Pensions Update

Pensions Update

Postby Nick Della Volpe » Wed Dec 02, 2015 11:23 pm

District Court Upholds Chattanooga Ordinance Changing COLA Adjustment in Pension Plan

In March 2014 the Chattanooga City Council passed an ordinance reducing the COLA formula for the Fire and Police Pension Plan from a fixed 3% rate to essentially one following the Consumer Price Index (CPI) up to a maximum increase of 3%. ( Aside: There were interim tighter restrictions on COLA until the plan reached 80% funding, but those details are not pertinent here.) They acted to address shortfalls in pension funding resulting from the 2008 national economic turndown, longer life expectancies, and poorer returns on investment in order to make their plan more sustainable. The changes were challenged in Court.

In November 2015, Federal District Judge Collier granted summary judgment in favor of the City, finding that the employees had no vested contract right or property interest in the COLA. The Court ruled that COLA "is an adjustment to the pensioners' benefits rather than the benefit itself," intended to "ameliorate the effects of inflation,"and, thus, that the legislative body retained the right to change the law establishing it. The Court notes that the presumption is that a law is a declaration of policy to be pursued, and that absent a clear indication in the statutory language itself, is not intended to create private contractual or vested rights. There was therefore no violation of the Contracts Clause of the federal and state constitution (nor of the Takings Clause or Due Process Clause) which were relied upon by the plaintiffs.

The plain language of the Chattanooga City Code shows that "the COLA is not a vested financial benefit." The pension benefit was based on years of service times a percentage of salary. The Court rejected the plaintiffs' heavy reliance on the Blackwell case since it dealt with changes in the calculation for monthly benefits under a pension plan; "it did not involve COLA, and is thus not particularly illuminating to the dispute before the Court." Additionally, in looking at the March 2014 law the Court observed that it "makes sense that the City would preserve its ability to adjust the COLA to respond to shifts in inflation rather than locking itself in to a 3% COLA for all time."

Bottom line: a COLA adjustment provision does not create a vested right. The City retains the right to make adjustments to changed circumstances to keep its pension plan financially sound. For the past several years the CPI has been closer to 1 1/2% than a 3%.

Knoxville's pension plan has $716M in liabilities and only $530M in assets as of the end of October 2015.
Nick Della Volpe
Posts: 110
Joined: Mon Jul 02, 2012 4:00 pm

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