Can they do that to public employees?

That’s the issue to be addressed tomorrow morning in Session 703 at the EA meeting:

703 – Can They do That? Plan Design and Constitutional Issues

Credits: EA Core 0.75 EA Noncore 0.75 CPD 1.50

Many governmental plan boards and sponsors are asking their actuaries for advice on plan design and contribution changes to address issues of underfunding and sustainability. The speakers at this session provide a brief overview of the type of plan design changes that have occurred since 2008 and focus on the legal constraints on reducing benefits and increasing contributions for participants. The panelists also address other “change agents” affecting governmental plans, such as municipal bankruptcy and IRS policies.

My first question would be how many actuaries get asked for advice on plan design when none get asked* about the choice of actuarial assumptions.  My second question:

Shouldn’t these plans that are cutting back on cost-of-living-adjustments (COLAs), even for current retirees, all be disqualified?

Of course government plans are exempt, for the most part, from ERISA (most glaringly as it applies to funding issues) but to have the plan considered ‘qualified’ there are certain advantages (as noted in the outline to session 303):

Advantages of Qualification

  • Employer contributions are not taxable to participant even if fully vested.
  • Qualified distributions may often be rolled over to an eligible retirement plan.
  • No employment taxes on contributions (except for certain “414(h)(2) pick-up” contributions).
  • Investment return on the trust is not subject to taxation.

To be qualified a government plan must meet some of the standards laid out in IRC section 401(a) including:

(25) Requirement that actuarial assumptions be specified.— A defined benefit plan shall not be treated as providing definitely determinable benefits unless, whenever the amount of any benefit is to be determined on the basis of actuarial assumptions, such assumptions are specified in the plan in a way which precludes employer discretion.

It should be pretty easy for a competent ERISA litigator to argue that COLAs are an actuarial assumption and any reduction would be impermissible since it would violate the definitely determinable clause.  But would they want to argue that?  What if the states cutting COLAs agreed and accepted disqualification thus making those benefits taxable to the participants?

What do you think?  Tomorrow I’ll report back on what a gathering of public plan actuaries thinks.




* OK maybe some do get asked but they certainly do not get listened to as Buck’s disclaimers  on interest assumptions used in their New Jersey valuation reports clearly attest.

21 responses to this post.

  1. Posted by Al Moncrief on April 10, 2013 at 2:25 pm


    By now, you have certainly heard that the State of Colorado is trying to break its contracts. A majority of Colorado legislators actually voted for a bill (in 2010) that claws back accrued, contracted benefits from pensioners in their home state.

    This is odd, since the Colorado Legislature has also recently enacted a pension reform measure that honors the accrued public pension benefits of certain other public pensioners in the state. We recently learned that, last year, the Colorado Legislature adopted legal, prospective pension reforms, in the bill SB12-149, for a number of Colorado’s county governments (administrative arms of the state). These county government pension reforms honor pension benefits that have been accrued to date, and make changes only on a prospective basis, while the pension reforms adopted for the Colorado PERA pension system seize pension benefits that have been accrued over decades. In spite of the fact the Colorado Legislature has adopted pension reforms that honor the accrued benefits of certain county government retirees, the Legislature persists in its attempt to claw back accrued benefits from PERA state government and other retirees. How is it possible that such a glaring disparity of treatment of the contractual rights of similarly situated parties under Colorado law escaped mention during the hearings on this legislation (SB12-149)?

    We also recently learned that the State of Colorado has an extra billion dollars to spend in the next year . . . and yet the State of Colorado persists in its efforts to break its contracts, due a financial “crisis.”

    We have learned that the failure of the Colorado Legislature to pay its pension bills for the last decade (as recommended by Colorado PERA’s actuaries), and the Legislature’s and Governor Bill Owens’ mismanagement of the pension system, are largely responsible for the decline in Colorado PERA’s funded ratio in the last ten years.

    More truth has come to light. In 2009, the Colorado PERA Board of Directors desired a legal opinion that they could use to justify their contemplated breach of Colorado PERA retiree pension contracts. They sought some means of circumventing legal roadblocks in the form of a 2004 Colorado Attorney General opinion on the subject and adverse Colorado case law. In addition, the Board faced the substantial hurdle presented by their own General Counsel’s testimony that the accrued pension benefits targeted by the Board were indeed contractual obligations of the State of Colorado.

    So, where did the Colorado PERA Board look for this desired legal opinion in 2009? They did not seek an opinion from a law firm that had specialized for decades in employee benefits law. Instead, they sought an opinion from an admirable Colorado attorney, who happens to be a “current full-time activist,” and a public education advocate . . . having founded a think tank that provides public education advocacy. The author of the 2009 “COLA-taking” opinion (on which Colorado PERA based its 2009/2010 legal, lobbying and public relations campaigns to break PERA pension contracts) is an impressive Colorado resident . . . indeed, a woman who has served on the Colorado Judicial Performance Commission.

    Now, to the meat of this article. According to Colorado PERA officials, the PERA pension plan is a “qualified plan” under federal IRS regulations:

    “Colorado PERA is a qualified retirement plan that can substitute for Social Security, as required by law.”

    “PERA is a qualified retirement plan under the Internal Revenue Code Section 401(a). As a defined benefit plan, PERA benefits are guaranteed based on a benefit formula that is set by law.”

    “In 1951, public employers could join Social Security; the Colorado Legislature decided to continue the PERA program instead of joining Social Security.”

    Yet, under IRS regulations, a public pension plan must have something called “definitely determinable benefits” in order to pass muster as an IRS “qualified plan.”

    Denver attorney Cindy Birley (a woman I consider to be a champion of prospective public pension reform in Colorado) addressed this requirement for qualification of public pension plans at the Legislature’s Senate Finance Committee hearing on the bill SB12-149, on March 13, 2012:

    Cindy Birley:

    “Generally, you would not change people who have already retired . . .”.

    “There may be an issue with what we would call ‘definitely determinable benefits,’ and this is a tax code concept.”

    “The . . . Internal Revenue Code requires for a defined benefit plan that your benefit be . . . ‘definitely determinable’.”

    “So a benefit that fluctuated based on your funding, it may be difficult to change that unless it’s somehow a cost-of-living adjustment that’s done more on an ad hoc basis.”

    “Because, it may not qualify as a defined benefit plan.’

    “We could adjust benefits for future retirees as long as it still meets Internal Revenue Code requirements.”

    “It still has to pass muster as a DB plan.”

    Since the Colorado General Assembly has clawed back “definitely determinable” Colorado PERA pension COLA benefits from PERA retirees in 2010, and retrospectively altered this pension COLA benefit, how can this “automatic” PERA COLA benefit still be characterized as a “definitely determinable” public pension benefit?

    IRS attorneys write that a qualified “governmental plan” must have “definitely determinable benefits”:

    “Definitely Determinable Benefits/Written Plan Document Section 401(a)(25) provides that the actuarial assumptions used to calculate participants’ benefits must be specified in the plan.”

    “A pension plan within the meaning of section 401(a) is a plan established and
    maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. (§1.401-1(b)(1)(i)).”

    Reading this, I wondered how an IRS qualified governmental plan can be considered to have “definitely determinable benefits” if the plan sponsors are free to vary an “automatic,” contracted COLA as they please. For example, if a pension plan sponsor reduces its “automatic,” contracted COLA from 3.5 percent to 2 percent or lower, diminishing the value of an annuitant’s lifetime “guaranteed” pension benefit by say, one-third, how could such variable benefits be considered “definitely determinable”? Are qualified governmental plans, like Colorado PERA, required to report whether or not their COLAs are “automatic” or “ad hoc,” i.e., discretionary? How can the IRS know what the “definitely determinable” lifetime retirement benefit is without knowing the nature of a public pension plan’s COLA benefit? As we have seen, Colorado PERA has consistently described the PERA COLA benefit as “automatic.”

    IRS attorneys also note that qualified plans “must operate in accordance with plan terms,” and “must meet “Pre-ERISA Vesting Requirements in Section 411(e)(2).”

    “Pre-ERISA Vesting Requirements in Section 411(e)(2)

    “A governmental plan shall be treated as meeting the requirements of section 411 if the plan meets the vesting requirements resulting from the application of sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974. “Including “Vesting on Normal Retirement Age.”

    In 2009, Cindy Birley and Rebecca Hudson of the Denver law firm Davis Graham & Stubbs wrote an article: “New Trends in Public Sector Plans.”

    Cindy Birley writes:

    “A ‘qualified’ plan under Code Sec. 401(a) is afforded special tax treatment provided numerous requirements under Code Sec. 401(a) are met. The primary advantages of being a qualified plan are: 1) employer contributions are not taxable to the participants as they are made, 2) trust earnings are not taxable, and 3) favorable tax treatment is available to participants when they receive distributions (i.e., rollover treatment).

    “A defined benefit plan . . . is a retirement plan that provides (my emphasis) ‘DEFINITELY DETERMINABLE’ benefits. For instance, a defined benefit plan might entitle a participant to a monthly pension for life equal to a percentage of the participant’s monthly compensation.”

    “Cindy S. Birley is an attorney practicing at the Denver law firm Davis Graham & Stubbs LLP. Ms. Birley has 17 years of experience in the employee benefits/executive compensation field. Ms. Birley has extensive experience with public sector plans. She is also a member of the National Association of Public Pension Attorneys.”

    In a May 30, 2008, “Public Employment and Pension Law Update,” for the Colorado Municipal League, Cindy Birley notes that the IRS is increasing scrutiny of public plans:

    “Increased Scrutiny of Governmental Plans, questionnaire to be sent to 200 government plan representatives. Failure to reply could open a compliance check.”
    How has Colorado PERA described its pension COLA benefit in responses to such IRS questionnaires?

    Although the Colorado General Assembly has not paid its full pension bill for the last
    decade, at least one member of the Colorado PERA Board of Trustees, as a fiduciary, seems to feel some responsibility to encourage Colorado legislators to do so.

    Colorado PERA Board Trustee Maryann Motza (elected to the PERA Board in 2005) is the author of an article published in Vol. 22, No. 1 of the journal, “Government Finance Review,” that addresses training of new public pension board members.
    From Trustee Motza’s article “Recommended Practice: a Tutor for New Pension Board Members”:

    “Assure that actuarially required contributions are collected by the pension plan on a timely basis, so as to achieve the plan’s stated funding policy.”
    PERA Board Trustee Motza writes that Colorado PERA follows recommended practices of the Government Finance Officers Association (GFOA):

    “It is comforting to know that PERA adheres to GFOA’s recommended practices, which set the standard on how the funding of public pension plans can best be achieved and maintained.”

    But, I see no endorsement from the GFOA for the retrospective taking of accrued public pension benefits. From GFOA Best Practices (regarding the creation of new benefit tiers):

    “Identify and address legal constraints. Consult with legal counsel to identify any
    federal and state legal impediments. In some states, there may be a legal foundation for changing current employees’ pension benefits prospectively.”

    The GFOA also recommends that public pension trustees consult the writings of Professor Amy Monahan at the University of Minnesota School of Law, “Public Pension Plan Reform: The Legal Framework.” “

    See ‘Public Pension Plan Reform: The Legal Framework’ by Amy B. Monahan, Education and Finance Policy, Fall 2010.”

    It happens that the aforementioned public pension attorney, Cindy Birley, has recommended (and advocated in testimony to the Colorado Legislature) prospective public pension reform for administrative arms of Colorado state government (county governments) that conforms perfectly to Professor Monahan’s legal theories.
    Back to the GFOA:

    “If state law allows public employers to change plan benefits prospectively for current employees, this right should be clearly stated in the plan documents that are distributed to employees. If there is no explicit or implied contract that entitles an employee to accrual of benefits indefinitely under the current benefit structure for future service, this should be clearly stated in the plan documents as well. Consult with legal counsel to ensure that such descriptions do not violate the requirement that benefits be ‘definitely determinable’ under Internal Revenue Code 401(a). Generally, a plan does not provide definitely determinable benefits if a member’s ability to receive the benefit is conditioned on the employer’s discretion, absent plan changes.”

    “Defined benefit plans . . . Investment risk born by the plan sponsor.”

    “Guaranteed lifetime annuity to members at retirement unless they choose an alternate payment method.”

    “Guaranteed or ad-hoc cost-of-living adjustments provided to annuitants.”

    In light of all this, how has Colorado PERA remained a “qualified plan” under IRS regulations?

    Colorado PERA active and retired members, help put an end to the Colorado Legislature’s ill-advised attempt to escape its contractual obligations. Contribute at and “Friend” Save Pera Cola on Facebook!


  2. Posted by Tough Love on April 10, 2013 at 3:06 pm

    Al … nobody gives a crap


    • Posted by Al Moncrief on April 10, 2013 at 3:25 pm

      Thanks TL, good to know, federal law has no meaning . . . “nobody gives a crap” about federal law, or the Contract Clause of the U.S. Constitution. Now I am free to direct my efforts elsewhere. Al


      • Posted by Tough Love on April 10, 2013 at 4:31 pm

        Colorado, a freaky place. Just today half the State’s sheriffs announced they will sue to block the State’s new gun control law (background checks for all buyers and limiting magazine size). Sends a great message.

        And all Public Sector pensions granted in excess of what is reasonable (meaning comparable to what the Taxpayers who pay for almost ALL of it get) and ignoring the obligation of fairness to taxpayers, rightfully should NOT be honored. Dumping the COLAs is but the 1-st of additional reductions that rightfully should follow.


        • Posted by Al Moncrief on April 10, 2013 at 5:20 pm

          Hey TL, Colorado taxpayers are the least burdened by state taxation (nearly) in the nation. Last time I checked we ranked 49th in state tax collections per capita. Last time I checked Colorado governments were contributing about 2.2 percent of all public sector expenditures toward the support of public pensions, well below the national average. I’m sure that Colorado PERA is hoping their attorneys can come up with a better legal argument than “these particular public sector contracts SHOULD not be honored.”


  3. Posted by Elaine on April 10, 2013 at 11:09 pm

    Al thanks for continuing to try and educate people who do give a crap about fairness.


    • Posted by Tough Love on April 11, 2013 at 12:10 am


      Fairness ?

      Where was the “fairness” when the Public Sector Unions colluded with the Unions to grant pensions and benefits 2, 4 even 6 times greater than that of the Private Sector Taxpayers whose contributions (and the investment earnings thereon) pay for 80-90% of the total cost ?

      If you (clearly a Public Sector workers on the receiving end of these grossly excessive promises) don’t like us exposing this collusion …. and the need to reduce these pension promises, that your problem.


      • Posted by Tough Love on April 11, 2013 at 12:11 am

        Of course the 2-nd “Unions” (above) was supposed to be “politicians”


      • Posted by Elaine on April 11, 2013 at 9:51 am

        TL…Once again I’m amazed at how much time you and Mary Pat Campbell have to post all over the place. You certainly give the impression of no busy full time jobs or families.

        I was a public worker who left to start a business with my husband. We saw the writing on the wall on my retirement. I fall under the WEP in social security so I left my former career while I still had time to recreate another (which once again like my public job keeps me damn busy so little time to post here and continue to remind everyone I’m a public and private)

        btw…nope on the giant retirement pension. Mine is 39K after 30 years. No ss from my first career and second jobs during public employment. I get subsidized health ins but only use it as a major medical policy because it doesn’t cover much and has high deducts. I pay for my own stuff. (from knowing friend’s self bought cheap insurance mine costs me around $30/month less and offers about the same benefits).

        My private sector friend’s retire at similar ages ..early 60s. I see way higher savings rates (because they made way higher salaries, got bonuses and weren’t forced into 403bs that sucked out huge fees), pensions similar to mine (despite your disbelief sometimes include COLAs.)They will get SS.

        Totally agree on the outrageous pensions for some public employees but not the ones I know.


        • Posted by Tough Love on April 11, 2013 at 2:54 pm

          Elaine, While I don’t know your particulars, (job, education, skills, etc.) when the Public and Private Sector pensions of 2 comparably-employed workers with the SAME pay, the SAME years of service, and the SAME age at retirement are compared, the Public Sector pension will almost NEVER be less in “value” (meaning, including the incremental value of COLA increases that Private Sector pensions almost never include) than twice that of the Private Sector pension, and most OFTEN 3-4 times greater, and for safety workers, USUALLY 4-5 times greater.

          And this, in the context that (per the US Gov’t BLS), “cash pay” in comparable Public and Private Sector jobs is very close. This means that there is no justification for ANY greater Taxpayer-funded pensions or benefits let alone ones that are multiples greater in value.

          I understand that you want what you were promised, but from the Taxpayers perspective, our elected representatives (most often bought-off with Public Sector Union campaign contributions and election support) betrayed their obligation to fairly represent Taxpayer-interests, and promised too much…. and it’s time for a pension reset.


    • Posted by Tough Love on April 11, 2013 at 12:37 am

      Elaine, This is how California’s Public Sector workers define “Fair” compensation:


  4. Posted by Richard on April 10, 2013 at 11:10 pm

    Yo TL. I assume from your comments that you consider yourself a conservative. So do I. I left the R party stage right. But don’t conservatives believe in the sanctity of contract are you just into class war.


    • Posted by Tough Love on April 11, 2013 at 12:32 am

      In the past 4 years I have moved from independent to slightly conservative, but essentially I consider myself a well educated, very knowledgeable (pension-wise) individual thinker who believe in FAIRNESS for the masses and clearly sees how the Public Sector Unions, in cahoots with our politicians, are robbing the taxpayers (and their kids) futures. To stop that, we must renege on a large share of the grossly excessive pension and benefit promises that have been made. The Public Sector Unions have become a CANCER on Society.

      And I do believe taxes should be substantially raises on the wealthy. The idiot Democrats are just going about it the wrong way. To get popular support (especially from the masses of lower and middle income republicans … hoodwinked to the n-th degree by their richer brethren), they should focus on how senior executive Corporate pay has gone fro 20-30 time that of the average employee 30 years ago to 30-400 time today. And since there is ZERO possibility of reducing these excessive GROSS pay level (back down o the more reasonable ratio of 30 years ago), then it must be done to their NET income via VERY substantial tax increases.

      And then of course there is the hedge fund managers’ earnings being treated as “carried interest” and taxed as capital gains rather than ordinary income ….. few tax loophole are more outrageous.

      And to answer your question directly. Public Sector Compensation contracts (for pay, pensions, benefits) “negotiated” by Public Sector Unions on one side of the table, and elected representatives who accept those Unions’ campaign contributions and election support does NOT make for an arms-length negotiation, and any contracts resulting from such negotiations should not be honored by third parties (the Taxpayers) betrayed by their elected representatives but told to pay the bill.


      • Posted by Richard on April 11, 2013 at 2:20 pm

        Pension benefits in CO which is what Al is talking about are not subject to collective bargaining. They are simply mandated by statute. Allowing governments to breach contracts when they are no longer convenient is a very slippery slope. If I were a construction company, a software vendor or a bond buyer, I would think very hard about this.


        • Posted by Tough Love on April 11, 2013 at 3:02 pm

          When you say that CO pensions are mandated by the statute, don’t CO elected officials who approve these excessive pension stautes accept campaign contributions and election support from the Public Sector Unions ?

          While certainly not specifically stated, clearly the trade-off for those contributions are favorable votes on these excessive pensions.


  5. Posted by MJ on April 14, 2013 at 7:58 am

    Elaine, you mention about TL and Mary Pat having a lot of time to post about the real situations with public pensions yet I see no mention of Al’s textbook posts ad nausea in regards to contract law. People have been warning about this for the last 25 years. It has only been since the advent of the Internet, blogs, etc. that information has been so easy to share and/or research. John, TL, Mary Pat, Muni and all the rest keep up the good work, I have learned so much here and one thing is certain, whatever you publics think you are going to get from the government–forget about it and plan accordingly.. Elaine, you must have a lot of time on your hands as you obviously are reading the blogs.


    • Posted by Tough Love on April 14, 2013 at 7:04 pm

      MJ, Thanks for the support … it can be a lonely fight. And just for what it’s worth, I often post comments with statements and/or figures that to some might seem so extreme that they might be questionable … figures/comments that state things like (a) ALL of the workers pension contributions (WITH interest) through retirement accumulate to a sum rarely sufficient to buy more than 10-20% of their rich pensions, with the Taxpayers responsible for the 80-90% balance, and (b) the taxpayer paid-for share of the TYPICAL Public Sector pension is 2, 4 (even 5-6 times for safety workers) greater in value at retirement than the pension of the comparably paid Private Sector worker retiring at the SAME age and with the SAME years of service. I don’t make these comments willy-nilly. They are accurate and not difficult to demonstrate.

      And I agree, change will come but slowly, with a continuing squeeze on services and Taxpayers (via increases taxes/fees) until the budget squeeze is so bad (and complaints from non-Public Sector citizens so loud) that our elected official see the writing on the wall (i.e., being voted out of office) and change sides, abandoning their support for the Public Sector Unions. And if they had any brains, the younger Public Sector “actives” will join them demanding changes to the current pension structure, as there is ZERO possibility that THEY will actually get the same rich pensions of the current retirees and all of their contributions are simply going out the door to subsidize the very rich pensions of those that came before them …. leaving little left for them.

      And Eliane is one of thousands of other “Elaines” … Public Sector workers who are just pissed off at those who “have the nerve” to challenge their rich (and unjust) pensions and advocate for reform. Ignor her.


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