Over the last couple of weeks there has been increased media coverage of pension lawsuits in Minnesota, Colorado and South Dakota. The publicity was triggered by the trial that was to begin in Minnesota on September 15th. This was to be the first hearing of these cases. At issue was a motion by the State of Minnesota for dismissal of the suit. The judge denied the motion and gave the plaintiffs 90 days to provide arguments as to why their suit should not be dismissed.

As the Minnesota lawsuit – the first of three in the nation challenging state legislation changing current public pension benefits –proceeds through, every other state will be watching. The outcome could lead others to follow or stop a movement in its tracks.

The legal battle in Minnesota will test the ability of states to change benefits of current retirees. The outcome could prompt other cash-strapped states to follow suit or grind a fleeting movement to a sharp halt.

“I think a lot of people will be closely following what happens in Minnesota,” said Katie Kaufmanis, director of communications for Colorado Public Employees' Retirement System.

Spurred by the deepest recession since the Great Depression, states around the country are scaling back retirement benefits estimated to be at least $1 trillion and possibly more than $8 trillion underfunded.

While most states that overhauled pensions trimmed benefits for future hires, Minnesota, Colorado and South Dakota passed legislation that trimmed cost of living adjustments for current recipients.

The Pew Center on the States reported this year that in eight states, at least one-third of the future pension obligations for all public employees, including teachers, are unfunded. As of 2008, Pew said, state and local governments had pension obligations totaling $3.35 trillion — $1 trillion of that not covered by the future stream of government and employee contributions specified under current law.

Only four states — Florida, New York, Washington, and Wisconsin — had fully funded pension systems as of 2008.

Minnesota lowered its 2.5 percent COLA to a rate ranging from 1 to 2 percent, depending on the plan, for the majority of the 65,000 retirees, and suspended COLA for retirees in the Teachers Retirement Association for two years, according to the lawsuit. Plans are scheduled to resume the 2.5 percent rate once they are 90 percent funded.

Colorado suspended its 3.5 percent COLA earlier this year, as state projections [1] showed its retirement system bankrupt by 2029 even if the system met it’s 8.5 percent assumed return rate, while South Dakota reduced its COLA [2] from 3.1 percent to 2.1 percent in July.

Retirees in all three states have filed suit, and first on the docket is Minnesota.

The lawsuit contends that plaintiffs, upon retiring, “acquired vested rights to their pensions, including the right to statutory post-retirement adjustments to their pension benefits.”

State officials say the solvency of state pensions is at stake.

“The state passed legislation based on the severe drop in the market,” Minnesota State Retirement System Executive Director Dave Bergstrom said. “We wanted to make sure our plans are sustainable.”

The lawsuit comes as states and municipalities are scrambling to shore up budget deficits, with some proposing selling off assets such as zoos, parking lots, airports and water supplies to plug budget holes, according to the Wall Street Journal. [3]

With states facing a $90 billion budget gap next year and ballooning long-term pension obligations, officials in several states indicated they would be watching the outcome in Minnesota. But some pension experts say the case may not have a sweeping affect, whatever its outcome.

“I’m not sure how much can be learned from one state to another,” said Olivia S. Mitchell, Director of the Pension Research Council at the Wharton school.

Mitchell said several states have “ironclad” constitutions that preclude adjustments once a recipient begins drawing benefits. From her experience in corporate pension suits, Mitchell said cases often hinge on the finer points in legal documents.

“This might largely depend on the contracts themselves and the language used,” Mitchell said.

In Washington, Backenhaus v. City of Seattle and other supporting cases are controlling on the issue of our pension being contractually and constitutionally protected.

Richard Maus, a retired middle and high school teacher who lives in Northfield, MN, said he believes retroactive adjustments to his retirement plan are unfair.

“Basically I just figured a contract was a contract,” said Maus, a plaintiff who worked primarily in the Robbinsdale school area and retired after 26 years.

Mitchell said exposing retirees to inflation can result in significant wage losses over time, particularly for those who live a long time.

“It has the perverse effect of cutting benefits for those who are most likely to feel the effects the greatest,” Mitchell said. “Then again, at least they get something; in corporate America it’s usually nothing at all.”