Ruling on PERA bill expected shortly

By Marianne Goodland
THE COLORADO STATESMAN

The effort to overturn Senate Bill 1, the law passed in February that seeks to shore up the Public Employees’ Retirement Association (PERA), is now in its fourth month with a ruling on the first round of motions expected shortly from Judge Robert S. Hyatt of the Second Judicial District in Denver.

Three days after Gov. Bill Ritter signed SB 1, members of SAVE PERA COLA filed suit against the state and PERA, attempting to overturn a portion of the SB 1 law dealing with PERA’s annual Cost of Living Adjustment (COLA). The original motion was amended in March in part to add named plaintiffs who come from PERA’s four divisions. The lawsuit, which seeks class-action status, now names as plaintiffs Gary Justus, a retired Denver Public Schools teacher who testified against SB 1 at the state capitol in January; Kathleen Hopkins, a retired state employee; retired Judge Eugene Halaas; and Lisa Silva-Derou, a current employee of the Colorado Department of Public Health and Environment. Silva-Derou, according to the amended motion, is eligible to receive a full service pension benefit from PERA because she has met PERA’s age and service requirements.

The lawsuit charges that SB 1 is unconstitutional “because it impairs the retirees’ contractual rights to receive pension benefits at the level promised” when employees retired or were eligible to do so. The lawsuit wants to stop PERA from eliminating the COLA in 2010-11 and to prevent implementation of lower adjustments in future years.

Under SB 1, the 2010-11 adjustment that would have gone into effect on March 1 was instead cancelled. Beginning in 2011, the COLA will drop to the lower of 2 percent, or indexed based on the Consumer Price Index for Urban Wage Earners (CPI-W). The COLA also could drop to zero if PERA experiences a negative investment return year, as was the case in 2008.

Both the state and PERA filed motions in May asking the court to dismiss six of the eight claims contained in the plaintiffs’ case. The state is represented by the Attorney General’s office; PERA’s lead attorneys are Mark Grueskin and Edward Ramey of Isaacson Rosenbaum, PC.

In their motions, the defendants noted that the basis for the lawsuit is that the COLA could never be adjusted, despite the fact that it has been adjusted numerous times. “All of the Plaintiff’s claims are premised on their singular objection to the Legislature’s modification of the [COLA],” according to the motions.

The state and PERA motions point out that the COLA has changed a dozen times in the past 40 years, ranging from a low of 1.5 percent from 1970 to 1973 to a high of 3.5 percent from 2001 through 2009. In addition, the COLA has been set to compound only since 1994; prior to that it was a non-compounding adjustment. Of interest in that 2001-2009 period is that the CPI-W was only at or above 3.5 percent twice, in 2005 and 2007. During the other seven years the CPI-W ranged between a low of -0.7 percent in 2009 to 2.7 percent in 2001. So a cost-of-living adjustment for seven of the nine years exceeded the rate of inflation.

But for most of the years presented in the defendants’ motion inflation has been higher than the COLA. Out of the 40 years presented, only in 13 of those years was the COLA higher than the CPI-W. For 24 of those years, inflation was well above the COLA, including 12 years in which the CPI-W was double or more the COLA increase.

The state and PERA asked that the court dismiss the plaintiffs’ claims regarding violations of the state constitution as it pertains to changes to pension benefits. According to the amended motion filed by the plaintiffs, sections 19 and 20 of SB 1 illegally reduce the benefits of PERA members whose rights to a pension had already been vested. The motion noted that the Colorado constitution says that, “no obligation or liability of any person, association, or corporation, held or owned by the state, or any municipal corporation therein, shall ever be exchanged, transferred, remitted, released, or postponed or in any way diminished by the General Assembly.” In their response, the state and PERA both said that the constitution only prohibits the Legislature from modifying an obligation owed to the state, not by the state.

The state and PERA motions also seek dismissal of due process claims from the plaintiffs. In their amended complaint, the plaintiffs note that the state and PERA have deprived retirees of vested pension benefits in violation of the right to substantive due process guaranteed by the 14th Amendment. The state and PERA responded that pension benefits are not fundamental rights protected by the United States Constitution, and that the plaintiff’s conceded there was a rational basis for the Legislature to enact SB 1 to order to address PERA’s unfunded liabilities.

Attorney Steve Pincus, representing the plaintiffs, said that even if Judge Hyatt rules in favor of the state and PERA on their motions, the lawsuit would still go forward on the lawsuit’s contracts claims.

The contracts claims put forth by the plaintiffs point to state constitution language that says the General Assembly cannot make laws that would impair the obligation of a contract. Hence, the “Contract Clause of the Colorado Constitution forbids the State from enacting laws that adversely affect vested pension benefits of public employees,” the amended motion states. Consequently, the motion says, plaintiffs are entitled to the benefits at the levels specified under Colorado law when their pension rights were vested or when they actually retired.

In addition, the motion states that the General Assembly’s actions were “neither reasonable nor necessary” and that “alternatives were available to shore up PERA funding without breaching the contract rights of the plaintiffs.”

Neither of these claims was challenged by the state or PERA in their motions to dismiss.

The lawsuit puts PERA and its plaintiffs into a growing club around the nation: lawsuits filed against public pension plans because of benefit changes enacted by state legislatures in response to the 2008 market collapse.

At least five states are now being sued by current or former public employees: Colorado, Massachusetts, Minnesota, New Hampshire and South Dakota. Of the five, lawsuits in three states (Colorado, Minnesota and South Dakota) are fighting changes specifically to cost of living adjustments for retirees. All of the lawsuits are being handled by a Pennsylvania law firm that is working on the Colorado case: Stember, Feinstein, Doyle, Payne and Cordes, LLC, of Pittsburgh, which has a long history of working on class action cases involving pension and retiree health care benefits.

Even a state with a top-rated and fiscally healthy pension plan made changes in its benefits in 2010, and as a result is getting sued by its retiree members. In South Dakota, a lawsuit filed June 14 that represents four retired public employees is challenging recently-enacted legislative changes to their COLA.

Prior to the signing of SB 10-20, South Dakota retirees received an annual adjustment of 3.1 percent. For 2010-11, it would drop to 2.1 percent and beginning July 1, 2011 it would change to a range of 2.1 percent to 2.8 percent. It could only go back to 3.1 percent if the pension plan was fully funded. As of June 30, 2009, the South Dakota public pension plan was funded at 91.8 percent.

According to a February report on public pension plans issued by the Pew Charitable Trust, South Dakota’s public plan was ranked 7th out of pension plans in the 50 states and was cited as a “solid performer,” the highest ranking in the survey. In contrast, the Pew report, “The Trillion-Dollar Gap,” rated Colorado’s plan as one with “serious concerns,” the lowest ranking in the survey. Colorado’s rating was based primarily on its funding status; at 68 percent, based on 2008 data, the Pew report said Colorado falls below the 80 percent funded status that the U.S. Government Accountability Office says is preferred by experts. The report also noted that between 1999 and 2008, PERA’s pension liabilities grew 115 percent while assets grew only by 46 percent.

Pincus told The Colorado Statesman that the Minnesota and South Dakota cases differ from Colorado in one aspect; in those two states only retirees are suing their state pension plans; in Colorado the lawsuit includes current employees who are eligible to retire but not yet retired.

Finally, while the lawsuit moves through the courts, all eyes interested in PERA may be focused later this month on PERA’s board room, as a special meeting of the Board of Trustees will be held to release the 2009 Comprehensive Annual Financial Report, or CAFR. According to PERA spokesperson Katie Kaufmanis, the report will not only detail the results of 2009 investments, but will include an analysis of the impact of SB 1 on PERA’s future unfunded liabilities. The date for that special meeting has not yet been set.

The CAFR and an annual independent audit of PERA’s financial controls is scheduled to be reviewed in August by the Legislative Audit Committee.

Marianne@coloradostatesman.com