The Wall Street Journal highlights a lawsuit going before a Minnesota court today that could significantly impact the way teacher pensions are looked at from a legal standpoint. Essentially, the state said it was broke, its teacher pension plan was too generous, and it was going to reduce future benefits, even to current retirees. The Minnesota case is the first of three key tests in the states to determine whether these actions are legal. The graphic below shows what changes other states are making to their pension plans. 
First, if you care about teacher pensions, go read a copy of the Minnesota lawsuit (.pdf). One defendant worked for the City of Duluth for 34 years as a Draftsman before he retired in 2000. The other taught at a Minnesota public school for 14 years before retiring in 2008. These two retirees are part of a potential class-action lawsuit that could include up to 130,000 persons already receiving pensions from the state of Minnesota. The state has chosen not to enroll its public-sector employees in Social Security, meaning they have no other government-provided retirement benefit. To ensure that worker pension benefits do not wear away over time, the state has used a dual-component formula to allocate regular cost-of-living adjustments (COLAs) indexed to the rate of inflation.
In 2009 and 2010, Minnesota decided the COLAs were too generous, and so they reduced them and made them contingent on the plan’s overall funding level. We’re talking about small percentage changes here, but, over time, it adds up to real money.
The state claims its pension fund is broke and it needed to make these changes to ensure the plan’s long-term survival. That claim falls short on several accounts. For one, the state pension plan has never been fully funded and, after one of the worst decades in stock market history, it looks worse than it probably should. Two, Minnesota, like other states, enacted retirement benefit enhancements during the stock market boom of the late 1990s.
As opposed to targeting current retirees, there is a middle ground. Some states have laws on the books that give workers the right to accrue future benefits, so even if they’ve been working as little as one day, their pension formula can never be reduced. Those laws are extreme and should be reworked. But at the same time, states should protect the promises they’ve already made and be careful about making new ones. For more background and ideas forward on teacher pensions, see here.
This blog entry first appeared on The Quick and the Ed.