August 06, 2013 03:54 PM UTC

Making Life Easy for Elliot Fladen. (Algernon Volunteers to Pull Excerpts from the AEI Public Pension Contractual Rights Paper on Elliot's Reading List.)

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• by: PolDancer

Yesterday, fellow ColoradoPolster Elliot Fladen noted that he wants to do some "interesting reading" on public pension contractual obligations.  He referenced a paper written by Professor Amy Monahan of the University of Minnesota School of Law.  I consider Monahan to be the preeminent scholar in the nation in the area of public pension legal doctrine.

The paper on Elliot's reading list was written by Professor Monahan for the AEI:

http://www.aei.org/files/2013/05/29/-understanding-the-legal-limits-on-public-pension-reform_104816268458.pdf#sthash.kPA5Gs3k.dpuf

Although the paper Monahan wrote for the AEI is quite accessible, Monahan has written a beefier version entitled "Public Pension Reform: The Legal Framework."  Elliot, check it out too, when you have time.  (Also Elliot, note that most conservatives ardently defend the U.S. Constitution and its Contract Clause.  Be sure to join them in this effort.)

Since, you don't have time to read Monahan's AEI paper just yet, I have taken the initiative to extract some of the paper's highlights for you:

"Contract Approach. In many states, an employee’s right to public pension benefits is considered contractual, and therefore is protected against substantial impairment under both state and federal constitutions.  This protection is provided by the Contract Clause of the United States Constitution, which states, “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” Most state constitutions contain substantially similar language. As a result, once a court finds an employee’s right to her public retirement benefits to be contractual, it is generally unconstitutional for a state to take any action that substantially impairs the employee’s benefits."

(The Colorado Court of Appeals in 2012, and Colorado case law, Bills/McPhail, deem public pension benefits contractual obligations of public pension plan sponsors.)

"At the other end of the spectrum are states that find a contract to exist only once the employee has retired and begun receiving benefits under the plan.  In those states, it may be possible to make changes freely before an individual’s retirement."

(Colorado's Justus v. State lawsuit addresses RETIREE contractual rights.)

"They do so by examining the facts and circumstances of the case and often conclude that by providing retirement benefits that an employee can earn through performing services, the state has made a unilateral offer that the employee accepts through service, thereby creating a contract under traditional contract theory principles.  Even this approach is relatively uncontroversial when it is used to protect benefits that an employee has already earned.  However, in several of these states, courts have held that not only are benefits already earned through service protected, but so too are benefits to be earned in the future."

(In 2012, the Colorado Legislature adopted SB12-149, a bill that honors public pension benefits already earned by retirees in Colorado county government pension systems.  The bill allows prospective changes to the pension multiplier for benefits not yet accrued.  This "less drastic" pension reform could be applied to the Colorado PERA pension system.)

"In the pension context, courts typically find any decrease in the amount of retirement benefits to be a substantial impairment."

($165,000 for a typical PERA retiree in the coming decades according to the Ritter administration.)

"Where a state is seeking to impair a contract to which it is a party, a reviewing court does not completely defer to the state legislature’s determination of what is reasonable or necessary under the circumstances.  Relevant in determining reasonableness is whether the circumstances that necessitated the change 'were unforeseen and unintended by the legislature' at the time the contract was created."

(Colorado PERA's former Executive Director Meredith Williams has told us many times that PERA expects volatile markets, thus these volatile markets are not "unforeseen."  There was no talk from PERA of breaking PERA pension contracts during the 1987 market crash.)

"For an action to be considered necessary, (1) no other less drastic modification could have been implemented at the time of the challenged change, and (2) the state could not have achieved its goals without the modification."

(Numerous "less drastic" options were available to the Colorado Legislature in 2010, including the "SB12-149 plan.")

"As a general rule, changes that are purely prospective (changes that affect not what an employee has already earned but solely what he will earn through future service) invite less judicial scrutiny than changes that affect an employee’s already-earned and vested benefits because prospective changes are considered less substantial impairments than changes to accrued benefits."

("Ninety percent" of the "savings" [cost-shift] in SB10-001 is generated through substantial impairment of accrued pension benefits.)

"While distinct differences exist among the states with respect to the legal protections they grant to public employee pensions preretirement, changes to a participant’s benefits once she has retired will be extremely difficult to make in any state."

(This is what Colorado legislators were told before they voted to attempt to take the contracted PERA COLA benefit in 2010.  They didn't want to know the truth, they could not even be bothered to send the question to the Colorado Supreme Court through an interrogatory.  To their credit, the Colorado PERA Board of Trustees wanted to send this interrogatory.)

"The difference between the legal approach to pre- versus postretirement changes is that once a participant is retired, she has by definition fulfilled her side of any bargain that has been made. In contract theory terms, the participant has accepted the offer of pension benefits through performance."

(Colorado PERA retirees have acted in reliance on their PERA COLA contractual rights.  Many changed the course of their lives based on this reliance.)

"The protection given to pensions in this context is analogous to the legal protections given with respect to promised salary. If an employer offers an employee a specified salary and the employee accepts the offer by performing the desired work, the employee has a contractual right to the promised compensation."

(Public pension benefits are "deferred compensation, presently  earned.")

"However, COLA reductions that affect already-retired participants are typically analyzed under a contract analysis because the participant has already satisfied all of the conditions necessary to receive a benefit."

(SB10-001 reduced the automatic, contracted PERA COLA benefit for current PERA retirees.)

"Other courts see no distinction between base benefits and their COLA adjustments and protect COLAs to the exact degree that base benefits are protected, resulting in the state’s inability to reduce COLAs for current retirees unless the change is reasonable and necessary to serve an important public purpose."

(In Colorado public pension case law, a pension COLA is "pension."  Why would it not be?  The plan sponsor could have just as easily offered a larger flat monthly benefit in the contract with no contracted COLA benefit.

The Colorado Legislature's breach of PERA pension contracts in SB10-001 was not reasonable, nor was it necessary.  The Colorado Legislature has mismanaged the PERA pension, failing to make its full pension payment for a decade.  Further, the Colorado Legislature has paid off $700 million in local government legacy pension debt that IS NOT the contractual obligation of the State of Colorado, while ignoring its PERA pension debt.  The Colorado Legislature is looking to elderly PERA retirees to clean up its mess.)

Monahan:

"The (Denver District) court’s (2011) ruling (in Justus v. State) is surprising both because the court appeared to break from earlier Colorado decisions that found pension benefits to be contractually protected prior to retirement and because the change could be characterized as a retroactive change to benefits, which is the type of change that invites the most scrutiny under a contract clause analysis."

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