By JON MILTIMORE

ST. PAUL, Minn. — Attorneys made closing oral arguments in a Ramsey County courthouse Tuesday in a landmark lawsuit that could hinge on the interpretation of an obscure legal principal.

District Court Judge Greg E. Johnson must decide if the state is bound to a post-retirement formula used for 130,000 retirees despite the absence of a contract.

“Without a contract, you cannot have an impairment,” said Assistant Attorney General Rita Coyle DeMueles, lead counsel for the State of Minnesota.

The lawsuit will determine if hundreds of millions of dollars go to retirees or are returned to the state’s depleted pension systems. Currently, the state pension systems officially are only 68 percent funded despite legislative changes enacted in 2009 and 2010.

The state argues that because workers did not have a contract, the Legislature was within its rights to make “modest adjustments” to ensure the integrity of the state’s retirement system, which lost 30 percent of its value in the wake of the stock market crash.

Part of those changes included reduction in automatic cost of living benefit increases for retired employees.

Stephen Pincus, an attorney representing the retirees, said the state acted unlawfully when it changed the COLA funding formula of pension recipients who were already retired.

“The law at the time provided for this base benefit,” said Pincus. “It also provided for this adjustment.”

At issue is the dual-component formula (based on investment returns and inflation) the state used to calculate a post-retirement adjustments (APRA).

In 2009, facing financial pressures, the state scrapped the investment portion of the formula and replaced it with a guaranteed annual 2.5 percent adjustment. The following year, that rate was lowered to a rate between 1 percent and 2 percent for the majority of state employees.

Plaintiffs want the formula back.

Though miniscule in terms of actual benefits paid, these compounded adjustments make a significant financial impact in the amount that the state pays in pension benefits. State systems are estimated to save as much as $1 billion from the changes over time.

A typical Minnesota State Retirement System pension recipient who retired with 30-years of service stands to lose as much as $75,000 over a lifetime, according to plaintiffs. A retiree in the Public Employee Retirement Association would lose $216,000. Police and firefighter retirees would see even greater losses.

Pincus said the annual adjustment was something workers had planned their retirements around and had come to rely upon.

“It’s not something they heard on the street or talking to union members,” said Pincus, noting state handbooks promised the 2.5 percent annual adjustment. “This came directly from the retirement system.”

The state notes retirees actually enjoyed larger increases under the new formula after enactment last year because of poor asset performance and low inflation. “There has been no impairment, let alone a substantial impairment.”

Contract or no contract?

Matters are complicated by the fact that Minnesota is one of only a handful of states that doesn’t embrace a constitutional or contract approach to pensions. Instead, the state relies on promissory estoppel, a legal principal that says promises that otherwise might not be legally binding can sometimes still be enforced to prevent injustices.

With few precedents to go by, the court will largely be covering new ground in how it will balance the rights and interests of pension recipients and taxpayers.

“Other states just assume pension plans are contract,” said Lawrence Martin, Director of the Legislative Commission on Pensions and Retirements (LCPR) and a former Minnesota State Bar Association member. “What we do here is a little different.”

Martin said the state’s “quasi-contract” approach relies more on the facts in individual cases to establish whether or not a relationship has been formed. “What (Judge Johnson) will have to decide is, does this relationship rise to the level of a contract?”

There are some precedents likely to guide the court’s decision.

In the 1985 case Christensen v. Minneapolis Mun. Employees Ret. Bd, the state Supreme Court rejected the view that pensions were mere gratuities the state could unilaterally adjust at their whim. However, the court did rule the state’s police powers allowed “reasonable and necessary” changes under some economic conditions, particularly fiscal stress.

State officials say the changes were both reasonable and necessary, and were part of a comprehensive and bipartisan approach taken by the Legislature to repair a retirement system on the verge of insolvency following the market crash.

Actuaries in systems used an approach of “shared sacrifice,” the state says, that reviewed dozens of models to find the best way to make retirement systems solvent at a minimal burden to all parties.

“The plans were facing default in a relatively short period of time,” DeMueles said. “All active and retired members faced the real possibility these funds would not be around in their working or retired years.”

Pincus admits the retirement system was distressed, but to a far lesser degree than systems in many other states. He said the changes the state made were neither reasonable nor necessary. “Minnesota still has a AAA credit-rating; Illinois is two steps above junk status,” said Pincus, who claimed Minnesota is well below the national median in the percentage of state revenues paid toward pensions.

He said other policy options were available to lawmakers, such as raising taxes. “What (the state) wants is for you took look at the system in isolation and ignore everything else going on around it.”

A ruling on the case may not come until until sometime this summer. Johnson ordered counsels to prepare finding of facts documents by May 13. A judgment can be expected within 90 days of that date, attorneys said, though an appeal is considered likely by the losing party.

Martin said the case will have a far-reaching impact on the fiscal health of state pension systems, which are still recovering from steep market losses.

He said if the court sides with retirees and rules the Legislature’s actions unlawful, retirement systems would face even steeper shortfalls. “The post-retirement increase changes were a significant chunk of savings realized from the 2010 changes,” he said.

Shortfalls for state retirement systems currently stand at $15.5 billion, according to LCPR documents.

Other estimates, including projections from Andrew Biggs of the American Enterprise Institute, show the state’s unfunded liabilities at between $55 billion and $60 billion.

Jon Miltimore is a reporter for Minnesota State News.