March 01, 2013 08:50 PM UTC

Colorado PERA: Give it Up Already, the COLA is a Contract!

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• by: PolDancer

Three years ago, the Colorado Legislature and its pension administrator Colorado PERA hit upon the idea of reducing state debt by taking back accrued public pension “COLA” (cost-of-living) benefits from retirees in the pension.  They retroactively seized these accrued pension benefits in a bill, SB10-001.

The members of the Colorado PERA pension whose COLA benefits were taken (PERA retirees) claim that the State of Colorado broke their pension contracts, and they’re fighting the taking of their COLA benefits in court.  But, the people who actually owe the money due under the contracts (the State of Colorado, Colorado PERA and its affiliates) can’t make up their minds on the subject of the PERA contract breach.  They claim that the pension COLA benefits ARE their contractual obligation, AND they claim that the pension COLA benefits ARE NOT their contractual obligation.

Such extreme cognitive dissonance must certainly result in great discomfort.  I imagine that it is very disconcerting to Colorado PERA’s SB10-001 Legal Defense Colossus . . . composed of a group of capable in-house Colorado PERA attorneys, the external high-powered law firm paid to help take the COLA benefit, AND the gifted lawyers of the Colorado Attorney General’s Office.  The Colorado PERA SB10-001 legal defense team is truly colossal!

However, it is unfortunate for the Colorado PERA SB10-001 Legal Defense Colossus that their client (Colorado PERA) has so resoundingly contradicted the Colossus’ theory of the law case . . . and in writing submitted to the Colorado General Assembly no less!  This must be quite uncomfortable.

But, does this seem fair to you?  In one corner we have the Colorado PERA SB10-001 legal defense team with access to boundless Colorado taxpayer litigation dollars AND, incredibly, Colorado PERA retiree trust funds!  In the opposite corner we have some elderly, not-particularly-wealthy, retired public workers who humbly ask for what they are owed.  (I know . . . life’s not fair.)

Fortunately, Colorado courts have staved off Goliath’s earlier attempts to seize accrued public pension benefits.  For half a century, Colorado courts have held that public pension benefits ARE contractual obligations of Colorado public pension plan sponsors.  This makes sense . . . otherwise, Colorado’s public pension benefits would be illegal “gifts” under Colorado’s Constitution.

PROPONENTS OF BREAKING COLORADO PERA CONTRACTS BEFORE THE BREACH, “THE PERA COLA IS A CONTRACTUAL OBLIGATION.”

Colorado PERA in a written document, to the Colorado General Assembly’s Joint Budget Committee on December 16, 2009 states that the PERA COLA benefit IS a contractual obligation of PERA, “The General Assembly cannot decrease the COLA (absent actuarial necessity) because it is part of the contractual obligations that accrue under a pension plan protected under the Colorado Constitution Article II, Section 11 and the United States Constitution Article 1, Section 10 for vested contractual rights.”

Link:

http://www.kentlambert.com/Files/PERA_JBC_Hearing_Responses-12-16-2009_Final.pdf

Greg Smith, Colorado PERA General Counsel, (at the time) in the Denver Post, November, 30, 2008: “The attorney general's opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments.”

Link:

http://www.denverpost.com/news/ci_11105271#ixzz0eEZGoxly

Senator Josh Penry, co-prime sponsor, SB10-001 appearing on Your Show, Channel 20 with Channel 9 News (KUSA-TV) host Adam Schrager on January 10, 2010 at 10:30 a.m.:

“What the courts have said with the case law and opinions have said is that you can’t, it is a contract unless there is actuarial necessity.”

Legal Brief of Colorado PERA General Counsel (at the time) Greg Smith, as described by a Rocky Mountain News reporter on August 17, 2005:

“His briefing paper said ‘there has never been a finding in Colorado that the state has reserved its power to make changes’ in PERA’s benefit structure.”

PROPONENTS OF BREAKING COLORADO PERA CONTRACTS AFTER THE BREACH, “THE PERA COLA IS NOT A CONTRACTUAL OBLIGATION.”

Adam Franklin, Senior Staff Attorney, Colorado PERA, April 5, 2011 (as documented by the organization Friends of PERA):

“PERA believes that the COLA formula is not contractual.”

Link:

http://www.friendsofpera.com/0405meeting.pdf

Attorney General John Suthers in testimony to the Colorado Legislature’s Joint Budget Committee on December 4, 2012:

“We’re appealing because we believe there was no contractual right (to the PERA COLA.)”

In my opinion, what our esteemed Attorney General really meant to say is (no offense intended John): “We’re appealing because we WISH there was no contractual right to the PERA COLA.”

Colorado courts have correctly determined that Colorado public pension benefits (including public pension COLA benefits) ARE contractual obligations.  They arrive at this conclusion rationally, based on a contract analysis.  This is the legitimate test for the contractual nature of public pension benefits.  But, even the legislative history of the Colorado PERA COLA benefit makes it clear that the COLA benefit is a contractual obligation.

In 2000, the Colorado General Assembly enacted legislation to set the Colorado PERA COLA benefit at a flat 3.5 percent rate.  Colorado PERA describes this change in their publication “History of Colorado PERA Legislation” as follows:

“2000, HB 00-1458: Established 3.5% compounded annual automatic COLA effective March 2001.”

Link:

http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251603807998&ssbinary=true

Now, it would be rather difficult for Colorado PERA administrators to deny that the “legislative history” of the PERA COLA benefit establishes the PERA COLA benefit as contractual. Particularly, after we learn that these Colorado PERA administrators describe the PERA COLA benefit as “automatic” in their own publication setting forth the “History” of “Colorado PERA Legislation.”

Colorado PERA administrators use the word “automatic” in their publication to describe the PERA COLA since “automatic” pension COLA benefits may not legally be diminished by public pension plan sponsors.  Pension COLA benefits that may be legally diminished by public pension plan sponsors are known as “ad hoc” COLA benefits.  Colorado PERA’s administrators are well aware of this fact.  (I suspect that they would prefer that PERA retirees defending their pension contracts were not well aware of the fact.)

As we have seen, in 2004, in another bill, the General Assembly “grandfathered” in past PERA members at the 3.5 percent COLA level enacted earlier in 2000.  Going forward, into 2005 and beyond, new PERA members were granted a COLA of the lesser of 3 percent or inflation.  If the Colorado PERA COLA of 3.5 percent enacted in the bill, HB 00-1458, was not an “automatic,” “guaranteed,” “fixed,” “contracted” COLA benefit, then why would the Legislature have bothered with “grandfathering” in 2004?  Answer: They would not have bothered.  They would have simply reduced the PERA COLA across the board as state legislatures do if their state has an “ad hoc” COLA benefit.  This change made to the Colorado PERA statutory contract in 2004 was legal, because it was “PROSPECTIVE,” it did not impair existing contracts.

Public pension benefits may be legally reduced for future members of pension plans without impairing contracts.  Public pension benefits may also be legally improved for current members of pension plans without impinging on their contractual rights.  On the other hand, changes to public pension statutory contracts that diminish contracted benefits (e.g., the COLA provisions of SB10-001) are indeed unconstitutional . . . such changes take earned, accrued, deferred compensation.

Even earlier, back in 1993, the Colorado PERA COLA benefit was IMPROVED to “the lesser of 3.5 percent or inflation.”  This 1993 bill, HB93-1324, also struck the “ad hoc” language from Colorado law whereby the General Assembly reserved the right to approve COLAs before they were paid.  HB 93-1324 struck the following language from the PERA statutes “COLA increases shall be made only on approval of the General Assembly.”  Consequently, the discretion of the Colorado General Assembly to diminish the PERA COLA benefit for vested PERA members was eliminated.

On March 24, 1993 (1:32 PM – 2:28 PM) the House Finance Committee of the Colorado General Assembly heard House Bill 93-1324, i.e., the bill that made the 1993 improvement in the PERA COLA.  The testimony given at this meeting and the responses of the members of the House Finance Committee make it clear that the PERA COLA benefit they are putting into Colorado law is a contractual obligation of Colorado PERA and its affiliated public employers.

If you listen to the recording of this meeting, you will hear a member of the House Finance Committee refer to the Colorado PERA COLA provision under consideration as a pension benefit that is “guaranteed,” “now and in the future.”  This House Finance Committee member made certain that all of her colleagues were on the same page . . . the new, automatic PERA COLA benefit was “guaranteed” into the future for Colorado PERA retirees.

You will hear the Chairman of the House Finance Committee, Representative Martin, tell the committee that the proposed PERA COLA benefit had been “unanimously approved by the PERA Board.”  Rep. Martin added: “I think this is a reasonable approach.”

You will hear Rob Gray, PERA’s Director of Government Relations, tell the committee: “The PERA Board does support this bill.”  “We felt like it is something that is good pension policy . . . that it makes sense . . . THAT IT IS MAKING PERMANENT CHANGES, and also that it does help employers which is one of the goals of the bill.”

In 1993, the Colorado PERA Board of Trustees and the Colorado General Assembly were concerned that the existing “ad hoc” PERA COLA provisions could lead to the payment of higher pension COLA rates to retirees in the future, if inflation accelerated.  Ironically, at the time, they believed that the proposed PERA COLA, at a predetermined, fixed level, was a good deal for Colorado PERA-affiliated employers, even though the PERA COLA would become “automatic.”  Note that even when this “automatic” PERA pension COLA was put into Colorado law in 1993, the primary concern was limiting Colorado PERA employer contributions.

Rob Gray continued: “The (CPI up to) 3.5 percent increase is a reasonable level.”  “It will probably come close to what the long-term inflation rate is.”  (SB10-001’s illegal 2 percent COLA provision seeks to inflate away Colorado PERA-affiliated employer pension debt.  The official Colorado PERA inflation assumption is 3.75 percent.)

Significantly, the Colorado PERA representative, Rob Gray, pointed out an advantage of the proposed “automatic” PERA COLA.  According to Rob Gray, the advantage of the proposed COLA: “is that it adds predictability for current and future retirees, people looking at leaving might look at this and say now I know how my future increases are going to be determined . . .”.  Here, Rob Gray clearly allays the concerns of PERA members about making the retirement decision.  He offers assurances to Colorado PERA members choosing to retire under the statutory Colorado PERA contract that they need not be concerned that the annual increases in their pension benefits will ever be diminished.  With the bill, COLA benefits were now safe . . . “predictable.”  Many PERA members have changed the course of their lives by choosing to retire in reliance upon this “automatic,” contracted Colorado PERA COLA benefit.

At the bill hearing, Rob Gray noted that: “when a change in benefits is added, like this bill, it extends out the period for paying off that unfunded liability.”  Thus, Rob Gray characterized the Colorado PERA COLA benefit as a Colorado PERA liability.

Rob Gray’s comments continue: “We like all three parts of the bill . . . we urge you to support all three.”  “We think the cost-of-living changes make a lot of sense.”

Rob Gray: “The Cost-of-Living Stabilization Fund change ended up pushing the amortization period too, simply because you’re funding it on an actuarial basis and you’re recognizing that it’s an ongoing thing.”  Why would Rob Gray bother characterizing the proposed PERA COLA as “an ongoing thing” if it was actually discretionary, i.e., “ad hoc”?  He would not.

Rob Gray: “You’re right that you do have compounding there for the first time.”  “I think the retirees support this change, because they see it as a more actuarial way of funding it.”  “It will be easier for them to understand, because they won’t have two methods of increase . . . it will just be the single increase.”

The legislative history of the Colorado PERA COLA benefit makes it clear that the PERA COLA is a contractual obligation of Colorado PERA and PERA-affiliated employers.  During the March 24, 1993 presentation and discussion of HB93-1324 we hear the Colorado PERA COLA benefit under consideration described as a public pension benefit that is “guaranteed,” “now and in the future,” “an ongoing thing.”  We hear the proposed Colorado PERA COLA benefit described as “predictable,” “permanent,” and a Colorado PERA “liability.”  Further, we hear a representative of Colorado PERA inform the House Finance Committee that members of the Colorado PERA pension plan who are considering retirement will be able to look at the proposed PERA COLA benefit and “know how . . . future increases are going to be determined.”

Despite Colorado PERA’s wishes, an “automatic,” contracted public pension COLA benefit cannot legally, retrospectively metamorphose into an “ad hoc” pension COLA.  The legislative intent is clear.  It is obvious that the members of the House Finance Committee and the Colorado PERA representative were describing a contractual obligation of Colorado PERA and its affiliated employers.  Retroactively changing the PERA COLA benefit to the detriment of a Colorado PERA retiree is unconstitutional.

Our Colorado Attorney General has told us: “We’re appealing because we believe there was no contractual right.”  But, our Attorney General must know that when a public employee has earned his retirement benefit and retired, at that time, pension benefits become “a vested right of which the person entitled thereto cannot be deprivedНѕ it has ripened into a full contractual obligation."

In my opinion, the most honorable path for our Attorney General to take is to have the thing out at once.  He should acknowledge that the Colorado PERA COLA benefit is manifestly a contractual obligation.

Please help Save Pera Cola do battle with the Colorado PERA SB10-001 Legal Defense Colossus.  (It’s no small undertaking.)  The website, saveperacola.com, explains how to make a contribution.  And, Friend Save Pera Cola on Facebook!