The Pew Charitable Trusts

Decisions by district court judges in Colorado and Minnesota supporting public pension benefit cuts could encourage other states to join a gathering movement to roll back cost-of-living increases for current retirees. But probable appeals could delay the issue for years, legal analysts say.

Denver district judge Robert Hyatt on Wednesday threw out a challenge by a group of retired state employees to the Legislature's 2010 pension legislation, which among other things capped the cost-of-living adjustment at 2 percent for current and future retirees. The same day, Ramsey County (Minnesota) district judge Gregg Johnson dismissed a challenge by a group of retired state employees to the Legislature's 2010 pension cuts, which also lowered the annual cost-of-living increase by changing the percentage upon which it is calculated.

Public pension officials around the country have been following the Colorado and Minnesota cases, and a similar one pending in South Dakota, because of their potential impact on state efforts to rein in retirement costs by freezing, reducing or eliminating annual cost-of-living increases for retired workers. Though what happens in Colorado and Minnesota courts may not directly apply to benefits in other states, the judges' reasoning in both cases may serve to embolden other states.

New Jersey was the latest state to get rid of cost-of-living increases; Washington state also voted this year to eliminate automatic increases for retirees whose checks exceed the minimum benefit. Many states, following legal advice, have taken the safer course of rolling back cost-of-living adjustments for future retirees. But that alone is not reaping the savings states need to trim retirement system costs, leading lawmakers to consider applying the changes to current retirees as well.

In both rulings Wednesday, the key takeaway was that the judges said legislatures may alter cost of living adjustments because COLAs — which change from year to year — are different from the permanent, base pension benefits promised to state employees when they retire.

Hyatt said the retirees who filed the lawsuit in Colorado have no contractual right to keep the same cost-of-living adjustment that was in place when they retired. Colorado lawmakers have changed the cost-of-living adjustment repeatedly for the last 40 years, including for some of the retirees who filed the lawsuit, the judge said. The retirees signed documents when they retired acknowledging that the adjustments were subject to change.

"The General Assembly's most recent change to retiree COLA (cost-of-living adjustment) does not alter the fundamental mechanism for payment of pension benefits for…retirees," Hyatt wrote. "That has always been and remains to this day a base benefit set at retirement. There has also been a separately calculated cost-of-living adjustment based on a formula that has always been fluid and repeatedly changed."

Johnson, the Minnesota judge, characterized the Legislature's pension legislation as a "minimal alteration" in retirement benefits and "a reasonable response" to a fiscal crisis that threatened the long-term financial security of retired state workers. Setting the cost-of-living adjustment, unlike base retirement benefits, is an annual event, Johnson said. It is not a contract protected from changes by the Minnesota and U.S. constitutions, Johnson said.

"The right to change state policy…is an inherent element of legislative power," Johnson wrote, adding that there was no legal reason for the judiciary to interfere.

Stephen Pincus, a Pittsburgh attorney representing the retirees in both states, said the statutes granting the cost-of-living adjustments include the same mandatory language as the statutes that grant retirees' base benefits, which the Colorado and Minnesota Supreme Courts have previously found to be enforceable contracts.

"Under the [Denver] court's reasoning, the legislatures could eliminate the entire COLA and the retirees would have no recourse," Pincus said.

Appeals courts in California and West Virginia have previously found that retirees have a right to receive the cost-of-living adjustment in place at the time of retirement, if not earlier, Pincus said.

The rulings were a blow to retirees who were counting on keeping the same cost-of-living increases, but the judges' decisions were a victory for all state workers, because they reiterated that base retirement benefits promised to employees in Colorado and Minnesota are constitutionally protected and cannot be taken away.

"This is a less terrible decision if you are still working and are worried about whether the state will honor your base retirement benefits. This was a clear statement those benefits are protected," said Robert Klausner, a Florida attorney who specializes in public pension law.

Public pension legal analysts caution that court decisions in one state are not always relevant in another because retirement benefit plans vary widely. A key legal question is what the Legislature intended when the plan was established, which by nature differs between states.

In addition, in the Colorado and Minnesota cases, the challenge was brought by groups of retirees, not as a class action. That means the rulings Wednesday apply only to them. Pincus said trial court decisions are not binding on other courts in Colorado and Minnesota, let alone other states.

Meredith Williams, who manages Colorado's public employee retirement system, said at a recent public pension conference sponsored by the Pew Center on the States that the lawsuit could take several years before it is resolved.

The three Minnesota public pension plans, in a statement Thursday praising the court decision, noted that the 2010 legislation stemmed from a belief by leaders of all political parties that retirement benefits needed to be cut to restore the systems to financial health. The legislation reduced the projected future costs of the three systems by $5.9 billion, officials said.