsensical.”)
From the Marcucci “outline”:
“Does a jurisdiction’s domestic relations law treatment of pensions affect whether or not it is subject to pension contract protections?”
(My comment: This Marcucci question reminded me of a comment by “Alan B” that was posted in the on-line version of the Denver Post in 2010 in regard to the initial Denver District Court decision in the case Justus v. State. Here’s the comment: “What truly confounds me in this case is that Judge Hyatt ruled the opposite in my divorce case. Which only shows what I have read before that it takes the courts 5 to 10 years to figure something out. He ruled that my wife was entitled to her share of PERA discounted at the legal rate assuming that PERA would pay my pension compounded at 3.5 percent for the rest of my life. Her lawyers argued that her social security could not be guaranteed yet the PERA could be. Judge Hyatt ruled for her and in this case he ruled the opposite of what he had ruled in the current case. Is the 3.5 percent annual adjustment guaranteed or not, Hyatt has spoken on the record, yes and no.”
Marcucci cites the Colorado public pension case Ackman a couple of times in his “outline”:
“In Colorado pensions are part of the public employee's compensation due under the employment contract, particularly where the pension is funded, at least in part, by employee contributions. City Of Aurora v. Ackman, 738 P.2d 796 (Colo.App. 1987).”
“In almost all states where contract rights exist, the terms of the contract are found in the enabling legislation. O'Dea v. Public School Employees' Retirement Board, 66 Dauphin 58, 88 D&C 593 (1954) (The retirement code and its amendments establishing the retirement system are incorporated into and constitute the essential provisions of a member's contract.)”
“In many states, enforceable pension terms attach at the start of employment.” City Of Aurora v. Ackman, 738 P.2d 796 (Colo.App. 1987).
(My comment: Here’s a link to our Colorado case, City of Aurora v. Ackman:
http://scholar.google.com/scholar_case?case=7030368230157738825&q=City+Of+Aurora+v.+Ackman,+738+P.2d+796+(Colo.App.+1987&hl=en&as_sdt=2,6
Ackman is a 1987 Colorado Court of Appeals decision, in which the court affirmed the decision of a District Court that the City of Aurora could not retroactively change its employees (fire fighters) eligibility for retirement.
Here are some excerpts from Ackman:
“Yet, any ambiguities appearing in statutes regulating pension and retirement funds must be construed favorably toward the employee. Taylor v. Public Employees' Retirement Ass'n, 189 Colo. 486, 542 P.2d 383 (1975); Endsley v. Public Employees' Retirement Ass'n, 33 Colo.App. 416, 520 P.2d 1063 (1974).”
“After a bench trial, the district court found that the increased service requirement of 25 years constituted, from the firemen's perspective, an adverse change to the pension plan; that the rank escalator benefit did not represent a ‘corresponding contemporaneous increase,’ or a ‘substantial increase,’ in the plan's benefits; and that, consequently, the City could not impose a 25-year service requirement upon its firemen until January 1, 1976, when the provisions of Part 5 became effective, and then such a requirement could be made effective only for firemen hired on or after that date.”
“This statutory provision, while not directly relevant to the issue here, does constitute, in our view, a general recognition by the General Assembly that it would be improper to attempt to apply the provisions of a new pension program to employees who have been employed in anticipation of the receipt of benefits under another program.”
“It is now well settled, however, that such a pension program constitutes a part of the public employee's compensation due under the contract of employment, particularly where, as here, the pension program is funded, at least in part, by contributions from the employee. Consequently, a substantial adverse change cannot be made in the ‘vested’ pension rights of an employee who has already met the eligibility requirements of such a program. Police Pension & Relief Board v. McPhail, 139 Colo. 330, 338 P.2d 694 (1959).”
“Likewise, even though an employee's pension rights may not yet have become vested, because he has not yet met the length of service or other eligibility requirements under the plan, once a prospective pension benefit is included in an employee's employment contract, as one of his employment conditions, and he performs service for the public employer under that contract, he is normally entitled to receive benefits pursuant to the terms of that pension program, subject only to his meeting the program's stated eligibility requirements. This contract between the public entity and the employee generally prohibits a change in the existing program which would have a substantially adverse effect upon the employee's anticipated pension benefits. Police Pension & Relief Board v. Bills, supra. But cf. Peterson v. Fire and Police Pension Ass'n.”
If you made it this far, congratulations! You must truly find these court cases “appealing.” But, don’t stop now . . . remember to help support public pension contractual rights by contributing to saveperacola.com. (Their website explains how to do this.) Also, don’t forget to Friend Save Pera Cola on Facebook!
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