Reversing a lower court decision, the Colorado Court of Appeals recently ruled that “limited” contractual rights apply to cost-of-living benefit adjustments (COLAs) payable from the statewide pension plan (Colorado PERA). The contract rights apply to the COLA in effect when a participant’s benefit becomes “vested.” The Court of Appeals reasoned that the statute unambiguously said the COLAs “shall be” a specified amount, and that frequent past changes to the COLAs did not affect the contract right this wording created. Justus v. State of Colorado, 2012 COA 169. No. 11CA1507 (October 11, 2012).
In response to this decision, the lower court must now answer the following questions in order to determine whether a law passed in 2011 may be applied to reduce COLAs for vested Colorado PERA participants: (a) Did the law cause only an “insubstantial impairment of” the contract right to a COLA? (The answer to this question is presumably no, because it was the high cost of the COLAs that made them an appealing target for the legislation’s attempt to reduce unfunded pension liabilities); or (b) If the law caused a “substantial impairment,” was that impairment “reasonable and necessary to serve a significant and legitimate public purpose (i.e., actuarial and funding considerations).” (This is the big question: At what point do underfunded public pensions become an unreasonable drag on public finances, so that the contractual promise may be broken?)
This case raises issues of great significance to Colorado and possibly other states (although it the court said its decision is not relevant to cases decided differently in South Dakota and Minnesota.) Both sides have appealed the decision to the Colorado Supreme Court.
Here is a link to a 2008 New York Times article about this case that explains the broad scope of political and economic issues that are involved.
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