Lawsuits in Minnesota, Colorado and South Dakota aim to reverse new state laws that reduce cost-of-living adjustments for retired public employees, and the outcome could affect other states' efforts to make similar changes.
Minnesota passed a law in 2009 replacing the annual COLA — which used a formula based on the consumer price index and the state retirement systems' investment returns — with a flat 2.5% annual adjustment until state plans reach a 90% funding level.
Colorado, which had a guaranteed 3.5% annual COLA for public employees and 3.25% for Denver public school employees, froze COLA adjustments in 2010 and replaced the automatic adjustment effective 2011 with a formula capped at 2% until the funded status exceeds 103%.
South Dakota in July replaced its automatic annual COLA of 3.1% with a formula that determines the annual adjustment based on the funded status of the state's pension plans.
Other states are considering making similar changes to the COLAs.
In Ohio, a coalition of unions, retirees, pension plan administrators and others are considering asking the Legislature to reduce the annual COLA to 2% from 3% for existing and future retirees, and New Jersey Gov. Chris Christie said in September that he aims to suspend COLAs for existing retirees.
Stephen Pincus, a partner with Pittsburgh-based law firm Stember Feinstein Doyle Payne & Cordes LLC, represents the plaintiffs in the Colorado, Minnesota and South Dakota suits. In all three states, he claims, the changes violate state and federal contract and so-called takings clauses. The COLA adjustments are contractual obligations between the state and retirees, the contract argument goes. The takings clause strategy argues that private property cannot be taken for public use without just compensation.
Mr. Pincus said, however, that states facing significant budget problems could get federal courts to support the proposals out of financial necessity.
“Most states find that pensions are contracts between the employee and the employer, and if (a court) establishes that there is a contract and this contract has been substantially impaired, the state can get out of its contract if it is able to show it's reasonable and necessary to serve an important public purpose,” Mr. Pincus said in a telephone interview.