cost of living adjustments | Pension360

Jacksonville Poised to Pass Amended Pension Reform Plan

After months of debate, the Jacksonville City Council is as close as ever to passing an oft-amended pension reform bill.

The bill originally was designed to force the city to pay higher annual payments into its Police and Fire Pension Fund. But new amendments will likely force pensioners to shoulder some of the burden, as well.

Details on the new amendments to the bill, from the Florida Times-Union:

One amendment favored by City Council would give the city the power to unilaterally impose changes in pension benefits in three years if there is an impasse between the city and police and firefighter unions in future collective bargaining talks.

Gulliford said that would put Jacksonville in the same posture as other Florida cities.

Another amendment would change the cost-of-living adjustments that current police and firefighters would get for pension benefits earned after a new agreement takes effect. Instead of a guaranteed 3 percent COLA annually, the COLA would float based on Social Security’s cost-of-living index, with a maximum COLA of 4 percent.

That change would reduce the city’s pension cost in years when Social Security is less than 3 percent, but the city’s cost would be higher if inflation pushes that index above 3 percent.

According to the calculations of the Times-Union, the bill, amendments included, is likely to pass a vote by City Council:

Most Finance Committee members previously backed the amendments during an initial round of voting last week.

Though nothing would be final until the full council meets Dec. 9, the votes so far show an emerging majority of council is lining up to approve the pension legislation, albeit with significant differences from the tentative agreement put forward by Mayor Alvin Brown.

In the Rules Committee, the unanimous votes for the amended bill were cast by Bill Bishop, Johnny Gaffney, Bill Gulliford, Warren Jones, Robin Lumb, Don Redman and Matt Schellenberg.

[…]

In addition to the seven City Council members who voted to move forward with the amended bill Monday, the amendments drew support at last week’s Rules-Finance committee meeting from council members Richard Clark, Lori Boyer, John Crescimbeni and Jim Love. City Council President Clay Yarborough also supported the amendments.

That would add up to at least 12 members voting for the bill, which would exceed the 10 votes needed to get a majority on the 19-member council.

The city’s Police and Fire Pension Fund is 43 percent funded.

Illinois Borrowing Costs To Rise In Wake of Ruling Overturning Pension Reform

Illinois already has the lowest credit rating of any state in the country. But it could see its borrowing costs rise further after a court law week overturned the state’s pension reform law.

From Bloomberg:

Illinois bonds are set to weaken after a judge struck down a plan to address the biggest pension deficit among U.S. states, according to Wells Capital Management.

Illinois 10-year obligations yield 3.68 percent, or about 1.4 percentage points above benchmark municipal debt, data compiled by Bloomberg show. At that yield spread, the smallest since July, the debt isn’t attractive given the legal developments and the potential financial strain, said Robert Miller, who helps oversee $35 billion of munis at Wells Capital.

The lowest-rated U.S. state plans to appeal the Nov. 21 ruling that its constitution protects cuts to public pensions, which face a $111 billion shortfall. The decision marks the latest challenge to emerge for the incoming governor, Bruce Rauner, who takes office Jan. 12. He also has to grapple with a $2 billion budget hole from expiring increases to income-tax rates.

“You would expect on this news that spreads would widen out,” said Miller, who’s based in Menomonee Falls, Wisconsin. “The pension is definitely a looming problem and something they need to deal with.”

Some Illinois bonds weakened after last week’s pension decision. Taxable debt maturing in June 2033, the state’s most frequently traded securities, changed hands Nov. 21 at yields as high as 5.42 percent, Bloomberg data show. The debt’s spread to Treasuries was about 0.3 percentage point more than the average for the past five months.

If history’s any guide, the court decision will keep inflating the state’s relative borrowing costs. In July, Illinois yields surged after a separate court ruling signaled the 2013 pension fix might be in jeopardy. The law would save an estimated $145 billion over 30 years by reducing cost-of-living adjustments and raising the retirement age.

The state is appealing the circuit court’s decision to the Supreme Court.

Oklahoma Labor Group Pushes For COLA Boost In Wake of Pension Funding Improvement

Since 2010, the aggregate funding ratio of Oklahoma’s state-level pension systems has risen from 58 percent to 74 percent. Meanwhile, unfunded liabilities have declined by over $6 billion.

Now, a labor group is pushing lawmakers to boost public employee cost-of-living adjustments. The state froze COLAs in 2008.

From the Associated Press:

Representatives of Oklahoma’s public retirees who have not had a cost-of-living adjustment, or COLA, since 2008 say the time has come to boost their pension incomes now that the state’s underfunded pension systems are regaining their financial strength.

Managers of some of Oklahoma’s biggest retirement systems say they are financially stronger than they were just four years ago. Unfunded liability has declined by $6.5 billion and the funded ratio of the systems has improved from 58 percent four years ago to 74.4 percent.

The turnaround has emboldened officials at the Oklahoma Public Employees Association to make COLAs for the state’s pensioners a top priority when the 2015 Legislature convenes in February.“We have made sacrifices to make sure our system is stronger,” OPEA Executive Director Sterling Zearley said. “I think it’s time that we start looking at allowing COLAs.”

But some lawmakers expressed hesitancy and called a COLA re-instatement “premature”. From the AP:

State officials responsible for overseeing the financial health of Oklahoma’s pension systems say that while their improved financial condition is good news for the state, they may still not be financially strong enough for COLAs.

“I would caution and suggest that it’s maybe still a little bit premature to be having that conversation,” said Preston Doerflinger, director of the Office of Management and Enterprise Services and Gov. Mary Fallin’s secretary of finance, administration and information technology.

[…]

Rep. Randy McDaniel, R-Edmond, who has authored many pension overhaul bills, said he favors postponing consideration of pension benefit increases until pending litigation that is challenging one of the measures is resolved.

The lawsuit challenges legislation adopted this year that would end the traditional pension system for newly hired state workers in favor of a 401(k)-style retirement plan beginning in November 2015. It alleges the transition could cost Oklahoma taxpayers millions of dollars in lost revenue returns and reduced employee contributions

State Treasurer Ken Miller cautioned that the turnaround was fueled in part on income from the investment of pension funds that has been “exceptional yet unsustainable.”

“If you look at the long term average of the stock market, 20 percent returns are extraordinary but not sustainable,” Miller said.

Court: Colorado Pension System Can Cut COLAs

The Colorado Supreme Court ruled Monday that Colorado’s largest pension fund could legally scale back cost-of-living adjustments.

In 2010, the Colorado Public Employee’s Retirement Association (CPERA) cut annual COLA increases from 3.5 percent to 2 percent. Retirees took the cuts to court, alleging breach of contract. But the ruling today sided with the pension system, and so the COLA cuts will remain.

From the Denver Post:

The Colorado Supreme Court on Monday ruled that the Colorado Public Employee’s Retirement Association can adjust the cost-of-living increases that current retirees under the state’s largest pension plan receive.

“We hold that the PERA legislation providing for cost of living adjustments does not establish any contract between PERA and its members entitling them to the perpetual receipt of the specific COLA formula in place on the date each became eligible for retirement or on the date each actually retires,” the Colorado Supreme Court stated in its ruling.

Cost-of-living formulas were first implemented in 1969 and have been adjusted several times over the years, with a 3.5 percent fixed rate set back in 2000 after stock markets had several years of big gains.

Concerns that the pension plan was severely underfunded triggered 2010 legislation that capped annual cost-of-living increases at 2 percent unless the pension’s investment suffered a loss the prior year.

In that case, the increase adjust at the actual inflation rate, up to 2 percent.

Retirees sued, arguing that PERA had a contractual obligation to provide the increases in place at the time they retired for the remainder of their lives.

A district court judged ruled against the retirees in Justus v. State, but the Colorado Court of Appeals overturned that decision.

Colorado Attorney General John Suthers, who office argued the case for the state, said he was pleased with the decision.

“The law in question was an important part of ensuring that PERA remains there for state retirees long into the future. As we argued to the Court, upholding the law helps protect both current and future retirees, and the state’s taxpayers,” he said in a statement.

PERA manages over $40 billion in assets and has over 400,000 members.

Photo by TaxRebate.org.uk

Oregon PERS Reforms: The Supreme Court Will See You Now

Two major reform measures are finally ready for their day in the Oregon Supreme Court.

Public employees are challenging the 2013 reforms –which reduced the state’s unfunded pension liabilities by $5 billion by cutting COLAs and scaling back benefits – on the grounds that the measures broke contracts protected under the state’s constitution.

This week, both sides submitted their written briefings to the Supreme Court. Reported by the Oregonian:

Monday marked the deadline for written briefings to the Oregon Supreme Court, where public employees are challenging the legality of two pension reform bills enacted last year.

The laws reduced retirees’ annual cost of living increases and eliminated a benefit bump-up for out-of-state retirees that don’t pay taxes in Oregon. As such, they helped staunch the precipitous rise in required contributions to the system since the 2008 financial crisis decimated the fund’s investment portfolio and opened up a $16 billion funding gap.

Oral arguments will be held Oct. 14. Each side will have one hour. After that, public employers, the governor, lawmakers, employees and retirees can hold their collective breath, with a decision anticipated during expected in time for the 2015 Legislative session.

A quick breakdown of what we can expect each side to argue, from the Oregonian:

The Legislature referred any challenges to the bills directly to the Supreme Court to expedite the legal decision process. Public employees appealed the changes, arguing in briefs filed earlier this summer that the benefit changes violate the contract clauses of the Oregon and U.S. constitutions and amount to an illegal taking of private property without compensation.

The state and public employers maintain that the cost of living adjustments, contrary to previous decisions by the court, is not an immutable part of the contract. And even if it is, they maintain it can be changed, as the Legislature has done previously.

Likewise, they argue that the extra payments to cover beneficiaries’ state tax liabilities aren’t part of the contract and can be eliminated for out-of-state retirees who don’t pay Oregon taxes.

Legislators briefly weighed enacting another round of pension reforms this year, but they decided against it.

Court: Washington Acted Within Law When It Repealed Pension Benefits

The Washington Supreme Court unanimously sided with the state on not one, but two pension-related decisions over this past weekend.

The court affirmed the legality of two actions by Washington in recent years: in 2007, the state repealed a “gain-sharing” policy that had given retirees a bonus when pension fund investments exceeded return expectations. Then, in 2011, Washington eliminated automatic COLAs for certain classes of retirees.

Gain-sharing and automatic COLAs were originally implemented in the mid-1990s. But when the lawmakers repealed the policies in recent years, public employee unions were quick to sue the state for breaches of contract.

Lower courts had previously sided with unions on these issues, but the case was appealed all the way to the state Supreme Court.

The high court found that, in both cases, the state acted legally when they repealed the policies. The actions weren’t a breach of contract, the court said, because the legislature had reserved the right to reverse those policies at any time.

But public employees claim they were duped—they say the state put workers in pension plans that provided less benefits, but came with promises of “gain-sharing” and automatic cost-of-living adjustments. From the Seattle Times:

Public-sector unions and others who sought to maintain the benefits concede they are pricey. But, they argued, the state had dangled the promise of the pension enhancements in the late ’90s when officials persuaded tens of thousands of workers to give up their defined-benefit retirement plans for cheaper plans.

The cheaper plans reduced the defined benefits by half while adding a mix of defined contributions and gain-sharing, which occurred when investment returns exceeded 10 percent for four straight years.

James Oswald, a Seattle lawyer who represented state ferry worker Cheryl Costello and others who sued over repeal of the gain-sharing benefit, said that when the state Department of Retirement Systems provided written material encouraging workers to give up their more expensive plans, it never informed them gain-sharing could be repealed. The workers could not have known unless they had parsed the fine print of the statute creating the benefit, he said.

“Tens of thousands of employees gave up their benefits based on representations about what they’d receive,” Oswald said. “They were never told that these benefits could be repealed, and that’s very troubling to me. That’s the kind of bait-and-switch the court would never permit a private employer to do.”

A bit of background of the “gain-sharing” policy, from the Bonney Lake Courier Herald:

The Legislature enacted gain-sharing in 1998. Gain-sharing gave certain public employee retirees (members of Plans 1 and 3) a share of extraordinary investment gains whenever the pension trust funds had average investment gains of more than 10 percent over the prior four years.

When enacting gain-sharing, the Legislature made clear that it “reserves the right to amend or repeal this chapter in the future and no member or beneficiary has a contractual right to receive” this pension provision not granted prior to the time of the repeal.” (Former RCW 41.31.030 and former RCW 41.31A.020)

The Legislature repealed gain-sharing in 2007, after paying gain-sharing benefits already earned.

When the legislature enacted automatic COLAs for retirees, they gave themselves an identical way out—writing that they “reserve the right to amend or repeal this chapter in the future and no member or beneficiary has a contractual right to receive” this pension provision not granted prior to the time of the repeal.”

Photo: “Washington Wikiproject” by Chetblong. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

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