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The Colorado Supreme Court ruled on Monday that the state Legislature may reduce the Cost of Living Adjustments (COLAs) for existing retirees, and that such reduction does not violate the Contracts Clause of either the US or the state Constitutions.
The lawsuit, known as Justus, was brought by current retirees and members of Colorado’s Public Employees Retirement Association (PERA), and sought to restore the 3.5 percent COLA cap. In 2010, the Legislature reduced the cap on COLAs to 2 percent per year as part of a broad package of reforms, designed to reverse the long-term slide towards insolvency. The suit claimed that in creating the 3.5 percent cap, the Legislature had, in effect, created a contract with its employees, and that forcing PERA to reduce that cap interfered with the execution of that contract.
In its opinion, the Court summarized the position of the plaintiffs, and the history of the case to that point:
The plaintiffs in this case are retired public employees who contend they have a contract with the State of Colorado entitling each of them, upon retirement, to have their base pension benefit annually adjusted by the specific COLA formula in existence at the time they were eligible to retire, for the rest of their lives without change. On summary judgment, the district court ruled they had no such contract right to an unchangeable COLA formula. The court of appeals disagreed. It determined that the retirees have a contract right to the formula in place at the time of eligibility for retirement or actual retirement based on the so-called “public policy exception” and remanded for further review…
At issue was the question of whether or not a legislature may create a contract through legislation, or whether it may not. In general, the Courts have held that legislatures cannot conduct legislative contracting. Two prior cases, McPhail and Bills, created an exception to that rule, meaning that pension formulas, even though created in statute, were a form of contract.
In those rulings, the Court had held that other pension changes to other plans did violate the Contracts Clause. Those changes had substantially altered the formula under which base benefits were calculated. Since salaries —the basis for the benefits—were in the hands of the employers, and the formula for benefits was based on those salaries, the entire process was in the hands of the employer.
In Justus, the Court ruled that the base formula for benefits had not changed, and that since COLAs were not part of that base package, and that their execution was subject to inflation, which is outside the hands of the Legislature or any state employer, there was never a binding contract on the COLAs. Moreover, the Court found that in the past, the legislature had frequently altered the COLA language, and had never set a duration limit on any particular formula, undermining the expectation that there was a contract.
Justice Nathan Coates filed a separate, concurring opinion in which he agreed that the state had the right to reduce benefits, and further claimed that the Court had increased confusion over which elements of a pension plan could be considered contractual, and which elements could not. McPhail and Bills had created broad contractual pension obligations; Coates found the COLA exceptions carved out by the current decision to be unpersuasive and unclear.
The Court’s ruling in Justus appears to adopt the reasoning that some obligations, but not all, are contractual, and that at least part of the criteria for determining that is how badly-off the pension plan is.
Image Source: Shutterstock
Tags: COLA, PERA, Public Pension
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