Opinion
No. 1327 C.D. 2013
05-02-2014
Muhlenberg Township, Appellant v. Muhlenberg Township Police Labor Organization
BEFORE: HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge
OPINION NOT REPORTED
MEMORANDUM OPINION BY JUDGE SIMPSON
In this labor relations case, Muhlenberg Township (Township) appeals an order of the Court of Common Pleas of Berks County (trial court) that denied the Township's petition to vacate an "Act 111" grievance arbitration award (Award). We are asked whether a grievance arbitration award violates the Municipal Pension Plan Funding Standard and Recovery Act (Act 205) by requiring inclusion of a lump sum payment for accumulated, unused sick leave in the computation of a retired police officer's monthly pension benefit, in the absence of an actuarial report that clearly indicates the pension plan is or would be actuarially sound after the plan modification. Concluding the actuarial report here does not clearly indicate actuarial soundness as contemplated by Act 205, we are constrained to reverse.
Act of June 24, 1968, P.L. 237, as amended, 43 P.S. §§217.1-217.10 (Policemen and Firemen Collective Bargaining Act).
Act of December 18, 1984, P.L. 1005, as amended, 53 P.S. §§895.101-895.803.
I. Background
A. Facts
The Township, a First Class Township, and the Muhlenberg Township Police Labor Organization (Union), which represents members of the Township Police Department for purposes of collective bargaining, are parties to a collective bargaining agreement (CBA). The parties' CBA expired on December 31, 2010. Thereafter, an Act 111 interest arbitration award was issued covering the period of January 1, 2011 through December 31, 2014.
Article XXVII of the CBA outlines the pension benefit provided to Township police officers. It states, as pertinent:
Section 1. An officer who shall have completed twenty-five (25) years of aggregate service with the Township, and who has attained the age of fifty (50) years of age, shall upon application, be entitled to a pension allowance computed by averaging the officer's final thirty-six (36) months compensation. Compensation shall include salary, longevity pay, service increments, yearly base holiday payments, and all other compensation as permitted by law and applicable ordinances. The amount shall never be less than the final thirty-six (36) months yearly base salary.Reproduced Record (R.R.) at 4a, 6a. These provisions were left unchanged by the interest arbitration award. R.R. at 16a-17a.
* * * *
Section 7. Pension benefits shall be in accordance with Act 600[] provisions. Annuity options under Act 600 are limited to Straight Life Annuity or Joint and 50% Survivor Annuity. Therefore, normal retirement benefit as herein defined shall be payable in the form of a straight line annuity for unmarried individuals, and a joint and 50% survivor annuity for married individuals.
The Police Pension Fund Act, commonly known as Act 600, Act of May 29, 1956, P.L. (1955) 1804, as amended, 53 P.S. §§767-778.
On December 31, 2010, Sergeant Richard Metzger (Metzger) retired from the Township Police Department. In contemplation of Metzger's retirement, the Township issued Metzger his final paycheck on December 30, 2010, with a gross payment of $26,970.50. The check included: a payment of $2,123.90 for regular hours worked during the pay period; a lump sum payment of $5,344 for accrued, unused vacation time; a lump sum payment of $18,704 for accrued, unused sick leave; and, a lump sum payment of $801.60 for accrued, unused personal leave. The Township deducted pension contributions of $539.41 from the $26,970.50, representing the prevailing two percent employee contribution rate.
On January 18, 2011, the Township notified Metzger that it was refunding pension contributions withheld from the amount paid to him attributable to pay for his accrued, unused sick leave. The Township subsequently included payment of $7,014 in unused sick leave in the calculation of "compensation" for pension purposes (which apparently represents the portion of the total $18,704 for unused sick leave Metzger earned during the 36-month averaging period). R.R. at 22a.
Prior to Metzger's retirement, four other Township police officers retired under the same CBA provisions. Specifically, between 2003 and 2008, three Township police officers retired. All were paid lump sum payments for unused sick leave and vacation time. None of those lump sum payments were included in the officers' pension benefit calculations. In 2010, a fourth Township police officer retired, and he was paid lump sum payments for unused sick leave and vacation time. In this one instance, both lump sum payments were included in the officer's pension benefit calculation.
In January 2011, the Union filed a grievance on Metzger's behalf, alleging the Township violated the CBA by excluding the remainder ($11,690) of the lump sum payment to Metzger for unused sick leave from his final pension calculation. Metzger asserted the Township erred in not including all "compensation" as that term is contemplated under the CBA in his pension calculation. R.R. at 20a. The Township processed the grievance in accordance with the relevant CBA provisions. The matter proceeded to arbitration before an arbitrator (Arbitrator).
B. Arbitrator's Interlocutory and Final Awards
Before the Arbitrator, the parties submitted stipulations of fact, obviating the need for an evidentiary hearing. R.R. at 20a-22a. The parties also stipulated the issue before the Arbitrator was: "Whether the Township violated the [CBA] in the calculation of compensation for pension purposes? If so, what shall the remedy be?" R.R. at 22a. The parties subsequently submitted briefs in support of their respective positions.
Based on the parties' contentions, the Arbitrator explained that the dispositive questions were: (1) whether the CBA required the Township to include some or all of the payment for Metzger's accumulated, unused sick leave in his pension benefit calculation, and (2) if so, could the Township be legally required to recalculate Metzger's pension benefit with the inclusion of that payment as part of his "compensation"? Arbitrator's Decision & Award, 1/12/12, at 9.
The Arbitrator explained that resolution of the first issue was limited to an examination of the language of the CBA. Given the unambiguous language of Section 1, Article XXVII of the CBA, which states that "compensation" includes "salary, longevity pay, service increments, yearly base holiday payments, and all other compensation as permitted by law and applicable ordinances," the Arbitrator agreed with the Union that the accumulated unused sick leave payments should be included in the pension benefit computation. R.R. at 4a (emphasis added). To that end, the Arbitrator determined payment for accumulated, unused sick leave upon retirement was lawful and there was no record information regarding any ordinance that would prohibit such payments.
The Arbitrator also rejected the Township's argument that inclusion of the accumulated unused sick leave payments in the pension calculation would violate the CBA's requirement that pension benefits be provided in accordance with Act 600. See R.R. at 6a. The Arbitrator stated Act 600 does not exclude pension benefits calculated on sources in addition to base "salary," as that term that is used in Act 600. See Borough of Nazareth v. Nazareth Borough Police Ass'n, 545 Pa. 85, 680 A.2d 830 (1996); Palyok v. Borough of W. Mifflin, 526 Pa. 324, 586 A.2d 366 (1991).
The Arbitrator also rejected the Township's reliance on a 2001 Auditor General Bulletin and a 2002 Auditor General Memorandum, which state that, as a general rule, the Auditor General disapproved lump sum end of career payments as components in pension benefit calculations. The Arbitrator found the Auditor General's pronouncements of little value because the Auditor General has no judicial role, no authority to make law, and has not issued regulations pertaining to such payments. Further, the Auditor General's only pension function is to review the compliance of funding and administration of Act 600 and Third Class City plans and to note where the Auditor General's Department believes a plan is not in accord with the law. The Arbitrator found the Auditor General's "impotence" in enforcing either Act 600 or Act 205 was "evident." Arbitrator's Decision & Award at 11.
U. Chichester Twp. v. Pa. Labor Relations Bd., 621 A.2d 1134 (Pa. Cmwlth. 1993).
Nevertheless, the Arbitrator explained, in Shippensburg Police Association v. Borough of Shippensburg, 968 A.2d 246 (Pa. Cmwlth. 2009) and Upper Merion Township v. Upper Merion Township Police Officers, 915 A.2d 174 (Pa. Cmwlth. 2006), the Commonwealth Court vacated decisions by grievance arbitrators that effectively increased pension benefits without evidence of how the increased benefits would affect the relevant pension plans. See also Borough of Ellwood City v. Ellwood City Police Dep't Wage and Policy Unit, 573 Pa. 353, 825 A.2d 617 (2003). The Arbitrator recognized that, based on the record before him, an award ordering the Township to include lump sum payments for accumulated unused sick leave in pension benefit calculations would be issued without the benefit of evidence of the effect such inclusion would have on the Township's police pension plan. Thus, such an award would be directly contrary to the holdings of Shippensburg and Upper Merion.
In short, the Arbitrator found the CBA required the inclusion of payment for accumulated unused sick leave as part of "compensation" for purposes of computing a retiring officer's pension benefit. Arbitrator's Decision & Award at 12. Because such payment must be made before the officer retires, the payment is within the last 36 months of his employment. Thus, the Arbitrator determined the entire amount of the payment, regardless of when the leave was accrued, is to be included contractually, regardless of any contrary pronouncement by the Auditor General.
However, because the record lacked evidence as to the effect of such inclusion on the Township's pension plan, the Arbitrator observed that he could not direct the Township to recalculate Metzger's pension benefit using the entire payment for his accumulated unused sick leave. Rather, the Arbitrator ordered the Township and the Union to direct their respective trustees on the police pension fund board to authorize an actuarial report on the effect that inclusion of accumulated unused sick leave payments would have on the police pension plan between the date of the Arbitrator's decision (January 12, 2012) and December 31, 2014, the end of the current CBA as augmented by the 2011 interest arbitration award. Recognizing there could be disagreement over the effect of including the sick leave payments on the actuarial soundness of the plan for this period, the Arbitrator retained jurisdiction for the purpose of resolving any such dispute.
Pursuant to the Arbitrator's directive, Mockenhaupt Benefits Group issued a letter and actuarial report. R.R. at 61a-63a. The Arbitrator then issued a final award in which he explained that he reviewed the actuarial report, and based on its findings, a recalculation of Metzger's pension benefit to include all of his accumulated unused sick leave payment as compensation would not have a materially adverse impact on the soundness of the plan or render the plan actuarially unsound. Thus, the Arbitrator entered an award directing the Township to recalculate Metzger's retirement benefit with the inclusion of the entire amount of accumulated unused sick leave pay counted as "compensation" retroactive to the date of his retirement.
C. Petition to Vacate Arbitrator's Award
The Township filed a petition to vacate the award with the trial court. After the submission of briefs and oral argument, the trial court issued an opinion and order denying the Township's petition to vacate.
In its opinion, the trial court began by setting forth the narrow certiorari standard of review applicable in Act 111 cases. The trial court stated the narrow issue before it was whether the Arbitrator exceeded his authority in issuing the award by requiring the Township to perform an illegal act, or to do something it could not do voluntarily.
At the outset of its discussion, the trial court noted that, in addition to its contentions that the Arbitrator's award violated certain statutory provisions, the Township asked the trial court to apply principles of contract interpretation to determine whether the CBA required the inclusion of lump sum payments for unused sick leave in the pension benefit calculation. The trial court explained such a determination fell outside its standard of review and, therefore, would not be considered.
The trial court then explained that Act 205 was enacted "in an effort to strengthen pension plans of municipalities across the Commonwealth." Upper Merion Twp. 915 A.2d at 175. Consistent with this objective, Section 305 of Act 205, 53 P.S. §895.305, prohibits a municipality from modifying its pension plan without first obtaining a cost estimate of the effect of the proposed modification. 53 P.S. §895.305. Likewise, because an arbitrator cannot compel a municipality to violate the law or to perform an act it could not voluntarily perform, this provision prohibits an arbitrator from ordering a municipality to modify its pension plan without first obtaining the required cost estimate. Shippensburg.
The trial court stated the record contained an exhibit comprised of a letter from the Mockenhaupt Benefits Group to the Township Manager, followed by a one-page report entitled "Township of Muhlenberg Police Pension Plan: Actuarial Study as of January 1, 2011." R.R. at 63a. The letter indicated that in response to the Arbitrator's award, a study was prepared evaluating the cost impact of two potential scenarios:
1. If the benefit for Richard Metzger were revised to include all of his lump-sum payments at retirement for unused leave, and compensation for unused sick leave were included in the pension calculation for four other participants who will be eligible to retire before December 31, 2014.
2. If the benefit for Richard Metzger were revised to include all of his lump-sum payments at retirement for unused leave, and compensation for unused sick leave were included in the pension calculation for all current active participants upon retirement.R.R. at 61a (emphasis in original). The trial court explained the one-page report showed that either scenario would result in an increase in the minimum municipal obligation (MMO). The letter and accompanying report also indicate the plan's funded ratio would decrease under either scenario.
The trial court then addressed the Township's assertion that the award constituted a modification of the pension plan, thus invoking the requirements of Section 305 of Act 205. Relying on Shippensburg, the trial court concluded that it did, in fact, constitute a modification, thus triggering the requirements of Section 305(a) for a "cost estimate."
The trial court then considered whether the record contained the required cost estimate under Act 205. An arbitration award that relies on an insufficient cost estimate violates the requirements of Act 205, and thus exceeds the arbitrator's authority; therefore, such an award must be vacated. Northampton Twp. v. Northampton Twp. Police Benevolent Ass'n, 885 A.2d 81 (Pa. Cmwlth. 2005).
The trial court stated the only record evidence from which it could determine whether the arbitration award here relied on a proper cost estimate was the letter and accompanying report from Mockenhaupt Benefits Group. A table of figures on the last page of that exhibit suggested that an increase in the MMOs will result from the recalculation of benefits. The letter also states, and the accompanying tables reflect, the plan's funded ratio will decrease as a result of the recalculation. No other record evidence showed the impact of the modification on the future financial requirements of the pension plan.
The trial court stated it was constrained to disagree with the Township's argument that the cost estimate was inadequate and failed to comply with the requirements of Act 205. The cost estimate produced by the Township's pension consultant, while succinct, clearly revealed the plan's funded ratios and the practical dollars-and-cents effect of the modifications to the plan under either of the scenarios posited. Thus, the remaining question was whether the modification would cause the plan to become "actuarially unsound."
Unfortunately, the trial court stated, neither Act 205 nor case law interpreting it provided a satisfactory definition of the term "actuarially sound." However, in City of Butler v. City of Butler Police Department, Fraternal Order of Police, Lodge # 32, 780 A.2d 847 (Pa. Cmwlth. 2001), this Court noted there is a definition of that term in Section 102 of the Pennsylvania Municipal Retirement Law, 53 P.S. §881.102. As can be seen from that definition, it can be argued that a pension plan that has no assets at all is nonetheless actuarially sound if the plan annually receives sufficient funds to pay the plan's current costs and one-thirtieth of the amount necessary to bring the plan into fully funded status in 30 years.
Act of February 1, 1974, P.L. 34, as amended. Section 102 of the Pennsylvania Municipal Retirement Law defines the term "[a]ctuarially sound" as follows:
'Actuarially sound' means a plan which is being operated under supervision of an actuary and which is being funded annually at a level not lower than the normal cost of the plan plus a contribution towards the unfunded accrued liability sufficient to complete the funding thereof within thirty years of the effective date of the system. If the unfunded accrued liability is increased subsequent to the effective date of the system, such additional liability shall be funded within a period of thirty years from the effective date of the increase. If deemed advisable by the actuary, the initial liability and any increase thereof, may be combined and amortized over a period of years, not to exceed thirty.
The trial court further noted there is nothing in Act 205 or Act 600 that would prohibit the Township here from agreeing to the pension structure ultimately awarded by the Arbitrator here.
The trial court also expressed its disagreement with the Arbitrator's conclusions that: (1) the language of the CBA encompassed the inclusion of accumulated sick leave for purposes of determining final average salary; and, (2) that review of the cost estimate revealed no serious adverse actuarial impact from the proposed modification. The trial court noted the Arbitrator reached this second conclusion despite the fact that the cost estimate clearly indicates the unfunded ratio of plan assets would increase. The trial court explained that if it were responsible for adjudicating this matter in the first instance, it would have reached a contrary result. However, the fact that changes would negatively affect the funded ratio of the plan did not render it "actuarially unsound" by any reasonable definition of the term. Thus, the trial court could not conclude the Arbitrator exceeded his authority. As a result, the trial court denied the Township's petition to vacate the grievance arbitration award.
The Township filed a notice of appeal, and the trial court directed it to file a concise statement of the errors complained of on appeal, which it did. The trial court then issued a Pa. R.A.P. 1925(a) Opinion in which it incorporated by reference its initial opinion and order. This matter is now before us for disposition.
II. Issues
On appeal, the Township presents three issues. Specifically, it asks: (1) whether Act 600, which directs that a police officer's pension be calculated on the basis of salary, disallows the inclusion of lump sum payments for unused sick leave accrued outside of the measuring period where the excess benefit has neither been agreed to by the parties nor established by past practice; (2) whether the Arbitrator exceeded his authority by retroactively modifying the pension plan to require the inclusion of unused sick leave earned outside of the measuring period where the Act 205 report and cost study were not prepared, presented or considered prior to the modification; and, (3) whether the Arbitrator exceeded his authority by ordering the increased benefit where the only actuarial report was that the plan is not actuarially sound and the modification would cause a further increase in its underfunded ratio.
III. Discussion
A. Narrow Certiorari Review
Our review of a grievance arbitration award under Act 111 is a very constricted one and is in the nature of narrow certiorari. Shippensburg. Narrow certiorari allows us to inquire into only four aspects of an Act 111 arbitration award: the jurisdiction of the arbitrator; the regularity of the arbitration proceedings; whether the arbitrator exceeded his authority; and, whether the arbitrator deprived one of the parties of constitutional rights. Id. In addition, we may not disregard the arbitrator's findings or contract interpretation if the arbitrator is arguably construing or applying the contract and acting within the scope of his authority. Id.
B. Compliance with Act 600
1. Contentions
The Township first argues the grievance award is unenforceable because it is contrary to law, and the Arbitrator lacked authority to alter the terms of the pension plan in violation of Act 600. Under the CBA, the pension benefit calculation is based on "the officer's final thirty-six months compensation" that includes "salary, longevity pay, service increments, yearly base holiday payments and all other compensation as permitted by law." R.R. at 4a, 6a. The Township contends lump sum payments for unused sick leave earned outside of the averaging period are not "permitted by law." Act 600 provides that pensions are to be based on salary and does not authorize the inclusion of such payments. Neither this Court nor the Auditor General construe Act 600 as authorizing the inclusion of such payments, absent a past practice or agreement of the parties. As such, implementation of the Award is contrary to, rather than "permitted by," Act 600.
Specifically, the Township contends that in 2001, the Auditor General published Municipal Pension Bulletin No. 2001.01 on the topic of "Unauthorized, or Excess, Benefits." Reproduced Record (R.R.) at 29a-31a. There, the Auditor General examined the question of whether Act 600 permitted the inclusion of all lump sum payments for accumulated unused benefit time for purposes of calculating an officer's pension benefit. The Auditor General relied on the specific legislative constraints in Act 600 regarding the proper basis for pension benefit calculations and determined the inclusion of lump sum benefit payments in the pension calculation was impermissible. Further, the following year the Auditor General published a Memorandum to Municipal Officials and Attorneys regarding Municipal Pension Bulletin No. 2001-01. R.R. at 32a-34a. There, the Auditor General made clear that a municipality may include accumulated unused leave in pension calculations so long as the leave was earned during the applicable pension computation period or the last 36 months of employment, but not outside this period, over the entirety of an officer's career. Id.
The Township further asserts our appellate courts previously determined what Act 600 authorizes as the proper basis for calculating a pension benefit. Specifically, "[A]ct 600 directs a police officer's pension benefits be calculated on the basis of salary." Borough of Nazareth, 545 Pa. at 91, 680 A.2d at 833. This judicial interpretation is rooted in the statute itself, which provides that pension benefits are to be computed "at one-half the monthly average salary of such member during not more than the last sixty nor less than the last thirty-six months of employment." Section 5(c) of Act 600, 53 P.S. §771(c) (emphasis added). As such, "the term 'salary' as embodied in Act 600 denotes salary and excludes other forms of compensation unless the parties through past practice or agreement have expanded the definition." Borough of Nazareth, 545 Pa. at 92, 680 A.2d at 834.
Here, the parties did not expand the definition of salary through past practice. Instead, the Arbitrator concluded the inclusion of lump sum payments for unused leave at retirement was required by the plain language of the CBA. The Township argues that, although this untenable reading of the CBA was a tactic to avoid application of the statute, the trial court approved. The Township asserts the CBA does not identify the lump sums as part of the calculation and simply allows that which is permitted by law and "in accordance with Act 600." R.R. at 6a. As a result, the Township asserts, the award contravenes the clear import of Act 600 as interpreted by our appellate courts and the Auditor General.
The Union counters that the Township's assertion that the Arbitrator erred in interpreting the law is beyond this Court's scope of review. Town of McCandless v. McCandless Police Officers Ass'n (Franceschina), 952 A.2d 1193, 1195 (Pa. Cmwlth. 2008) ("[E]rror of law is not enough to allow a court to vacate an Act 111 arbitration award.") The Union contends the parties agreed to submit matters of contract interpretation to an arbitrator. The question of whether pay for accumulated, but unused sick leave is "any and all other compensation as permitted by law and applicable ordinances," is a question of contract interpretation for the Arbitrator, and the parties and this Court are bound by the Arbitrator's construction within the narrow certiorari standard of review. Borough of Jenkintown v. Hall, 930 A.2d 618, 622 (Pa. Cmwlth. 2007); see also Rebert v. York Cnty. Detectives Ass'n, 909 A.2d 906 (Pa. Cmwlth. 2006).
In any event, the Union argues, the Township's contention is incorrect as a matter of law. To that end, in Borough of Nazareth, the Supreme Court held the definition of "salary" for purposes of Act 600 included base salary alone, unless the parties, through collective bargaining or past practice expanded that definition. Further, the Supreme Court, citing its prior decision in Palyok, identified a third way in which the definition of "salary" for Act 600 purposes could be expanded—the assessment of mandatory pension contributions on payments made to the employee. Here, the Union maintains, the Arbitrator recognized the parties expanded the Act 600 term "salary" to include pay for accumulated but unused sick leave in all three ways. Thus, the conclusion reached, that pay for accumulated but unused sick leave is "compensation" for the purposes of the CBA, is fully consistent with law, and the Arbitrator did not err even if his construction were reviewable under narrow certiorari.
2. Analysis
Here, the Arbitrator determined the language of the CBA contemplated inclusion of Metzger's accumulated unused sick leave in his pension benefit calculation. Specifically, the Arbitrator interpreted the language in Section 1 of Article XXVII of the CBA, which states that an officer who meets applicable service and age qualifications, "shall upon application, be entitled to a pension allowance computed by averaging the officer's final thirty-six (36) months compensation. Compensation shall include salary, longevity pay, service increments, yearly base holiday payments, and all other compensation as permitted by law and applicable ordinances." R.R. at 18a (emphasis added).
Construing the CBA's "unambiguous" language defining "compensation," in part, as "all other compensation permitted by law and applicable ordinances," the Arbitrator determined payment for accumulated unused sick leave upon retirement was lawful, and the record lacked information as to any ordinance that would indicate otherwise. Arbitrator's Dec. & Award at 10. Thus, the Arbitrator determined that contractually these payments should be included in the pension benefit computation. Our narrow certiorari standard of review does not permit us to disregard the Arbitrator's interpretation of the method of calculating pension benefits under the CBA. See Shippensburg (summarily rejecting borough's contention that grievance arbitration award violated Section 5(c) of Act 600, 53 P.S. §771(c), by requiring payment of a pension benefit that was not based on "salary," where arbitrator determined CBA and pension plan required inclusion of payment for unused vacation leave in pension benefit calculation).
Nevertheless, the Township points out that the CBA here specifically states that "pension benefits shall be in accordance with Act 600 provisions." R.R. at 6a. Section 5(c) of Act 600, which sets forth the calculation of pension benefits, provides, as relevant: "Monthly pension or retirement benefits other than length of service increments shall be computed at one-half the monthly average salary of such member during not more than the last sixty nor less than the last thirty-six months of employment." Thus, Act 600 directs a police officer's pension benefits be calculated on the basis of "salary." Borough of Nazareth. However, Act 600 does not define the term "salary." Id.
In Borough of Nazareth, our Supreme Court explained, "the term 'salary' as embodied in Act 600 denotes base salary and excludes other forms of compensation unless the parties through past practice or agreement have expanded this definition." Id. at 92, 680 A.2d at 834 (emphasis added).
Here, the Arbitrator determined the parties' CBA uses the broad language "all other compensation permitted by law and applicable ordinances," R.R. at 4a, which was broad enough to encompass accumulated, unused sick leave. The Township cites no provision of Act 600 or relevant case law that states that inclusion of accumulated, unused sick leave is illegal, and the Arbitrator found the record lacked evidence regarding any ordinance that would affect such inclusion.
The Township acknowledges it bargained for this language. See Appellant's Br. at 16.
In addition, as for the Auditor General's Municipal Pension Bulletin No. 2001-01 and Memorandum cited by the Township, see R.R. at 29a-31a, 32a-34a, the Township correctly notes these documents state the Auditor General's opinion that the inclusion of a lump sum payment for total, "end-of-career" accumulated unused leave (as opposed to unused leave earned during the averaging period) in a pension calculation is an unauthorized or excess benefit. However, the Arbitrator's decision not to rely on the Auditor General's opinions, which do not have the force of law, is not a basis upon which we can disturb the Arbitrator's decision under the narrow certiorari standard.
C. Compliance with Act 205
1. Contentions
a. Timing of Actuarial Report
The Township next contends that increasing pension benefits that are not required by statute may only occur when preceded by actuarial reports in compliance with Act 205. As such, any action modifying the pension plan benefit without a preceding cost estimate showing its effect violates Act 205. See Shippensburg; Upper Merion Twp.; see also United Police Soc'y of Mt. Lebanon v. Mt. Lebanon Comm'n, 49 A.3d 4 (Pa. Cmwlth. 2012), appeals granted, ___ Pa. ___, 74 A.3d 1025, 1026 (2013); Borough of Doylestown v. Doylestown Borough Police Ass'n 732 A.2d 701 (Pa. Cmwlth. 1999); City of Butler. The Arbitrator here recognized the Act 205 requirement had not been met, but attempted to circumvent this deficiency by directing a limited actuarial review before ordering the retroactive increased benefit through a final award. The Township asserts this after-the-fact and limited actuarial review directed by the Arbitrator did not meet the requirements of Act 205. See Shippensburg.
The Township further argues Section 302 of Act 205, 53 P.S. §895.302, requires an actuarial report that indicates that the pension plan is actuarially sound. Here, no such report was provided before the plan modification. Indeed, there was no testimony or evidence that the pension plan is or would be actuarially sound after the modification. When a plan modification does not contain the information required by Act 205, an arbitrator exceeds his powers by determining it satisfies Act 205. Northampton Twp.
The Union responds that the Arbitrator complied with Act 205. Act 205 requires that any modification to an Act 600 police pension plan be based on an actuarial cost study. Northampton Twp. There is no question that under Act 205 a cost estimate is necessary to effectuate a change in pension benefits or funding methods. City of Butler.
According to the Union, each and every step required of Act 205 was complied with before any change in administration of the plan was directed by the Arbitrator. Before directing a remedy that might change the manner in which the pension plan was administered, the Arbitrator ordered an Act 205 Cost Estimate be prepared and presented to him for consideration. The Plan Actuary, David H. Stimson, E.A., M.A.A.A., an ERISA enrolled actuary, prepared the cost study at the direction of the Township. It was based on the January 1, 2011, biennial valuation, the most recent available. Finally, it indicated in a way reasonably calculated to disclose to the average Township Commissioner the impact of the proposed benefit plan, the modification on the future financial requirements of the pension plan and the future minimum obligation of the municipality with respect to the pension plan. The Arbitrator considered the study and concluded the change would not have a materially adverse impact on the soundness of the plan or render the plan unsound. Thus, the Arbitrator met all the requirements of Act 205. See United Police Soc'y.
b. Sufficiency of Actuarial Report
The Township also argues the Arbitrator disregarded the only actuarial evidence presented here, which showed the plan was not actuarially sound and that a modification to include lump sum payments would render it even more actuarially unsound. "Act 205 requires an actuarial report under Section 302 ... that the pension plan is actuarially sound." City of Erie v. Int'l Ass'n of Firefighters Local 293, 836 A.2d 1047, 1051 (Pa. Cmwlth. 2003).
The Township maintains the Arbitrator and the trial court disregarded the adverse actuarial impact of "spiking" the pension calculation by including a lump sum for sick leave earned outside of the measuring period. The actuary reported that Metzger's increased benefit and the short-term impact (through 2014) would have the adverse impact of decreasing the funded ratio from 71.3 percent to 70.1 percent and would increase the MMO from $694,000 to $722,000. Also, the long-term inclusion of the lump sum payouts would decrease the funded ratio from 71.3 percent to 67.8 percent and would increase the MMO from $694,000 to $802,000.
Moreover, the plan had current unfunded actuarial accrued liability of $3.5 million, which would increase to more than $4.1 million. Nowhere in the report or elsewhere is there evidence that the plan is or would be actuarially sound or that inclusion of the lump sums would not have an adverse actuarial impact. To the contrary, the only evidence presented was that the plan was not actuarially sound and that the benefit modification would adversely impact its underfunded actuarial liability. As pointed out by the actuary, the funded ratio for the plan is currently "minimally distressed" under Act 44 and the long-term impact would render it "moderately distressed." R.R. at 62a.
Act 44 refers to the amendments to Act 205 set forth in the Act of September 18, 2009, P.L. 396, No. 44.
The Township contends that, in City of Erie, this Court considered a record that lacked affirmative evidence of actuarial soundness, and we determined an arbitration panel exceeded its authority when it awarded a deferred retirement option program absent compliance with Act 205. The same result is warranted here.
The Township also argues the trial court's analysis inverts Act 205's mandate by placing a burden on the municipality to somehow show the plan is so woefully underfunded that it cannot achieve fully funded status in 30 years. City of Erie. Although the trial court lamented the lack of a clear definition of the phrase "actuarial soundness," its interpretation ignored existing guideposts and would render the actuarial review process meaningless. More specifically, the underfunding of a plan would present no impediment to increasing liabilities through arbitrator-ordered modifications not presented to a municipality in accordance with Act 205. The trial court's decision to disregard the unfunded actuarial accrued liability of $3.5 million and the undisputed increase resulting from the plan modification cannot be reconciled with Act 205 or applicable precedent. City of Erie.
The Union counters that, as the trial court aptly observed, there is a difference between actuarial soundness and an increased cost to a municipality funding a plan. See Northampton Twp. Reviewing the actual impact to the plan detailed by the Act 205 cost study, the trial court stated: "That the changes will negatively [affect the funded ratio of the plan does not ... render it 'actuarially unsound' by any reasonable definition of the term." Tr. Ct., Slip Op., 7/12/13, at 7.
Notwithstanding the trial court's cogent analysis of the term "actuarially sound," the Union maintains, whether plan changes will or will not affect the actuarial soundness of a plan is ultimately a finding of fact. Moreover, it is a finding of fact that was made by the Arbitrator here, which is beyond the narrow certiorari scope of review. City of Phila. v. Fraternal Order of Police Lodge No. 5 (Breary), 604 Pa. 267, 985 A.2d 1259 (2009) (narrow certiorari review requires acceptance of findings of fact).
2. Analysis
The General Assembly enacted Act 205 as "an Act mandating actuarial funding standards for all municipal pension systems [and] establishing a recovery program for municipal pension systems determined to be financially distressed ...." Section 101 of Act 205, 53 P.S. §895.101; City of Erie. Its purpose is to strengthen municipal pension plans "by requiring actuarially-based current funding standards and by establishing state-aided, voluntary remedial rules to aid seriously under funded pension plans in achieving compliance with the standards." City of Erie, 836 A.2d at 1049 n.3. Section 306(a) of Act 205 declares "that any actual or potential failure by a municipality to comply with the applicable funding standard established by this act threatens serious injury to the affected municipal pension plan, the entire system of public employee plans in the Commonwealth and to the Commonwealth itself." 53 P.S. §895.306(a) (emphasis added).
In a recent pair of decisions, this Court provided a detailed explanation of the relevant Act 205 provisions. See City of Scranton v. E.B. Jermyn Lodge No. 2 of Fraternal Order of Police (City of Scranton FOP (2013)), ___ A.3d ___ (Pa. Cmwlth., Nos. 2341, 2429 C.D. 2009, filed January 29, 2014), 2014 WL 309431, and City of Scranton v. Int'l Ass'n of Firefighters Local 293 (City of Scranton FF (2013)), ___ A.3d ___ (Pa. Cmwlth., Nos. 2342, 2442 C.D. 2009, filed January 29, 2014), 2014 WL 309441.
More specifically, in those cases, we explained that Chapter 3 of Act 205 governs minimum funding standards for municipal pension plans. See 53 P.S. §§895.301-895.307. Compliance with Act 205 is mandatory. City of Scranton FOP (2013); City of Scranton FF (2013). Section 301(a) provides (with emphasis added):
(a) Application.—Notwithstanding any provision of law, municipal ordinance, municipal charter, pension plan agreement or pension plan contract to the contrary, the applicable provisions of this chapter shall apply to any municipality which has established and maintains, directly or indirectly, a pension plan for the benefit of its employees, irrespective of the manner in which the pension plan is administered, and to the respective pension plan.53 P.S. §895.301(a). Thus, in the event of an actual conflict between Act 205 and a pension plan modification in a CBA, the requirements of Act 205 must be given effect. Ellwood City; City of Scranton FOP (2013); City of Scranton FF (2013). Act 205 also applies to pension plan modifications in Act 111 arbitration awards. City of Scranton FOP (2013); City of Scranton FF (2013); Shippensburg; Upper Merion Twp.; Northampton Twp.
Sections 302(b) and (c) of Act 205 require an annual determination of the financial requirements of a municipal pension plan for the following year and describe how the MMO with respect to the pension plan is to be determined. 53 P.S. §§895.302(b), (c). Of particular import here, a Section 302 actuarial report must show that the pension plan is actuarially sound in order for the municipality to determine the impact of the proposed modification on the pension plan's minimum funding requirements. Ellwood City; City of Scranton FOP (2013); City of Scranton FF 2013; City of Erie. Further, Section 302(d) requires that the municipality annually provide for the full amount of the MMO in its budget. 53 P.S. §895.302(d).
A grievance arbitrator who awards a modification of a police pension plan in the absence of an Act 205 cost estimate requires an illegal act necessitating vacation. Shippensburg; Upper Merion Twp.
Section 305 of Act 205, which requires a complete, accurate and understandable actuarial cost estimate for any benefit plan modifications, provides in part (with emphasis added):
(a) Presentation of cost estimate.—Prior to the adoption of any benefit plan modification by the governing body of the municipality, the chief administrative officer of each pension plan shall provide to the governing body of the municipality a cost estimate of the proposed benefit plan modification.53 P.S. §§895.305(a), (b), (e). Here, the parties do not dispute that an Act 205 cost study was required here. There is some disagreement as to whether the cost estimate is complete and understandable insofar as actuarial soundness of the proposed modifications are concerned.
(b) Defined benefit plan.—If the pension plan is a defined benefit plan which is self-insured in whole or in part, the cost estimate shall be prepared by an approved actuary and shall either be the updated actuarial exhibits of an actuarial valuation report specified in Chapter 2 or an estimate of the expected actuarial impact attributable to the proposed benefit plan modification.
* * * *
(e) Contents of cost estimate.—Any cost estimate of the effect of the proposed benefit plan modification shall be complete and accurate and shall be presented in a way reasonably calculated to disclose to the average person comprising the membership of the governing body of the municipality, the impact of the proposed benefit plan, the modification on the future financial requirements of the pension plan and the future minimum obligation of the municipality with respect to the pension plan.
On the issue of actuarial soundness, our decision in City of Erie is helpful. There, an interest arbitration panel awarded a Deferred Retirement Option Program (DROP) for the City of Erie's (City) fire fighter's pension fund. The City filed a petition to vacate the interest arbitration award. The common pleas court granted the petition to vacate based on its determination that the actuarial cost estimate reports submitted by the parties were insufficient to satisfy the requirements of Act 205. Among other things, the common pleas court determined there did not appear to be an actuarial report under Section 302 of Act 205, indicating the plan was actuarially sound, which would allow the City to ascertain the impact of the modification on the minimum funding requirements of Section 302. Because the arbitration panel's award would require the City to modify its pension plan without the benefit of this legally required information, the common pleas court determined the panel exceeded its authority in issuing the award.
On appeal, we considered whether the parties satisfied the pre-modifications requirements of Act 205 where both parties presented several witnesses and introduced documentary evidence concerning the actuarial costs associated with the proposed pension modification. Responding to this issue, we stated (with emphasis added):
Act 205 requires an actuarial report under Section 302, 53 P.S. § 895.302, that the pension plan is actuarially sound. See
Ellwood City; [City of Butler]. Our Supreme Court in Ellwood City pointed out that 'within the statutory framework, the General Assembly has bounded bargaining over and modification of pension benefits by a requirement of actuarial soundness as contemplated by Act 205 .... and has constrained the power of the judiciary accordingly.' Ellwood City, at 573 Pa. [364], 825 A.2d at 623-24.
Herein, the Union argues that neither its actuarial witness nor the City's testified that the pension plan is or would be actuarially unsound. In addition, the Union contends that the actuarial reports that were submitted show that the pension plan was actuarially sound as of January 1, 2001. However, our review of the record that was submitted to the trial court in this matter reveals that none of the witnesses testified that the pension plan is or would be actuarially sound after the modification of the plan to include the DROP. Moreover, the actuarial report submitted by the Union reflects that there is an unfunded actuarial accrued liability with respect to the current pension plan of $843,000. According to this actuarial report, this unfunded accrued liability will increase to $2,263,000 under the proposed DROP modification. While the actuarial report states that the proposed DROP modification will require an increase of $187,000 in the City's financial requirement, the report itself does not indicate that the pension plan will remain actuarially sound in the future and the Union's witness never testified that such an increase will produce a pension fund that is actuarially sound for the current plan year or in the future. Based on the requirements of Act 205, such a conclusion cannot be assumed.
Accordingly, we agree with the [common pleas] court that the record does not contain an actuarial report indicating actuarial soundness as contemplated by Act 205 which would allow the City to determine the impact of the modification on the minimum funding requirements of Section 302. Moreover, as stated by this Court in City of Butler, 'Sections 305(a) and (c) of Act 205 require the provision of a cost estimate to reflect the impact on the actuarial soundness of the plan regarding any benefit plan modification.' City of Butler, 780 A.2d at 855. Again, while the Union's witness and the City's witness both testified with respect to the cost of the proposed plan modification, neither specifically testified how the increased
costs of the DROP would impact the actuarial soundness of the current pension plan.City of Erie, 836 A.2d at 1051-52 (footnotes omitted).
Therefore, the arbitration panel exceeded its authority when it awarded a DROP for the fire fighters' pension plan without compliance with the provisions of Act 205 and by so doing directed the City to undertake an illegal act. Thus, the [common pleas] court's order is affirmed.
In addition, in City of Scranton FOP (2013) and City of Scranton FF (2013), this Court held that where interest arbitration panels approved increased retirement benefits in the absence of complete, accurate and understandable cost estimates that complied with the requirements of Act 205, vacation of the arbitration awards was required. In City of Scranton FOP (2013), the police pension plan had an existing one-third unfunded liability, which would increase under the proposed modifications. In City of Scranton FF (2013), the firefighters' pension had an existing 50 percent unfunded liability, which would increase under the proposed modifications. In both cases, we determined the failure of the Act 205 cost estimates to clearly address the actuarial soundness of the pension plans after the proposed modifications was a fatal omission. City of Scranton FOP (2013); City of Scranton FF (2013).
Here, in his initial decision, the Arbitrator correctly recognized he could not order the Township to include lump sum payments for accumulated unused sick leave for purposes of computing a police officer's pension calculation absent an actuarial report on the effect of such inclusion on the plan. Thus, the Arbitrator initially fashioned the following order:
[T]he Township and Union are ordered to direct their respective trustees on the Police Pension Fund board to immediately authorize an actuarial report on the effect inclusion of accumulated unused sick leave payments on pension calculations would have on the Police Pension Plan between now [(January 12, 2012)] and December 31, 2014, which is the end of the current [CBA] as augmented by the 2011 interest arbitration award. The actuarial report is to be completed by February 28, 2012. Should the report not find inclusion of payment for all of retirees' accumulated unused sick leave in their pension benefit calculation would render the Plan actuarially unsound between the date of Officer Metzger's retirement and December 31, 2014, the Township shall re-compute his pension benefit with payment for his accumulated unused sick leave included. If the report discloses the inclusion would render the Plan actuarially unsound during the aforesaid period, the Township shall have no obligation to re-compute Officer Metzger's benefit.Arbitrator's Dec. & Award at 14.
The undersigned will retain jurisdiction for the sole purpose of resolving any disagreement over the effect of the said inclusion on the actuarial soundness of the Plan between the date of Officer Metzger's retirement and December 31, 2014.
In response, Colleen A. Deer, Vice President, and David H. Stimpson, E.A., M.A.A.A., Vice President of Actuarial Services, of Mockenhaupt Benefits Group authored a two-page letter to Steven C. Landes, the Township Manager, together with a one-page actuarial study. R.R. at 61a-63a. The study shows the pension plan with an existing 28.7 percent unfunded liability of $3,507,000. R.R. at 63a. The unfunded amount increases under either scenario considered in the study ((1) with the inclusion of the lump sum for Metzger and those officers eligible to retire by December 31, 2014 it increases by 1.2 percent or $207,000, and (2) with the inclusion of the lump sum for Metzger and all future retirees by 3.5 percent or $629,000). Also, the MMO increases by $28,000 under the first scenario and $108,000 under the second scenario. The letter and actuarial report offer no opinion as to whether the Township could afford this increase.
The letter also states (with emphasis added):
The funded ratio of the plan under the current plan as of January 1, 2011, before recognizing the effect of the lump-sum unused leave payments in compensation, was 71% (actuarial value of assets divided by the actuarial accrued liability). Under Act 44, municipalities with aggregate funding ratios of 70-89% are considered minimally distressed. So this plan, viewed individually, would fall into the lower range of this category. If the cost of the unused leave were recognized only for Metzger and officers who are eligible to retire during the current contract, this funding ratio would decrease to 70%. If recognized for all future retirees (and Metzger), the funding ratio would decrease to 68%. Act 44 considers municipalities with funding ratios of 50-69% moderately distressed. So this change could increase the Township's distress level from 1 to 2. As a level 2 distress municipality, the Township would be required to aggregate the police and non-uniformed employee plan assets and develop a plan for administrative improvement.R.R. at 62a.
As in City of Scranton FOP (2013), City of Scranton FF (2013) and City of Erie, the cost estimate here does not clearly address the actuarial soundness of the police pension plan after the proposed modification other than to state that, as it relates to Act 44, the long-term effect of the proposed modification "could" increase the Township's distress level from "1" (minimum distress) to "2" (moderate distress). R.R. at 62a; see Sections 503(b), (d) of Act 205. As set forth above, the letter indicates that as a "level 2" moderately distressed municipality, the Township would be required to aggregate the police and non-uniformed employee pension plan assets and develop a plan for administrative improvement. See Sections 602(c), 605(a) of Act 205. Thus, the actuarial soundness of the plan after the proposed modification is unclear. As a further consequence, the cost estimate does not meet the complete, accurate and understandable cost estimate requirements of Section 305 of Act 205, 53 P.S. §895.305.
53 P.S. §895.503(b), (d). These Sections state:
(b) Actuarial indicator.--The actuarial indicator shall be based on the most current actuarial valuation report or reports filed by the applicable municipality with the commission pursuant to law and shall be made in aggregate for all pension plans maintained by the applicable municipality. The actuarial indicator shall be the ratio of the actuarial value of assets to the actuarial accrued liability, expressed as a percentage known as the funding ratio, and shall be applied in accordance with the following actuarial distress scoring system:
53 P.S. §§895.602(c), 895.605(a). In turn, the "plan for administrative improvement" requires the municipality to:
prepare and submit to [the Public Employee Retirement Study Commission] a comprehensive plan for administrative improvements in the pension plans, including, but not limited to, an improvement in investment performance, an increase in the liquidity of invested assets, an improved projection of future cash flow requirements, a reduction in any time delays for the deposit of member deductions and municipal contributions in the funding mechanism for the pension plan or an improvement in the collection of any other accounts receivable. Upon approval of the commission, the municipality shall implement the plan for administrative improvements.Section 607(i) of Act 205, 53 P.S. §895.607(i) (emphasis added). Further, Section 605(b) of Act 205, the provision regarding the aggregation of trust fund, states:
(b) Aggregation of trust funds.--If the municipality has established and maintained more than one pension plan for its employees and there are pension funds associated with those pension plans, the municipality may aggregate the assets to the credit of the various pension funds into a single pension trust fund. Subsequent to the aggregation, the pension trust fund shall be the funding mechanism for all pension plans connected with the aggregation.53 P.S. §895.605(b).
(1) Each pension plan subject to the aggregation shall have an undivided participation in the assets of the combined pension trust fund. For accounting purposes, the value of the participation by each plan shall be calculated annually. The value for the initial year following aggregation shall be that portion of the total value of the pension trust fund which bears the same relationship that the value of the assets of the pension plan, as of the date of the aggregation plus the contributions received by the pension trust fund with respect to that pension plan since the date of aggregation and reduced by the amount of retirement annuities and benefits paid from the pension trust fund for annuitants and benefit recipients of that pension plan since the date of aggregation, bears to the total value of all assets transferred to the pension trust fund as of the date of aggregation plus the total contributions received by the pension trust fund since the date of aggregation and reduced by the total amount of retirement annuities and benefits paid for all annuitants and benefit recipients since the date of aggregation. The value of the participation for each year subsequent to the initial year following aggregation shall be that portion of the total value of the pension trust fund which bears the same relationship that the value of the participation of the pension plan, as of the close of the preceding year plus the contributions received by the pension trust fund with respect to that pension plan during the year and reduced by the amount of retirement annuities and benefits paid from the pension trust fund for annuitants and benefit recipients of that pension plan during the year, bears to the total value of all participation in the pension trust fund as of the close of the preceding year plus the total contributions received by the pension trust fund during the year and reduced by the total amount of retirement annuities and benefits paid for all annuitants and benefit recipients during the year.
(2) Legal title to assets in the aggregated pension trust fund shall be in the municipality as trustee, or its nominees as trustees, for any person having a beneficial interest in a particular pension plan which is associated with the pension trust fund.
(3) The assets of the aggregated pension trust fund shall be invested in investment securities which are authorized investments pursuant to any applicable law for any of the associated pension plans.
(4) Investment earnings shall be allocated to each associated pension plan in proportion to the most recently determined participation value.
(5) Valuation of assets shall be pursuant to the provisions of section 202(e)(1) and any applicable rules and regulations issued by the commission.
(6) The aggregated pension trust fund shall be managed by a board of trustees. The board of trustees shall include at least one representative of the active membership of each pension plan included in the aggregated pension trust fund, who shall be elected by the active membership of the applicable pension plan. The remaining members of the board of trustees shall be drawn from the managing boards or entities of the associated pension plans, in a number equal to the members elected by the employees. If there is a deadlock, the members of the managing boards or entities shall mutually agree upon a member of the general public to cast the deciding vote.
Moreover, similar to City of Scranton FOP (2013) and City of Scranton FF (2013), given the existing 29 percent unfunded liability of $3,507,000, and the increase in the unfunded liability under the modification approved by the Arbitrator, the failure to clearly address the actuarial soundness of the plan after the proposed modification was a fatal omission. See City of Erie. In the absence of evidence that the pension plan here is or would be actuarially sound after modification, the requirements of Act 205 are not satisfied. Id. We may not assume a conclusion of actuarial soundness in the absence of such evidence. Id.
Further, as in City of Scranton FF (2013), we reject any suggestion that an arbitrator can award whatever pension plan modification he pleases as long as some cost estimate is in the record. As we stated in that case:
Finally, we reject as absurd the Fire Fighters' argument that the substance of a cost estimate is immaterial as long as some cost estimate is before the arbitration panel. Such an approach could neuter the actuarial soundness requirements flowing from Act 205's complete, accurate and understandable cost estimate provisions. 53 P.S. §895.305; see [City of Erie]. Instead, we hold that the record before the arbitrators must demonstrate compliance with the cost estimate requirements of Act 205 and must support the award.City of Scranton FF (2013), ___ A.3d at ___, Slip Op. at 14, 2009 WL 309441 at *7 (emphasis added).
Here, the cost estimate does not contain an understandable explanation of the impact of the proposed modifications on the actuarial soundness of the already distressed pension plan. Instead, the record demonstrates that the proposed modifications to the pension plan, if applied broadly, would increase the distress level of the plan and require significant administrative changes. Importantly, the administrative changes cannot be made unilaterally by the Township; rather, the administrative changes must be approved by the Public Employee Retirement Study Commission. Section 607(i) of Act 205, 53 P.S. §895.607(i). Under these circumstances, we do not understand how the cost estimate supports the Arbitrator's determination that the award "will not have a materially adverse impact on the Plan or make the Plan unsound." Arbitrator's Dec. & Award Pursuant to Retained Jurisdiction, 1/10/13, at 2.
For these reasons, the Arbitrator exceeded his authority when he ordered the inclusion of accumulated, unused sick leave in the calculation of Metzger's pension payment, without compliance with the provisions of Act 205 and, in so doing, directed the Township to undertake an illegal act. Thus, we must reverse the trial court's order and vacate the Arbitrator's award.
/s/_________
ROBERT SIMPSON, Judge ORDER
AND NOW, this 2nd day of May, 2014, the order of the Court of Common Pleas of Berks County is REVERSED. The January 10, 2013 Decision and Award Pursuant to Retained Jurisdiction entered in Case No. 14 390 00366 11 by Arbitrator Ralph H. Colflesh, Jr., Esq. is hereby VACATED.
/s/_________
ROBERT SIMPSON, Judge BEFORE: HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge
OPINION NOT REPORTED
DISSENTING OPINION BY SENIOR JUDGE FRIEDMAN
I respectfully dissent. Unlike the majority, I believe that the arbitrator acted within the scope of his authority in concluding that the modification to the police pension plan will not affect the soundness of the pension plan. Accordingly, I would affirm.
[R]eview of a grievance arbitration award under the act known as Act 111 is a very constricted one and is in the nature of narrow certiorari. Narrow certiorari allows us to inquire into only four aspects of an Act 111 arbitration award: the jurisdiction of the arbitrator; the regularity of the arbitration proceedings; whether the arbitrator exceeded his authority; and, whether the arbitrator deprived one of the parties of constitutional rights. In addition, we may not
disregard the arbitrator's findings or contract interpretation if the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.Shippensburg Police Association v. Borough of Shippensburg, 968 A.2d 246, 249 (Pa. Cmwlth. 2009) (citations omitted).
Act of June 24, 1968, P.L. 237, No. 111, as amended, 43 P.S. §§217.1-217.10.
"[B]efore an arbitrator modifies a police pension plan, there must be a finding under Act 205 that the modification will not affect the actuarial soundness of the pension plan." United Police Society of Mt. Lebanon v. Mt. Lebanon Commission, 49 A.3d 4, 11 (Pa. Cmwlth. 2012), appeal granted, ___ Pa. ___, 74 A.3d 1025 (2013). In this case, the arbitrator viewed a letter and actuarial report prepared by Colleen A. Deer, Vice President, and David H. Stimpson, E.A., M.A.A.A., Vice President of Actuarial Services, of Mockenhaupt Benefits Group and, based on its content, concluded:
Municipal Pension Plan Funding Standard and Recovery Act, Act of December 18, 1984, P.L. 1005, as amended, 53 P.S. §§895.101-895.803. --------
The undersigned has reviewed the report and based on its findings, the evidence presented in the stipulations, and the practices of the parties, a re-calculation of Officer Metzger's pension benefits to include all of his accumulated unused sick leave payment as compensation would not have a materially adverse impact on the soundness of the Plan or make the Plan unsound.(Supp. Award at 2.) (Emphasis added.)
The majority concludes to the contrary that "the cost estimate does not contain an understandable explanation of the impact of the proposed modifications on the actuarial soundness of the already distressed pension plan." (Maj. Op. at 35.) Although the report does not use the magical term "actuarially sound," I do not believe that the arbitrator exceeded his authority. The arbitrator based his determination on the evidence, including the impact on the plan's actuarial soundness of including lump-sum payments for accumulated, unused sick leave in the calculation of pension benefits. The funded ratio of the current plan was 71%. If the cost of unused leave was recognized only for Metzger and officers eligible to retire during the current contract, the funded ratio would decrease to 70%. If the cost of the unused leave was recognized for all future retirees and Metzger, the funded ratio would decrease to 68%. Additionally, the arbitrator considered the recent practice of Muhlenberg Township of including unused sick and vacation leave in the most recent retiree's pension benefits calculation. Because I believe the arbitrator acted within the scope of his authority, I would affirm.
/s/_________
ROCHELLE S. FRIEDMAN, Senior Judge
| Funding Ratio | Score |
| 90% or over | 0 |
| 70-89% | 1 |
| 50-69% | 2 |
| Less than 50% | 3 |
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(d) Levels of distress.--The three levels of municipal pension system financial distress shall be as follows:
(1) Minimal distress, which shall include any municipality which has a distress determination scoring equal to one.
(2) Moderate distress, which shall include any municipality which has a distress determination scoring equal to two.
(3) Severe distress, which shall include any municipality which has a distress determination scoring equal to three.