Given the 2010 Breach of Colorado PERA Pension Contracts, Do PERA Pension Benefits Remain “Definitely Determinable”?

By now, you have certainly heard that the State of Colorado is trying to break its contracts.  A majority of Colorado legislators actually voted for a bill (in 2010) that claws back accrued, contracted benefits from pensioners in their home state.

This is odd, since the Colorado Legislature has also recently enacted a pension reform measure that honors the accrued public pension benefits of certain other public pensioners in the state.  We recently learned that, last year, the Colorado Legislature adopted legal, prospective pension reforms, in the bill SB12-149, for a number of Colorado’s county governments (administrative arms of the state).  These county government pension reforms honor pension benefits that have been accrued to date, and make changes only on a prospective basis, while the pension reforms adopted for the Colorado PERA pension system seize pension benefits that have been accrued over decades.  In spite of the fact that the Colorado Legislature has adopted pension reforms that honor the accrued benefits of certain county government retirees, the Legislature persists in its attempt to claw back accrued benefits from PERA state government and other retirees.  How is it possible that such a glaring disparity of treatment of the contractual rights of similarly situated parties under Colorado law escaped mention during the hearings on this legislation (SB12-149)?

We also recently learned that the State of Colorado has an extra billion dollars to spend in the next year . . . and yet the State of Colorado persists in its efforts to break its contracts, due a financial “crisis.”

We have learned that the failure of the Colorado Legislature to pay its pension bills for the last decade (as recommended by Colorado PERA’s actuaries), and the Legislature’s and Governor Bill Owens’ mismanagement of the pension system, are largely responsible for the decline in Colorado PERA’s funded ratio in the last ten years.

More truth has come to light.  In 2009, the Colorado PERA Board of Directors desired a legal opinion that they could use to justify their contemplated breach of Colorado PERA retiree pension contracts.  They sought some means of circumventing legal roadblocks in the form of a 2004 Colorado Attorney General opinion on the subject and adverse Colorado case law.  In addition, the Board faced the substantial hurdle presented by their own General Counsel’s testimony that the accrued pension benefits targeted by the Board were indeed contractual obligations of the State of Colorado.

So, where did the Colorado PERA Board look for this desired legal opinion in 2009?  They did not seek an opinion from a law firm that had specialized for decades in employee benefits law.  Instead, they sought an opinion from an admirable Colorado attorney, who happens to be a “current full-time activist,” and a public education advocate . . . having founded a think tank that provides public education advocacy.  The author of the 2009 “COLA-taking” opinion (on which Colorado PERA based its 2009/2010 legal, lobbying and public relations campaigns to break PERA pension contracts) is an impressive Colorado resident . . .  indeed, a woman who has served on the Colorado Judicial Performance Commission.

Now, to the meat of this article.  According to Colorado PERA officials, the PERA pension plan is a “qualified plan” under federal IRS regulations:

“Colorado PERA is a qualified retirement plan that can substitute for Social Security, as required by law.”

https://www.copera.org/PDF/8/8-324.pdf

“PERA is a qualified retirement plan under the Internal Revenue Code Section 401(a).  As a defined benefit plan, PERA benefits are guaranteed based on a benefit formula that is set by law.”

https://www.copera.org/pdf/5/5-115.pdf

“In 1951, public employers could join Social Security; the Colorado Legislature decided to continue the PERA program instead of joining Social Security.”

http://class.ccaurora.edu/fiscal/PERA_Choice.pdf

Yet, under IRS regulations, a public pension plan must have something called “definitely determinable benefits” in order to pass muster as an IRS “qualified plan.”

Denver attorney Cindy Birley (whom I consider to be a champion of prospective public pension reform in Colorado) addressed this requirement for qualification of public pension plans at the Legislature’s Senate Finance Committee hearing on the bill SB12-149, on March 13, 2012:

Cindy Birley:

“Generally, you would not change people who have already retired . . .”.

“There may be an issue with what we would call ‘definitely determinable benefits,’ and this is a tax code concept.”

“The . . . Internal Revenue Code requires for a defined benefit plan that your benefit be . . .  ‘definitely determinable’.”

“So a benefit that fluctuated based on your funding, it may be difficult to change that unless it’s somehow a cost-of-living adjustment that’s done more on an ad hoc basis.”

“Because, it may not qualify as a defined benefit plan.’

“We could adjust benefits for future retirees as long as it still meets Internal Revenue Code requirements.”

“It still has to pass muster as a DB plan.”

Since the Colorado General Assembly has clawed back Colorado PERA pension COLA benefits from PERA retirees in 2010, and retrospectively altered this pension COLA benefit, how can this “automatic” PERA COLA benefit still be characterized as a “definitely determinable” public pension benefit?

IRS attorneys write that a qualified “governmental plan” must have “definitely determinable benefits”:

“Definitely Determinable Benefits/Written Plan Document Section 401(a)(25) provides that the actuarial assumptions used to calculate participants’ benefits must be specified in the plan.”

“A pension plan within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. (§1.401-1(b)(1)(i)).”

Reading this, I wondered how an IRS qualified governmental plan can be considered to have “definitely determinable benefits” if the plan sponsors are free to alter an “automatic,” contracted COLA as they please.  For example, if a pension plan sponsor reduces its “automatic,” contracted COLA from 3.5 percent to 2 percent or lower, diminishing the value of an annuitant’s lifetime “guaranteed” pension benefit by say, one-third, how could such variable benefits be considered “definitely determinable”?  Are qualified governmental plans, like Colorado PERA, required to report whether or not their COLAs are “automatic” or “ad hoc,” i.e., discretionary?  How can the IRS know what the “definitely determinable” lifetime retirement benefit is without knowing the nature of a public pension plan’s COLA benefit?  As we have seen, Colorado PERA has consistently described the PERA COLA benefit as “automatic.”

IRS attorneys also note that qualified plans “must operate in accordance with plan terms,” and “must meet “Pre-ERISA Vesting Requirements in Section 411(e)(2).”

“Pre-ERISA Vesting Requirements in Section 411(e)(2)

“A governmental plan shall be treated as meeting the requirements of section 411 if the plan meets the vesting requirements resulting from the application of sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974. “Including “Vesting on Normal Retirement Age.”

http://www.irs.gov/pub/irs-tege/govt_414d.pdf

In 2009, Cindy Birley and Rebecca Hudson of the Denver law firm Davis Graham & Stubbs wrote an article: “New Trends in Public Sector Plans.”

Cindy Birley writes:

“A ‘qualified’ plan under Code Sec. 401(a) is afforded special tax treatment provided numerous requirements under Code Sec. 401(a) are met.  The primary advantages of being a qualified plan are: 1) employer contributions are not taxable to the participants as they are made, 2) trust earnings are not taxable, and 3) favorable tax treatment is available to participants when they receive distributions (i.e., rollover treatment).

“A defined benefit plan . . . is a retirement plan that provides (my emphasis) ‘DEFINITELY DETERMINABLE’ benefits.  For instance, a defined benefit plan might entitle a participant to a monthly pension for life equal to a percentage of the participant’s monthly compensation.”

“Cindy S. Birley is an attorney practicing at the Denver law firm Davis Graham & Stubbs LLP.  Ms. Birley has 17 years of experience in the employee benefits/executive compensation field.  Ms. Birley has extensive experience with public sector plans.  She is also a member of the National Association of Public Pension Attorneys.”

http://www.dgslaw.com/images/materials/606317.pdf

In a May 30, 2008, “Public Employment and Pension Law Update,” for the Colorado Municipal League, Cindy Birley notes that the IRS is increasing scrutiny of public plans:

“Increased Scrutiny of Governmental Plans, questionnaire to be sent to 200 government plan representatives.  Failure to reply could open a compliance check.”

How has Colorado PERA described its pension COLA benefit in responses to such IRS questionnaires?

http://www.dgslaw.com/publications?&id=652

Although the Colorado General Assembly has not paid its full pension bill for the last decade, at least one member of the Colorado PERA Board of Trustees, as a fiduciary, seems to feel some responsibility to encourage Colorado legislators to do so.

Colorado PERA Board Trustee Maryann Motza (elected to the PERA Board in 2005) is the author of an article published in Vol. 22, No. 1 of the journal, “Government Finance Review,” that addresses training of new public pension board members.

From Trustee Motza’s article “Recommended Practice: a Tutor for New Pension Board Members”:

“Assure that actuarially required contributions are collected by the pension plan on a timely basis, so as to achieve the plan's stated funding policy.”

PERA Board Trustee Motza writes that Colorado PERA follows recommended practices of the Government Finance Officers Association (GFOA):

“It is comforting to know that PERA adheres to GFOA's recommended practices, which set the standard on how the funding of public pension plans can best be achieved and maintained.”

But, I see no endorsement from the GFOA for the retrospective taking of accrued public pension benefits.  From GFOA Best Practices (regarding the creation of new benefit tiers):

“Identify and address legal constraints. Consult with legal counsel to identify any federal and state legal impediments.  In some states, there may be a legal foundation for changing current employees’ pension benefits prospectively.”

http://www.gfoa.org/index.php?option=com_content&task=view&id=1887

The GFOA also recommends that public pension trustees consult the writings of Professor Amy Monahan at the University of Minnesota School of Law, “Public Pension Plan Reform: The Legal Framework.” “

See ‘Public Pension Plan Reform: The Legal Framework’ by Amy B. Monahan, Education and Finance Policy, Fall 2010.”

It happens that the aforementioned public pension attorney, Cindy Birley, has recommended (and advocated in testimony to the Colorado Legislature) prospective public pension reform for administrative arms of Colorado state government (county governments) that conforms perfectly to Professor Monahan’s legal theories.

Back to the GFOA:

“If state law allows public employers to change plan benefits prospectively for current employees, this right should be clearly stated in the plan documents that are distributed to employees.  If there is no explicit or implied contract that entitles an employee to accrual of benefits indefinitely under the current benefit structure for future service, this should be clearly stated in the plan documents as well.  Consult with legal counsel to ensure that such descriptions do not violate the requirement that benefits be ‘definitely determinable’ under Internal Revenue Code 401(a).  Generally, a plan does not provide definitely determinable benefits if a member’s ability to receive the benefit is conditioned on the employer’s discretion, absent plan changes.”

“Defined benefit plans . . . Investment risk born by the plan sponsor.”

“Guaranteed lifetime annuity to members at retirement unless they choose an alternate payment method.”

“Guaranteed or ad-hoc cost-of-living adjustments provided to annuitants.”

http://www.gfoa.org/index.php?option=com_content&task=view&id=1608

In light of all this, how has Colorado PERA remained a “qualified plan” under IRS regulations?

Colorado PERA active and retired members, help put an end to the Colorado Legislature’s ill-advised attempt to escape its contractual obligations.  Contribute at saveperacola.com and “Friend” Save Pera Cola on Facebook!

Algernon Moncrief

About Algernon Moncrief

Independent Nationwide Public Pension Rights Blogger.

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