Capping pensions: is it legal?

A House proposal to combat Minneapolis teacher pension shortfalls raises the question: Can the Legislature legally cut pension increases without negotiating with those retirees?

House Legislative Analyst Mark Shepard researched the issue and said there is "a lot of uncertainty," and it is "not well settled."

However, State Rep. Jim Knoblach, R-St. Cloud, cites Shepard's research to bolster his argument for a 2 percent state cap on most Minneapolis Teachers Retirement Fund Association (MTRFA) retiree increases, until MTRFA is fully funded.

According to Shepard's Feb. 18, 2004, memo, written for Knoblach's Ways and Means Committee:

MTRFA sued the state in 1992 over changes in the '70s and '80s. The key question was whether the state had to provide more funding, not benefit cuts.

The Minnesota Court of Appeals said the state was not required to pay more, Shepard wrote. Minnesota Statute 354A.09 said if there was not enough money for full benefits, MTRFA could "pro-rate," or cut them, a provision dating back to 1909.

Knoblach promotes his 2 percent cap as an alternative to pro-rating; if the state does nothing, MTRFA would spend down its assets and retirees "get nothing at all."

According to the Shepard memo, the Minnesota Supreme Court in 1983 said public sector retirement benefits are not a "gratuity" the public employer could abandon at will. However, the state can change public employee pensions "in the public interest."

The court set a three-part test for a pension change's constitutionality:

– Does the state law create a substantial impairment?

– If benefits are substantially impaired, has the state shown a legitimate and significant public purpose behind the change?

– Are the changes based on reasonable conditions and appropriate to the public purpose?

"The court recognized that there is a balance between the need for public employees to be secure in their retirement and the public's concern with the integrity of the pension fund and the state's overall fiscal soundness," Shepard wrote.

Courts are more likely to approve pension plan changes for new employees only, and are likely to invalidate changes applied to existing retirees, Shepard wrote.