Some states and cities have found that cutting cost-of-living adjustments (COLAs) to the pensions they provide their employees is a way to loosen the financial vise of pension liabilities and a shaky economy. The Center for Retirement Research of Boston College in its recent study, “COLA Cuts in State and Local Pensions” discusses this child of the Great Recession and generous pension plans whose context has changed.
By 2009, 76 percent of public pension plans provided automatic COLAs, either linked to the consumer price index (CPI) or at a fixed rate. Some were capped at 3 percent; others occurred at a rate the plan specified. But in the aftermath of the financial upheavals of 2008 and 2009 — which heightened the strains created by pension liabilities — 17 states cut COLAs in some manner.
Unlike ERISA, which allows employers to change the terms of pension benefits in the future, the laws in most states curb sponsors’ power to change future benefits for current employees. That would seem to constrain state governments from cutting COLAs, but almost every court challenge to a COLA cut has failed under the premise that COLAs are not a core benefit and therefore not a contractual right.
The states adopted different approaches: some dropped a guaranteed COLA and linked COLAs to the CPI; some reduced the COLA and linked it to the funded status of the plan; some reduced the COLA. One, Florida, suspended the COLA but only until 2016.
Florida provides an example of the fact that not only state, but also local, governments seek to address economic stress by cutting the public pension plan COLA — and that the process can be messy. Jacksonville Mayor Alvin Brown (D) proposed cutting the COLA for city pensioners; he and the Jacksonville Police and Fire Pension Fund arrived at an agreement regarding how that fund would cut its COLA, but the city council said the plan did not go far enough. And in May, Florida 4th Circuit Court Judge James Daniel ordered the fund to pay one of its participants $75,000 in a suit over the fees the fund charged him for access to its documents.
John Iekel is Senior Writer and Editor for the NTSA portal.
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