Colorado Court Rules That Pension COLAs Are “Limited” Contract Rights

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.

Colorado Government Immunity Act Does Not Protect Plan Trustees

Trustees of Colorado governmental pension and benefit plans should take note of a recent Colorado Court of Appeals decision, which ruled that the Colorado Government Immunity Act does not apply to protect trustees of an employee benefits trust. The Colorado Court of Appeals issued its opinion in Casey v. Colorado Higher Education Insurance Benefits Alliance Trust on August 16, 2012.

In response to this decision, trustees of Colorado governmental pension and benefit plans should review their fiduciary liability protections, including fiduciary liability policies. Trustees should be sure they understand the exact scope and limits of their potential fiduciary liability. Fiduciary liability insurance provisions that expose the trustees to potential liability should be identified, discussed and renegotiated.

Political Gridlock and Pension Law

The Presidential campaigns rarely mention pension issues, but pension law is shaped by politics. What do current political trends mean for the future of pension law? A recent book by two prominent congressional scholars tells us that the political gridlock in Washington is Even Worse Than It Looks. The authors, Thomas E. Mann and Norman J. Ornstein, explain that the causes for this include:

•  Political parties that are polarized and “vehemently oppositional”;  

•  The “checks and balances” in the U.S. constitutional system, which present “more structural impediments to action than any other major democracy”;

•  Redistricting that allows politicians to run in “safe” districts, not requiring them to respond to diverse political views;

•  Splintered media sources that narrow their ideology to viewers’ preferences, promoting extremism rather than centrism; and

•  Campaign finance laws that allow huge sums of money to buy negative, polarizing ads.

What does this portend for tax simplification proposals that would affect pension laws? It suggests that no comprehensive changes are imminent. In some ways, this is good. It delays the possible disruption that could be caused by major “simplification” of the kind proposed by the Bush administration, which would consolidate various retirement plans (457, 403(b), 401(k)) into a single form called an Employer Retirement Savings Plan. The American Society of Pension Professionals and Actuaries has stated that such reforms would “not be simplification” and “would disrupt saving, and force state and local government and nonprofits to modify their retirement savings plans and procedures.” Gridlock would also forestall proposals to reduce retirement plan tax benefits in order to raise revenue, such as the “20/20” proposal of the National Commission on Fiscal Responsibility and Reform that would limit annual contributions to the lesser of $20,000 or 20% of compensation.

The good news is that vast complexities of pension law could be simplified by administrative action and piecemeal legislation. Progress on simplifying pension law is possible despite a political situation that may remain Even Worse Than It Looks.