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The Associated Press April 11, 2012, 5:51PM ET

SD judge upholds cut in annual pension increases

The South Dakota Legislature acted legally when it trimmed the annual cost-of-living increase for retirees in the state's public pension plan during the recent economic crisis, a state judge ruled Wednesday.

The ruling, issued by Circuit Judge Mark Barnett of Pierre, rejected a retiree's claims that a 2010 cut in the annual inflationary adjustment was an unconstitutional violation of a contract between the state and members of the South Dakota Retirement System.

The judge said the Legislature had the constitutional authority to change the cost-of-living adjustment in response to the economic downturn, which damaged the retirement system's financial health. Retirees have no contract guaranteeing that the cost-of-living adjustment will not change, so the cutback to a lower adjustment did not amount to an improper taking of private property, he said.

"This court is hesitant to so limit the powers and duties of future legislature to provide sound governance of a fund so critical to so many present and future retirees," Barnett wrote.

After the economic downturn in 2008 and 2009 caused a drop in the retirement system's assets, the Legislature in 2010 passed a law pegging annual cost-of-living adjustments to the system's financial health. The annual increases had been 3.1 percent for many years, but were cut to 2.1 percent in each of the last two years. Because of more recent investment gains, the cost-of-living adjustment will return to 3.1 percent on July 1, the start of the system's next financial year.

After the 2010 cut, retired Circuit Judge Merton Tice Jr. filed a lawsuit arguing the reduced cost-of-living adjustment was unconstitutional because it interfered with his retirement contract and amounted to a taking of retirees' private property.

Tice's lawyer, Stephen M. Pincus of Pittsburg, said both sides in the dispute expect the case will be appealed to the South Dakota Supreme Court.

"We will be reviewing our right to appeal with our client in the coming weeks," he said.

Rob Wylie, executive director of the retirement system, said he had not had time Wednesday to review Barnett's decision in detail, but he is pleased it upholds the change approved by the Legislature.

"We consider it a great ruling," Wylie said.

The system has more than 73,000 members, and most have not yet retired. It includes employees of state government, cities, counties and school districts, and paid $371 million in retirement benefits last year.

The system's assets peaked at $8.2 billion before the Great Recession, but fell to $5.6 billion by June 2009. After gaining 18.7 percent two years ago and nearly 26 percent in the last financial year, it had about $7.9 billion in assets as of June 30 last year. Those investment gains meant the system was fully funded, having enough assets to cover all potential future benefits to be paid to retirees.

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