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Officer Down

Monday, September 29, 2014

Constitutional challenges to pension benefit cuts met with mixed results

-OBKCG Web Site-

--In Illinois, pension benefits are in the state's constitution which makes it difficult to cut pension benefits. These matters are currently being argued in court.--

Legal Insights for Pension Boards (Spring 2014)

by David T. Zafiratos and Ashley Folk

Although, it had traditionally been assumed that public pensions enjoyed a heightened protection from reduction, suspension or elimination for current public employees and retirees, recent cuts by many state legislatures have tested that assumption. Two recent cases from the New Mexico and Arizona Supreme Courts have rendered opposite conclusions.

In Bartlett v. Cameron, 316 P.3d 889 (2013), the Supreme Court of New Mexico held that the cost-of-living adjustment (COLA) paid out to retirees is not a vested property right. The case arose after New Mexico faced threats to the fiscal stability of the New Mexico Education Retirement Board retirement plan and subsequently passed a bill which amended the New Mexico statute governing COLA amounts, reducing COLAs to retirees. Several public education retirees sued, arguing that the legislature could not reduce their COLA benefits because they have a vested property right in the COLA calculation method that was in effect at the time that they retired.

The New Mexico Constitution provides that public employees acquire vested property rights with due process protections in their retirement plans. The retirees argued that the COLA payment is inseparably tied to their pension benefits, and is thus included as a vested property right. They claimed that reducing the amount of their COLA payment decreases the value of the entire retirement benefit, which is the same as if the legislature expressly cut their underlying retirement benefit. The State argued that COLA is not part of their retirement benefit, but instead is a separate amount that a retiree may receive, depending on certain economic conditions. The court ultimately determined that COLA was not part of the retirement benefit and was distinctively separate. The court labeled COLA as a legislative tool used to implement current public policy, as opposed to a vested property right. COLA is provided independently from the obligation to pay retirement benefits. Thus, reducing the COLA does not also reduce the retirees’ underlying substantive retirement benefits.

Conversely, in the case of Fields v. The Elected Officials’ Retirement Plan, 680 Ariz. Adv. Rep. 15 (2014), the Arizona Supreme Court held that modification of a statutory formula for calculating pension benefit increases violated the Pension Clause of the Arizona Constitution. The Arizona Constitution states that pension benefits shall not be diminished or impaired. Under the Arizona statute governing pension plans for elected officials, the benefit increase formula is similar to a COLA. The only difference is that the benefit increase is tied to the plan’s return on investment, as opposed to economic conditions. Under the Arizona statute, the benefit increase was also subject to a 4% increase cap. However, in 2011 the Arizona legislature enacted a bill that altered this formula. Subsequently, a class of retired judges and beneficiaries of the plan challenged this bill, claiming that it was unconstitutional.

The Supreme Court of Arizona came out opposite on this issue than the Supreme Court of New Mexico had in Bartlett. In Fields the court held that the term “benefit” encompasses benefit increases under the Pension Clause. The court relied on the history of the statute and Arizona precedent to reach this conclusion. Second, the court determined that changing the benefit increase formula diminished and impaired the benefits.

Recently, Illinois implemented a reform for its statewide pension systems relating to retirement benefits and COLA calculations (Public Act 98-0599) which have already been challenged. Illinois courts are not bound by or required to find either the Arizona or New Mexico decisions persuasive. However, in Fields, the Arizona Supreme Court specifically stated that Illinois had previously determined that benefit calculation formulas are entitled to constitutional protection. This could indicate that Illinois may hold itself in the minority with Arizona when the recent challenges are decided, and strike down the reform.

Of the seventeen states that have changed their COLAs, twelve have been challenged in court. In the nine states where the courts have ruled, eight have upheld the cut to COLAs. As the Bartlett court pointed out, the recent wave of COLA legislation can be attributed to the economic downturn that is affecting the fiscal viability of public funds. Illinois courts are being faced with identical arguments relating to the current reform —specifically that there is a constitutionally protected contractual right to the COLA calculation. Illinois has traditionally been considered one of the states with the greatest constitutional protection of public pension benefits. If Illinois courts decide to consider the current judicial thinking on the matter, it will be interesting to see if the reform is upheld in light of this strong constitutional protection.

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