6 thoughts on “AARP: We Will Defend the Contracts of Detroit’s Pensioners. AARP: We Will “Monitor” the Breach of Colorado PERA Pension Contracts.”

1. Hey Algernon, interesting COLA concept, especially if there is no upper cap on inflation adjustment … the devil is in the details.

   Illinois pension reform panel zeros in on COLAs
   

   http://www.reuters.com/article/2013/08/23/usa-illinois-pensions-idUSL2N0GO1XX20130823?feedType=RSS&feedName=bondsNews&rpc=43

   "The legislative panel is looking at changing the current 3 percent compounded cost of living allowance (COLA) to reflect half of the inflation rate, subject to certain compounding, according to the source."

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   1. KWAME RAOUL: FAILING TO PAY CONTRACTED COMPENSATION IS UNCONSTITUTIONAL.  FYI KWAME, PUBLIC PENSION COLA BENEFITS ARE ALSO CONTRACTED (DEFERRED) COMPENSATION FOR WORK COMPLETED. 

      Illinois State Senator Kwame Raoul is an engaging public figure, but he needs to get it right on public pension rights in Illinois.  Illinois' Governor recently decided to withhold the salaries of Illinois state lawmakers until they reach a solution to Illinois' historical pension underfunding problem (i.e., he wants them to propose breach of pension contracts.)

      Kwame Raoul thinks that it is unconstitutional for the state to withhold state legislator's earned compensation.  So, why does Kwame believe that it is constitutionally permissible for the state to withhold the earned, deferred compensation of retired public sector workers by perhaps seizing their contracted pension COLA benefits?

      Illinois Pension Conference Committee Chair Kwame Raoul on state legislator's contractual rights to earned compensation:

      "I think … there are just plain old labor law issues, employment law issues, because we’re employed, in essence, by contract.  And it’s an assigned salary, so if you don’t pay somebody, you’re obviously in violation of the law, you know?"

      Kwame Raoul on Illinois public pension retiree COLA benefits:

      "It’s identical in that aspect (the plan’s primary component is changing a 3 percent compounded cost-of-living increase to a percent equal to half of the inflation rate)."

      "One of the attractive aspects is the notion of inflation protection for the employees and retirees. And that’s attractive both from just a moral standpoint and from making an argument of constitutionality in terms of having something offered."

      (My comment: Kwame, breaking a contractual public pension COLA obligation is not at all "attractive," nor is it "constitutional."  Taking something from a person is not giving something to a person.  Illinois pensions have "automatic," contracted COLA benefits.  Public pension COLA benefits are deferred compensation, presently earned.  It looks like Kwame wants to see the State of Illinois "inflate away" its pension debt, by taking money from the elderly.)

      http://www.chicagolawbulletin.com/Articles/2013/07/30/dispatch-7-30-2013.aspx

      Support contractual public pension rights in the USA.  Contribute at saaveperacola.com.  Friend Save Pera Cola on Facebook!

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2. Algernon, I noticed you commented on this story.  Do these retired NM teachers have a guaranteed, fixed contractual such as PERA retirees, or is it an ad hoc COLA?

   The public pension reform mantra (or talking point) appears to be:  "We didn't change the base in pension payments, only the cost-of-living adjustments. And we did that as one of the steps to keep the system solvent."

   My question:  If the courts redefine a contractual, guarenteed fixed COLA into a "semi-contractual" gratuity based on a loosely defined "actuarial necessity", then what prohibits a state legislature from continued and deliberate underfunding of public pensions in order to give tax credits and/or increase government services and social benefits?

   Retired teachers want COLA pension hike

   NM Supreme Court will rule during Sept. 4 case

   http://www.demingheadlight.com/ci_23888662/retired-teachers-want-cola-pension-hike

   State Rep. Dennis Roch, himself a school administrator, said he believed the Legislature was on solid footing when it overwhelmingly voted to reduce cost-of-living adjustments to school retirees' pensions.

   The bill cleared the Senate 41-0 and the House of Representatives 54-13. Martinez signed it into law in March.

   "If I had to predict, I would say the law will be ruled constitutional," said Roch, R-Texico. "We didn't change the base in pension payments, only the cost-of-living adjustments. And we did that as one of the steps to keep the system solvent."

   Public school and university retirees who are suing claim that cost-of-living increases amount to a property right that is constitutionally protected from cutbacks.

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   1. Hey hawkeye, New Mexico is a special case since its public pension rights are property rights rather than contractual rights as I recall.  Thus, a successful COLA taking in New Mexico would have little relevance to those states that have COLA benefits that are contractual obligations (like Colorado.)  I will find some more material on this for you.  Al

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      1. Hawkeye, FYI:

         "The New Mexico Supreme Court seemed favorably inclined toward such claims when it stated, 'Any action by the legislature that serves to terminate, diminish or alter the value of pension benefits must be compensated for by providing an equal or greater benefit' (Pierce, 304). The court did not, however, rule on such grounds."

         http://www.aei.org/files/2013/05/29/-understanding-the-legal-limits-on-public-pension-reform_104816268458.pdf

         ____________________________________________

         New Mexico

         "New Mexico is somewhat unique in its approach to public employee pensions. In 1998, voters approved a state constitutional amendment that provides that public employee pensions are considered vested property interests after five years, once minimum service requirements have been met. It is one of a handful of states that follows a property-based approach and the only state that does so through a specific constitutional provision.  Vested property interests are constitutionally protected against arbitrary government action and against being taken away without just compensation.  There are no cases yet in New Mexico that interpret the exact scope of the legal protections granted to public employee pensions under the state’s constitutional provision. However, relying on cases in New Mexico prior to the constitutional amendment, as well as cases outside the pension context, it seems likely that the constitutional provision will prevent the state from making any detrimental changes to pension benefits that have already been earned by participants who have satisfied the plan’s minimum service requirements. It also seems clear that prior to a participant satisfying a plan’s minimum service requirements, changes to that participant’s benefits can be made freely. Finally, it is likely, though uncertain, that prospective changes to benefit accrual formulas can be made for all current employees.  The state constitution also provides, however, that nothing in the vested property rights provision shall be interpreted to prohibit modifications to retirement plans that enhance or preserve the plan’s actuarial soundness. While this exception to the general rule has not been interpreted by courts, it suggests that any changes to public employee retirement plans will be permissible, provided they enhance or preserve the plan’s actuarial soundness."

         How Does New Mexico Law Protect Public Employee Pensions?

         "New Mexico is one of a handful of states that has included in its state constitution a specific provision addressing public employee pensions. Section 22 of Article XX of the New Mexico Constitution provides, 'Upon meeting the minimum service requirements of an applicable retirement plan created by law for employees of the state or any of its political subdivisions or institutions, a member of a plan shall acquire a vested property right with due process protections under the applicable provisions of the New Mexico and United States constitutions.' It goes on to state, however, that 'Nothing in this section shall be construed to prohibit modifications to retirement plans that enhance or preserve the actuarial soundness of an affected trust fund or individual retirement plan.' These provisions were added to the New Mexico Constitution in 1998 following voter approval. There have been no cases in New Mexico interpreting these constitutional provisions. Instead, to determine their meaning and the scope of their protection, we must look to cases that address vested property rights in other contexts.  Labeling public employee pension rights as vested property rights is legally significant because property rights are entitled to the protection of due process under both the New Mexico and U.S. constitutions and cannot be taken away without compensation.  These protections, however, need further explanation.  First, due process has two separate components: procedural due process and substantive due process.  Procedural due process requires that individuals whose property rights may be negatively impacted receive adequate notice of the change and an opportunity to respond. With respect to public employee pension rights, procedural due process rights would not offer significant protection against detrimental changes, as the standard legislative process would typically satisfy the notice and comment requirements. Substantive due process considers whether a statute or government action ‘shocks the conscience’ or interferes with rights ‘implicit in the concept of ordered liberty.’” In considering substantive due process claims, courts determine the nature of the rights at issue in order to determine the proper level of scrutiny applicable to the state actions at issue. While no courts in New Mexico have ruled on the level of scrutiny to apply to public employee pension changes, courts in other states have found such changes to be subject to the “rational basis” standard, where changes are permitted if they are rationally related to a legitimate state interest. Provided, then, that the state is changing public employee pensions for legitimate state purposes (for example, to achieve a sustainable funding level) and not for illegitimate purposes (like raiding a pension fund or retaliating against public employees), substantive due process offers limited legal protection against changes.  The final source of potential protection is the constitutional requirement that property shall not be taken without just compensation. The New Mexico Supreme Court has stated that “any action by the Legislature that serves ‘to terminate, diminish or alter’ the value of pension benefits…must be compensated for by providing an equal or greater benefit.” This statement, however, is what is referred to as dicta— meaning that the statement did not directly relate to the holding or decision in the case but was made in passing. Statements such as these are in no way binding on future courts. As a result, it is not clear that the New Mexico Supreme Court, if it were to consider directly the issue of whether reductions in vested public employee pensions must be justly compensated as a taking of property, would adopt the dicta quoted above as the relevant standard to decide the issue.  Even if New Mexico courts hold that the pensions of public employees who have met the applicable minimum service requirements cannot be diminished without just compensation, there is significant leeway given in the constitution by providing that nothing in the constitution shall be interpreted to prohibit changes that enhance or preserve the plan’s actuarial soundness. This caveat to the protections otherwise provided to public employee pensions has the potential to allow a very wide range of changes to participant benefits. After all, any reduction in benefits or increase in contributions would enhance a plan’s actuarial soundness, provided the plan is less than fully funded. If a court interprets that provision to be as broad as it appears to be, it could in fact open the door to a wide variety of benefit changes for public employees, regardless of whether minimum service requirements have been met."

         Can Benefits That Have Already Been Earned Be Reduced?

         "Assume that a current state employee has accrued pension benefits for 10 years at a rate of 2.5 percent of salary per year and has satisfied the plan’s minimum service requirement. Could the state retroactively change the rate of accrual to be 2 percent of salary per year? While no cases in New Mexico have yet interpreted the scope of the constitutional protections for public employee pensions, it is highly likely that benefits that had already been earned could not be reduced once an employee has satisfied the plan’s minimum service requirements. If we change the example and assume the employee has not yet satisfied the plan’s minimum service requirements at the time of the change, the outcome would be different. Such an employee would not be entitled to any constitutional protection, and therefore the state may be able to retroactively change benefit accruals.  Of course, if the reduction at issue is interpreted to be a change that “enhances or preserves” actuarial soundness, such changes would appear to be permissible for all employees regardless of whether they have met minimum service requirements."

         Can Benefits Be Changed for Future Years of Service?

         "Assume that a current state employee is accruing pension benefits at the rate of 2.5 percent of salary per year and has met the plan’s minimum service requirements. Could the state change the rate of accrual, going forward, to be only 2 percent of salary per year? The legal answer is uncertain.  New Mexico’s Constitution is not specific regarding the precise contours of what is protected as a vested property interest. It states that participants have a vested property interest once minimum service requirements have been met, but it does not define the vested property interest that is protected. In general usage, the term “vested property interest” is used to refer to something that you already possess.  Given that the language is silent with respect to future accruals, that New Mexico courts have never held that future accruals are protected, and that the term is not typically used to refer to benefits to be earned in the future, it seems likely that prospective changes to benefit accrual rates would be permitted, even for employees that had satisfied minimum service requirements. Even if a court were to hold that a participant’s vested property right includes the right to future accruals, as long as the change to future accruals preserves or enhances a plan’s actuarial soundness, it would be permissible."

         What About Cost-of-Living Adjustments?

         "New Mexico courts have never ruled on whether or to what extent cost-of-living adjustments (COLAs) that apply to public employee pension benefits are legally protected. The extent to which COLAs are protected in New Mexico will depend on whether a court considers COLAs to be part of a participant’s vested property interest, or rather a future benefit that is not vested until the time that it is granted. Other states have come to mixed conclusions regarding the nature of COLAs. In many states, pension benefits that are earned through services performed for the state are held to include any COLA that applies to such benefit.  This approach is consistent with how federal law treats COLAs in the private employer pension context.  If New Mexico were to adopt such an approach, once a participant had met the plan’s minimum service requirements, the state would be required to pay the promised COLA on any pension benefit that had already been earned. However, it likely would be permissible to change the COLA formula going forward, as it applied to the pension earned by future years of service."

         http://www.ihsdo.org/modules/groups/homepagefiles/cms/2343937/File/PensionLegalGuide_RELEASE.pdf

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         1. Algernon, thanks for the info.

            I believe the days of defined benefit public pensions are numbered, as the private sector has discarded this kind of deferred compensation and is unwilling to support this kind of benefit for public employees.  I expect so-called hybrid pension plans, which is a limited defined benefit along with a cash balance feature, will replace most traditional defined benefit plans in the public sector. Indeed, the public at large, being stirred up by Wall Street investment bankers, Americans for Prosperity acolytes, and other similar public sector antagonists, will insist on such changes. You'll see more politicians such as Walker Stapleton leading the charge.

            In the meantime, current public retirees and vested members must assume a much more active role in protecting their pension rights, as retiree silence invites further assaults on their vested and contractual retirement benefits. 

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