Two Rulings Find Cuts in Public Pensions Permissible

 

By MARY WILLIAMS WALSH

Published: June 30, 2011 New York Times

 

 

Judges in Colorado and Minnesota have dismissed court challenges by retired public workers whose pensions had been cut — developments that may embolden other states and cities to use pension reductions as a tool to help balance their budgets.

 

The two lawsuits sought to reverse reductions in the cost-of-living adjustments that Colorado and Minnesota had previously promised to retired public workers. Generally speaking, once lawmakers have agreed to provide certain pension benefits to public workers, it is difficult, if not impossible, to roll them back because of protective language in state laws and constitutions and years of court interpretations.

Public pensions are considered so bulletproof that when the city of Vallejo, Calif., recently restructured its finances in bankruptcy, it cut other costs but left worker pensions intact.

 

The two court decisions, issued Wednesday, suggest that the legal tide may be changing for public pensioners. The political tide has already turned in some places — in addition to Colorado and Minnesota, South Dakota and New Jersey have also cut cost-of-living benefits for current retirees, and other states have been awaiting legal guidance before doing the same.

 

In their court filings, retirees in Colorado and Minnesota had argued that their benefits were contractual in nature, and therefore protected by state and federal constitutional language barring the impairment of contracts.

 

However, in his ruling dismissing the Minnesota case, Judge Gregg E. Johnson of the state’s Second Judicial District Court wrote that the retirees in that state “have not met their burden to show unconstitutionality beyond a reasonable doubt.”

 

Judge Robert S. Hyatt, a district judge in Denver, offered a different line of thinking, noting that the 2010 state law that cut the benefits did not actually allow the state to remove money from the pension fund and use it to balance the budget.

 

Rather, he wrote, the law required the state to send even more money to the pension fund at the same time that it required retirees to give up part of their benefit, “in order to create a larger pool of investable funds and thus provide for sustainable pension benefits in the future.”

 

He also drew a distinction between a base pension and a cost-of-living adjustment, often called a COLA. He suggested that the inflation adjustment could be reduced, but the base pension could not.

 

William T. Payne, a lawyer in Pittsburgh whose firm represented the retirees in both cases, said his clients were studying their options and might appeal.

 

Another lawyer at the firm, Stephen M. Pincus, said in a statement: “Under the courts’ reasoning, the legislatures could eliminate the entire COLA and the retirees would have no recourse.”

 

There has not yet been a decision in a third lawsuit challenging a cost-of-living adjustment cutback in South Dakota.

 

The three cases have been closely watched as bellwethers. Many states and cities have been trying to rein in the cost of their pension systems, but the easiest changes — like closing the pension plans to new members and making fixed contributions to 401(k) accounts instead — can take decades to produce any savings. Cuts in COLAs, by contrast, produce big savings immediately.

 

Mr. Pincus said it was not clear whether the two new rulings would affect the thinking of officials in other states. “Trial court decisions are not binding on courts in their own states, let alone other states,” he said. He added that appellate courts in other states, including California and West Virginia, had found that cost-of-living adjustments could not be reduced.

 

Cost-of-living adjustments are found primarily in the public sector, and in the past, states and cities have prided themselves on the practice of shielding their retirees from inflation. Very few companies offer pensions with cost-of-living adjustments. Social Security benefits are adjusted for inflation, but the adjustments can go both up and down.

 

Ever since the stock market crash of 2008 wiped out many people’s retirement savings, officials have had a hard time persuading taxpayers of the virtues of covering the cost of inflation-adjusted pensions, which typical taxpayers no longer get themselves.

 

http://www.nytimes.com/2011/07/01/business/01pension.html?_r=1&src=recg