A class-action lawsuit seeking to overturn the Public Employees Retirement Association solvency plan was filed against the state in Denver District Court Friday, just three days after Gov. Bill Ritter signed Senate Bill 10-001 into law.
At issue is the provision that cuts retirees’ annual benefit increases from 3.5 percent to 2 percent starting in 2011. (For this year there will be no increase. Future increases could drop below 2 percent under certain conditions.)
Despite support for the bill by organized employee groups, there’s widespread anger about the cut among individual retirees, and the lawsuit doesn’t come as a surprise.
The named plaintiffs are Gary Justus, a retired Denver Public Schools math teacher who had more than 29 years of service, and retired Department of Labor employee Kathleen Hancock, who worked for about 15 years.
‘This lawsuit is about the state complying with its own constitution,” Justus said in a statement. “The General Assembly is trying to correct its past mistakes on the backs of the retirees. We can’t go back and restart our careers.” DPS employees and retirees were moved into the PERA system effective Jan. 1.
Justus and Hancock are represented by Stember Feinstein Doyle & Payne, a Pennsylvania firm that has brought employee-benefit suits in other states, and Greenwood Village lawyer Richard Rosenblatt.
According to the lawyers, the “suit is filed on behalf of approximately 100,000 PERA members who became eligible to retire or who have retired since March 1, 1994, when annual pension increases were first guaranteed under state law.”
The suit, citing both court rulings and a 2004 Colorado attorney general’s opinion, argue that the annual benefit increases are a vested contractual right and can’t be changed by legislation. Although PERA operates separately from state government, benefits and contribution rates are controlled by the legislature.
PERA executives have consistently argued that “actuarial necessity” – the need to make the system financially solvent within 30 years – legally allows for benefit reductions. But, those executives also have acknowledged in legislative testimony that actuarial necessity isn’t well defined in law.
The SB 10-001 plan also includes changes in employer and employee contributions in varies benefit calculations. But, PERA officials say the rescue won’t work financially without cuts in retiree benefits.
Those cuts, though, could have significant impact on individual retirees. “For example, a public employee who retired in 2002 and who was eligible for $2,772 a month (the average PERA benefit in 2008) will lose more than $165,000 in promised benefits during the next 20 years,” according to a statement from the lawyers.
Its investments hollowed out by the recession, PERA’s net assets available for benefits dropped from $43.1 billion at the end of 2007 to $30.8 billion at the end of 2008, a loss of more than 25 percent. The system pays about $3.1 billion in benefits a year and receives about $1.7 billion in contributions from covered employees and their employers. PERA overall was about 70 percent funded at the end of 2008.
Some observers believe that past legislative actions, including benefit increases, contribution cuts and programs that allowed workers to buy extra years of eligibility, also weakened the pension system. (Those decisions were made in flush economic times, like the general tax cuts that have come back to haunt the state.)
The system has 190,684 active members, 81,248 benefit recipients and 143,619 inactive members (people with eligibility but no longer working in PERA-covered jobs.)
While often thought of as the state pension system, PERA membership is dominated by employees of schools and colleges. Of PERA’s 190,684 active members, 118,547 are in the school division. Some 44,806 people receive benefits from that division.
In 2008 employers paid more than $430 million into the school division trust fund while employees contributed about $304 million. There were about $1.4 billion in benefit payments. Because of the hit taken in PERA’s investments, in 2008 the net assets of the school division trust fund dropped from about $23 billion at the beginning of that year to about $16 billion at year’s end.
The state division includes employees of 28 colleges, universities and other education agencies, with 11,679 members (about 20 percent) accounted for just by the University of Colorado, Colorado State, Metro State and Front Range Community College. Some higher ed employees have access to other retirement plans. PERA members aren’t covered by Social Security.
The contribution increases required by SB 10-001 have many school districts worried, especially given the planned cuts in state school support this budget year and next.
The bipartisan group of legislative leaders behind the bill wanted it passed and signed before March 1 to head off the scheduled 3.5 percent increase for retirees. Most of the opposition to the bill came from other Republicans, but SB 10-001 passed the Senate 25-10 and the House 36-29.
When he signed the bill Tuesday, Ritter said, “This is a fiscally responsible bill, and it represents another difficult but necessary decision that will require shared sacrifice and shared solutions from public employers and employees alike without imposing an unfair or undue burden on either group.”
A PERA spokeswoman said Friday the agency hadn’t been served with any papers and doesn’t comment on litigation. Defendants in the case are PERA, the state, Ritter and two PERA board officers.
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