State Courts Are Defending Public Pension COLA Contracts, (Including Colorado PERA Pension COLA Contracts.)

(Colorado, Montana, Arizona, New Jersey, Illinois, Rhode Island, Washington, California, Oregon.)

Contrary to the public pension contract breach propaganda du jour, state courts are upholding contractual rights to "automatic" public pension COLA benefits.

Lately, a few proponents of taking accrued pension COLA benefits from pensioners have been trying to plant (in politician's heads) the false meme that courts are just fine with breach of public pension COLA contractual obligations.  Everyone is doing it!  Jump on the bandwagon!

Well, I follow developments in U.S. public pension litigation more closely than most, and this claim struck me as ludicrous.  So, I decided to locate and examine the recent pension COLA decisions myself.

Readers should know that a well-oiled, well-funded, corporate public pension "crisis" noise machine exists in the U.S.  The aim of this machine is to divert attention from the $80 billion in corporate welfare that is given away by state and local governments in the U.S., and try to focus attention on public pension unfunded liabilities (underfunded by approximately $40 billion annually.)  If successful, this effort will help protect U.S. corporate welfare.

One such propaganda piece was recently produced by a university research center (receiving corporate financial support from Goldman Sachs no less.)  The paper's author is "surprised" that courts are "upholding" COLA cuts by state legislatures!  Oh my!  But, this "surprise" is unwarranted, as it is contradicted by reality.

In this article I provide excerpts from recent state court decisions in public pension COLA cases, as well as links to the cases.  A brief examination of recent state court decisions will quickly debunk the "courts are just fine with breach of COLA contracts" meme.  This article concludes by providing background information relating to "automatic" and "ad hoc" public pension COLA benefits in the United States.

In 2010, a number of Colorado politicians, state officials and Colorado union officials decided that they wanted to break the COLA contractual obligation in the Colorado PERA pension plan. Yes, Colorado public sector unions have advocated for a breach of the contracts of their retired union "brothers and sisters."  (Remember that retirees no longer pay union dues.  In my view, Colorado public sector unions have sullied the U.S. Labor Movement and exacerbated income inequality in the U.S.)

The hope of the proponents of breaking Colorado PERA public pension COLA contracts was that Colorado courts would not know the difference between "automatic" and "ad hoc" public pension COLAs.  Their hope was that Colorado courts would fail to discover this difference in types of public pension COLA benefits and sanction the desired Colorado PERA pension contract breach.  (Some of those who participated in this scheme to help Colorado governments escape legal debts were Colorado state employees.)

In 2010, these public sector and union officials colluded to break the contracts of Colorado PERA pensioners and attempted to "claw back" accrued Colorado PERA pension COLA benefits (an annual percentage increase in the PERA base benefit that is specified in Colorado law.)  Colorado PERA pensioners are suing the pension administrator, Colorado PERA, and the State of Colorado for the pension contract breach (Justus v. State.)

Public pension administration and jurisprudence are extremely complex subjects.  The proponents of the Colorado PERA pension contract breach have hoped to use this complexity to their advantage.  Statutory public pension COLA provisions may be "ad hoc" COLA benefits that may be legally adjusted by public pension plan sponsors, or "automatic" public pension COLA benefits that are part of public pension contractual obligations.  Any diminishment or impairment of an "automatic" public pension plan COLA benefit by a public pension plan sponsor (such as the State of Colorado or Colorado PERA) is constitutionally impermissible. 

In legal briefs that the proponents of breaking Colorado PERA COLA contractual obligations have filed in the case, Justus v. State, no mention is made of the existence of "ad hoc" and "automatic" public pension COLAs.  Why is that? 

Since 2010, a number of states have attempted to escape statutory "automatic" public pension COLA contractual obligations.  However, state courts are slowly, but surely, learning the distinction between contractual "auto COLAs" and "ad hoc COLAs."  State courts are discovering that "automatic" public pension COLAs are no less a contractual obligation of public pension plan sponsors than are public pension base benefits.  State courts are upholding the Rule of Law in the United States:


Colorado Court of Appeal's Decision in Justus v. State (October 11, 2012): “We consider McPhail and Bills dispositive (indisputably bringing to a conclusion a legal controversy) of whether plaintiffs here have a contractual right to a particular COLA.”

Colorado PERA officials in written testimony to the Joint Budget Committee (December 16, 2009): “The General Assembly cannot decrease the COLA (absent actuarial necessity) because it is part of the contractual obligations that accrue under a pension plan protected under the Colorado Constitution Article II, Section 11 and the United States Constitution Article 1, Section 10 for vested contractual rights.”


Montana District Court GABA (COLA) taking injunction (December 27, 2013):

"The legislative reduction of the GABA implicates a fundamental constitutional right and must be evaluated under the strict scrutiny standard, 'whereby the government must show that the law is narrowly tailored to serve a compelling government interest.'" 

"Montana law treats public employee pensions as contractual obligations."


Arizona Supreme Court (February 20, 2014 Decision):

"After such vesting, '[the pension] contract cannot be unilaterally modified nor can one party to a contract alter its terms without the assent of the other party.'”

"Smith is inapposite.  Assuming the case was correctly decided, we note that it reflects the general principle that statutory provisions do not create contractual rights.  But statutorily established retirement benefits are an exception to this rule."

"We affirm the decision of the trial court."


New Jersey Appellate Court (June 26, 2014):

“'It is not the courts' role to run the pension systems,' Reisner wrote. 'Our responsibility is to interpret and apply the constitution in light of the evidence, and we will do so.'"

"Under settled law, for the state to be able to break the COLA contract, it must show at the trial court that the harm to retirees is not 'substantial,' that the government is breaking its agreement for a 'reasonable public purpose,' and that the freeze is related to 'appropriate governmental objectives.'


Illinois Supreme Court Decision (July 3, 2014) in a recent decision finding that retiree health benefits are constitutionally protected as public pension benefits:

“Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner.”

(Colorado Supreme Court: “As was noted in Endsley v. Public Employees Retirement Association . . . (1974) ambiguities appearing in statutes regulating pension and retirement funds are construed favorably toward the employee.” (Colorado Supreme Court in Taylor v. PERA, November 17, 1975.)

From the dissent of one Illinois Justice hearing the case:

“Stated otherwise, by its plain language, the pension protection clause prohibits legislative action that diminishes or impairs pension benefits by altering the terms of the contract governing the pension.”


Rhode Island Superior Court (April 16, 2014):

"Upon retirement, under Rhode Island law, COLAs and pension benefits are one and the same, providing retirees with a vested interest in the benefits which may not be altered retroactively."

"Because there has been a bargained-for exchange, supported by consideration, this Court finds that there is an enforceable implied-in-fact contract between Plaintiffs and the State."

"Furthermore, our Supreme Court’s jurisprudence supports a finding that Plaintiffs possess protected contractual rights in receiving a pension and a COLA."

"Here, having retired, the Plaintiffs have fully performed.  A valid contract exists between Plaintiffs and the State, entitling Plaintiffs to their pension benefits."


Washington Superior Court for Thurston County (November 9, 2012):

"In 2011, the Legislature amended these statutes again and repealed the UCOLA for all active and retired members.  It did not offer a benefit in exchange for terminating the COLA."

"Two cases are dispositive to this Court, Jacoby and Navlet.  In each of those cases, our Supreme Court rejected employers' attempts to reserve the right to unilaterally withdraw vested retirement benefits."

"This Court must follow the binding precedent of Jacoby and Navlet.  Under that precedent, the State is prohibited from reserving the right to unilaterally terminate the UCOLA.  The UCOLA was vested because employees began work based, partially, on the promise of a UCOLA.  Further, the parties agree that the State did not offer any off-setting benefit when it terminated the UCOLA.  The State's actions therefore violated existing law and summary judgment to the employees is warranted as a matter of law."

(My comment: Colorado PERA's former General Counsel and current Executive Director Greg Smith, August 17, 2005, Rocky Mountain News:

“His (Colorado PERA General Counsel Greg Smith) briefing paper said 'there has never been a finding in Colorado that the state has reserved its power to make changes' in PERA's benefit structure.”

"Smith said in his opinion that 'other (non-Colorado) courts have set a high burden to meet the necessity threshold.'"

"The PERA board, however, relying on a legal opinion by General Counsel Greg Smith, thinks benefits cannot be cut for any active PERA member.  That means not just current retirees and workers who are eligible to retire but the brand-new employee who has put less than a year of contributions into the plan."

"Smith argued, however, that there is no precedent for declaring an actuarial emergency unless a pension fund has a serious cash liquidity problem."


California Superior Court, County of Santa Clara (San Jose), (December 19, 2013):

(My comment: Note that the City of San Jose, California, in its efforts to escape public pension COLA contractual obligations, did not try do deny that the public pension COLA benefit is a contractual obligation, as have Colorado politicians.  The City of San Jose argued for the right to be able to suspend the COLAs in an "emergency.")

"A public employee's pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment.  Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity (Betts)."

"Section 1510-A (COLAs) provides that, if the Council adopts a resolution declaring 'a fiscal and service level emergency,' the City may, for a period of up to five years, suspend all or part of the COLA payments due to all retirees."

"The City argues that Valdes supports the notion that vested rights can be suspended in an emergency.  There are several difficulties with this argument."

"In authorizing denial of benefits rather than mere deferral, Section 1510-A exceeds the scope of what Valdes contemplates as potentially allowable.  Accordingly, Section 1510-A is unlawful and invalid."


The Oregon COLA-taking legislation was enacted last Fall (2013.)  Under a provision of the bill that broke the pension COLA contract the legal challenge was sent directly to the Oregon Supreme Court.  Just nine years ago the Oregon Supreme Court addressed this question, the contractual nature of public pension COLA benefits (in 2005.)

From the Oregon Supreme Court Decision in Strunk v. PERB (March 8, 2005):

"We therefore conclude that the elimination of annual COLAs from the 'fixed' service retirement allowance, as set out in Oregon Laws 2003, chapter 67, section 10(3), is inconsistent with the legislature's promise set out in ORS 238.360(1) (2001)."

" . . . Strunk and Sartain petitioners are correct in their assertion that the provision of the 2003 PERS legislation that directs PERB to not apply annual COLAs to certain retired members' 'fixed' service retirement allowances breaches the contrary obligation of the PERS contract to do so; that provision also is declared void and of no effect."

What about the South Dakota and Minnesota COLA decisions?

The South Dakota and Minnesota legislatures both passed bills in recent years that reduced public pension COLA benefits.  The Defendants in the Colorado COLA case, Justus v. State, cited these state bills as examples of successful state legislation reducing pension COLA benefits.  But, in its 2012 Decision in the case Justus v. State, the Colorado Court of Appeals noted that public pension COLA benefits in South Dakota and Minnesota are in essence "ad hoc" COLAs.

Colorado Court of Appeals: "Lastly, defendants point to two decisions by trial courts in other jurisdictions that have rejected contentions that the legislature’s modification of public employee retirees’ COLA violates the Contract Clause.  Those cases, however, are distinguishable.  In Swanson, the court held that the plaintiffs did not have a contractual right to a specific statutory COLA formula.  But in that case the relevant statute required only the use of certain procedures (tied to the level of the pension fund’s investment returns) to calculate “whether an adjustment is payable,” on an annual basis.  It did not set forth a specific rate of increase.  Here (in Colorado), however, the COLA formula was never tied to the level of PERA funding until after sections 19 and 20 of Senate Bill 10-001 took effect.  Rather, the formula in effect immediately before the bill’s enactment provided for a specific rate: “[t]he cumulative increase applied to benefits paid . . . shall be the total percent derived by multiplying three and one-half percent, compounded annually, times the number of years such benefit has been effective after March 1, 2000.”  In Tice, the court considered a COLA statute providing that “‘all benefits except those depending on the member’s contributions shall be annually increased by the improvement factor.’”  The court concluded that the statute mandated only that a contribution must be increased by an unspecified amount, which the legislature was free to change.  Here, as noted, the prior (Colorado) COLA statute established not merely the payment of a COLA, but the payment of a specified percentage."


"Minnesota is the sole state that protects pensions on the basis of 'promissory estoppel,' that is, public pensions are protected against reduction or other impairment only where an individual can show that he or she justifiably relied on the state’s promise of benefits and was harmed by the change."

Some background materials on public pension COLAs:


"The Governmental Accounting Standards Board (GASB) requires public pension plans to disclose assumptions regarding COLAs, including whether the COLA is automatic or ad hoc, and to include the cost of COLAs in projections of pension benefit payments."

(My comment: Thus, it should be a simple matter to locate a public pension plan's characterization of its statutory COLA benefit.)


"According to the Public Fund Survey, approximately three-fourths of pension plans sponsored by states and local governments provide some form of an automatic cost-of-living-adjustment (COLA), i.e., one that does not require specific approval of or action by the plan sponsor (the legislature or city council)."

In 2001, the actuarial firm, Buck Consultants provided a report to the Legislative Audit Committee of the Colorado General Assembly.  In agreement with a recent statement of Colorado PERA employee Koren Holden, the 2001 Buck Consultants report clearly identifies the Colorado PERA 3.5 percent COLA as “automatic.”  The report also refers to PERA's “guaranteed benefits at retirement,” and the “fixed” COLA, that is “compounded annually for each year of retirement.”  The Buck Consultants report identifies the 3.5% PERA COLA as “automatic,” contrasting the PERA COLA with an “ad hoc” COLA “as approved by Legislature.”

Koren Holden, Colorado PERA Project Manager, in Colorado PERA's on-line video series:

"This video describes the methods and assumptions used to calculate the net pension liability . . ."  "The projections should be based on the benefit terms and legal agreements existing as of the pension plan's fiscal year end."  "The benefits should also incorporate the effects of projected . . . automatic postemployment benefit increases such as the annual increase provided by Colorado PERA."  "In addition, ad hoc post-employment benefit changes should be included if they are considered to be essentially automatic. "

As we have seen, HB93-1324 struck the former “ad hoc” COLA language from Colorado law. The language stricken in the bill: “(2) Cost of living increases in retirement benefits and survivor benefits shall be made only upon approval by the general assembly."


"Questions and Answers Governmental Accounting Standards Board."

"The intent of Statement 25, paragraph 36a, in distinguishing between automatic and ad hoc COLAs, is to REQUIRE (my emphasis) that actuaries include in the scope of their projections any COLAs that are CLEARLY AUTOMATIC (my emphasis) — that is, COLAs embedded in the plan for which there is NO DISCRETION (my emphasis) or condition as to timing or amount.  This criterion is intended to be strictly construed, as a basis for a minimum standard."

From the Governmental Accounting Standards Board website:

"New GASB Pension Statements to Bring about Major Improvements in Financial Reporting."

"Measuring the Pension Liability."

"Provisions for automatic cost-of-living adjustments (COLAs) and other automatic benefit changes (which generally are written into the pension benefit terms) will also continue to be included in projections.  On the other hand, ad hoc COLAs and other ad hoc benefit changes—which are made at the discretion of the government—will only be included in projections if they occur with such regularity that they are effectively automatic."

August 2, 2010, (former Colorado Governor) Ritter Administration Letter to GASB on contractual public pension obligations:

“The criteria suggested as the basis for differentiating these COLAs [automatic] versus ad-hoc COLAs is the statutes that exist as of the date of the employer’s financial statements.”

“The essential difference between an automatic COLA and an ad hoc COLA is the legal requirement; with this core difference there is no way for the two not to be substantively different.  The legal difference in this instance is critical to the determination of whether the government is unable to avoid the surrender of resources to meet the obligation.”

The National Institute on Retirement Security on “automatic” and “ad hoc” public pension COLAs: “One key design feature of a COLA is whether it is automatic or ad hoc in nature.  An automatic COLA means the retiree’s benefit increases automatically every year by a certain percentage.  An ad hoc COLA is granted at the discretion of the plan sponsor, usually when the fund is in a well-funded position and investment gains have exceeded expectation.”

August 8, 2012, Douglas Greenfield: “The theory behind that is that a pension that has a COLA is the equivalent of a fixed pension . . . that you could just have a higher fixed pension and no COLA . . . and is just a method by which you are providing the benefit.”  Greenfield participated in a panel discussion hosted by the National Conference of State Legislatures. The panel discussion was titled: “How Much Can States Change Existing Retirement Policy?”

From the Colorado PERA “History of PERA Legislation” memorandum:

HB 00-1458 – "Established 3.5% compounded annual automatic COLA effective March 2001." "Prior to this date, the annual COLA equaled the lower of the actual inflation rate or annual 3.5% cumulative increases since retirement."

(My comment: Note Colorado PERA’s use of the word “automatic” to describe the COLA.)

From the 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.”

Keith Brainard, Research Director, National Association of State Retirement Administrators testifies before the a subcommittee of the U.S. House of Representatives (February 14, 2011):

“Only 30-40 years ago, most public plans were financed primarily on a pay-as-you-go basis.”

“Even after the most recent and unprecedented financial downturn, most state and local government pension trusts have plenty of assets to continue to pay promised benefits for years, and values already have rebounded sharply since the market low.” “The percentage of all state and local government spending on pensions has hovered around three percent during the last decade.”

NASRA COLA Issue Brief:

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One Community Comment, Facebook Comments

  1. hawkeye says:

    Profiles in Courage (1957) vs Colorado Courage (2013) …

    What a contrast in vision between JF Kennedy and Hank Brown.

    Surely JFK would have had all Coloradans contribute toward the state's PERA debt rather than a retroactive claw back from retirees to pay off 90% of debt.




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