Government Plan Litigation: The Past, Present, and Future Wave of Litigation

Transcription

1 Government Plan Litigation: The Past, Present, and Future Wave of Litigation NCPERS 2015 Annual Conference and Exhibition May 6, 2015 David N. Levine and Sarah Adams Zumwalt

2 Overview Past Funding Issues Plan Design Changes Service Provider Lawsuits Present Ongoing Past Litigation Bankruptcy Application of ERISA 2

3 Overview Future Bankruptcy Governmental Plan Status and Application of ERISA Service Provider Lawsuits Other Fiduciary Litigation 3

4 Past: Plan Design Changes Problem: Underfunding or Other Concerns Past Solutions Cost of Living Adjustments Upheld in Some Jurisdictions Colorado, Minnesota, New Jersey, and South Dakota Struck Down in Others Arizona Changes to Benefit Formulas Bankruptcy 4

5 Past: Design Changes Three Legal Concepts: Contracts Constitutional Property 5

6 Past: Design Changes Contract States Theory Benefits are Contracts Between Participants and the State Laws Modifying Benefits Impair These Contracts State and Federal Constitution Contract Clause Three Part Test Is There A Contract? Does The Legislation Impair the Contract? Is the Action in the Public Interest, Necessary, and Reasonable? 6

7 Past: Jurisdictional Differences Constitutional States State Constitution Expressly Prohibits Certain (Or More) Benefits Modifications Usually Requires a Constitutional Amendment to Reduce Benefits 7

8 Past: Jurisdictional Differences Property States Theory Benefits Are Property That Can Not Be Taken Away Without Due Process Under The Constitution Court Decisions Allowing Changes Adjustments Rather Than Taking 8

9 Past: Jurisdictional Differences Type of Jurisdiction State Constitution Contract Accrued and Future Benefits Accrued and Maybe Future Benefits Accrued Benefits Only AK, IL, NY AZ HI, LA, MI AL, CA, GA, KS, MA, NE, NV, NH, ND, OR, PA, TN, VA, WA, WV CO, ID, MD, MS, NJ, RI, SC Property ME, WY CT, NM, OH WI AR, DE, FL, IA, KY, MO, MT, NC, OK, SD, UT, VA Source: Center for Retirement Research at Boston College, August

10 Past and Present: Suing Service Providers Activity: Suing Service Providers for Alleged Errors Or Mistakes Case Study: Alaska and Mercer Actuarial Services to Alaska Retirement Management Board (20+ Years) 2000s: Fall From 100% to 75% Funding 2009: $2.8 Billion Lawsuit - Malpractice, Breach of Contract, and Unfair Trade Practices 2010: $500 Million Settlement 10

11 Present: Plan Change Litigation Activity: Plan Changes Colorado COLA Reduction Claim: COLA Adjustment is a Contract Clause and Takings Clause Violation Lower Court: No Contractual Right Exists Appellate Court: Overruled Lower Court and Sent Back For Review on Substantial Impairment and Significant Public Purpose CO Supreme Court: Agreed With Original Lower Court 11

12 Present: Plan Change Litigation Activity: Plan Changes New Hampshire COLA Adjustment, Benefit Caps, Increased Contributions Litigation: NH Supreme Court: Judges Pensions Contractual, Vested from Time Employment Begins Rule reducing benefits to no more than 75% of compensation = substantial impairment NH Lower Courts Grappling with Whether Rule Applies to Statutes Governing Benefits for Other Retiree Groups 12

13 Present: Bankruptcy San Bernardino Cause: Collapse of Subprime Housing Market Stopped Payments on $13 Million Debt to State Retirement Fund (CalPERS) Litigation Bankruptcy Court: City not Required to Pay CalPERS Benefits Contract is Like any Other CalPERS Threatened to Cut Employees Pensions 60% if No Payments City Caved 13

14 Present: Bankruptcy Detroit Avoiding the Nuclear Option ~$20 Billion Debt; Retiree Payments 1/3 of City Budget Litigation Issue: Can Detroit Cut Accrued Benefits in Despite Constitutional Provisions? Court-Approved Grand Bargain : Plans Frozen; Actuarial Assumptions; Hybrid Plans for Current Employees; Pension Reductions for Some Retirees, COLA Reductions for Others; Funding Targets 14

15 Present: Bankruptcy of Quasi- Governmental Entities Activity: Quasi-Governmental Entities Declaring Bankruptcy Chapter 9 v. Chapter 11 Is There a Choice? General Differences Chapter 9: Reorg. for Municipalities Chapter 11: Reorg. for Businesses and Individuals 15

16 Present: Bankruptcy of Quasi- Governmental Entities Payment of Retirement Benefits Chapter 11 Imposes Certain Requirements Not Found in Chapter 9 Chapter 9 v. Chapter 11 What Factors Should Quasi-Governmental Entity Consider? 16

17 Present: Bankruptcy of Quasi- Governmental Entities Seven Counties Services KY Bankruptcy Background: Seven Counties was Nonprofit Mental Health Provider, Later Recognized as Regional Mental Health Board to Operate Mental Health Facilities Under Contracts with Commonwealth Court: Debtor not Governmental Entity, Able to File Chapter 11 17

18 Present: Beginning of Governmental ERISA Litigation Activity: Contesting Whether Governmental Plans are Subject to ERISA Federal Case from Pennsylvania Background Plaintiff: School Nurse with Long Term Disability Plan Through School Board Insurance Trust Defendant: Insurance Company That Issued Policy to Trust to Cover Eligible Employees 18

19 Present: Beginning of Governmental ERISA Litigation Litigation Plaintiff Denied Benefits, Sued in State Court Defendant had Case Removed to Federal Court Plaintiff Argued Case Property in State Court Because Her Insurance Plan Was Not Governmental Plan 19

20 Present: Beginning of Governmental ERISA Litigation Court s Opinion Court Broadly Construed Statutory Requirement That Governmental Plan be Established by Governmental Entity Held: Claim Not Governed by ERISA, Case Remanded to State Court 20

21 Future: Bankruptcy Activity: Future Bankruptcy Litigation and Post Bankruptcy Litigation Detroit s General Retirement System Nov. 2014: Retirees Seek Appeal of Judge Rhodes Decision Approving Detroit Bankruptcy Settlement Sought Limited Stay of Pension Cuts Pending Appeal Jan. 2015: Appeal Assigned to U.S. District Judge Bernard Friedman 21

22 Future: Bankruptcy Stockton, CA CalPERS, the Bully with the Glass Jaw Entered Bankruptcy in 2012 Feb. 2015: Judge Rejects CalPERS $1.6 Billion Claim & Argument that Municipal Bankruptcy Cannot Affect CA Pensions Short Term: Victory for CalPERS, City to Pay Pensions in Full Long Term: What Impact will Court s Interpretation of CA Law Have? 22

23 Future: Bankruptcy Will Others Follow Detroit and Stockton? NY Federal Reserve President William Dudley: May Foreshadow More Widespread Problems than what Might be Implied by Current Bond Ratings Chicago $35 Billion in Unfunded Pension Liabilities, $8.3 Billion in General Obligation Bond Debt How Many Others in Similar Position? 23

24 Future: Bankruptcy Chapter 9 versus 11 Impact of Seven Counties bankruptcy Floodgate of Similar Bankruptcy Filings? Higher Costs for Other Public Employers? Court: Under Chapter 11, Seven Counties Can Reject Contract With KRS as Sound Business Judgment 24

25 Future: Plan Underfunding Activity: Claims of Fiduciary Breach Due to Underfunding of Plan Statutory Provisions Depending on the Jurisdiction, May Need Constitutional Amendment Funding Approaches Withdrawal Liability Segmented Asset Pools 25

26 Future: Governmental or ERISA? Church Plan Analogy Activity: Is A Plan A Governmental Plan? ERISA 3(32) Definition of Governmental Plan [A] plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing 26

27 Future: Governmental or ERISA? Church Plan Analogy Compare with ERISA 3(33) Definition of Church Plan (A) a plan established and maintained by a church or by a convention or association of churches (C)(i)... includes a plan maintained by an organization... if such organization is controlled by or associated with a church or a convention or association of churches 27

28 Future: Governmental or ERISA? Church Plan Analogy Returning to Recent Governmental Plan Litigation Courts Analyzing What it Means to be Established or Maintained by Governmental Entity Will Some Governmental Plans Become Subject to ERISA? 28

29 Future: Governmental or ERISA? IRS Guidance IRS Revenue Ruling: Degree of Control Government Entity Has Over Everyday Operations Other Factors: Specific Legislation Creating the Organization? Source of Funds for the Organization? How are Trustees or Operating Board Members Appointed or Elected? Does the State Consider Employees of the Organization to be State Employees? 29

30 Future: Common Issues in ERISA Litigation Activity: What to Expect if Governmental Plan Litigation Increases Plaintiffs Law Firms Exploratory Letters to Participants Crowdfunded Forensic Investigations about Fiduciary Duties, Plan Sponsor Fees Lengthy and Costly Class Action Litigation 30

31 Future: Understanding ERISA Funding and Compliance Effects of Being Subject to ERISA? Single Employer Plans Actuarial Rules for Determining Assets and Liabilities Annual Funding Target Attainment Percentage (AFTAP) At-risk Status = Accelerated Funding Schedules; Excise Taxes; Controlled Group Jointly and Severally Liable Required Notices and Disclosures 31

32 Future: Service Provider Litigation Activity: Suing Service Providers Florida: $8.5 Million Settlement between Merrill Lynch and Police, Firefighter, General Employees Pension Plans (March 2013) Suit Alleged Merrill Lynch Breached Responsibility to Plans by Acting in Own Interest When Selecting and Promoting Money Managers 32

33 Future: Defined Contribution Plan Litigation Activity: Governmental Defined Contribution Plans Importing from ERISA Defined Contribution Plans Fee Benchmarking and Class Actions State Statute Fiduciary Provisions and Role of ERISA (if any) Ways to Potentially Mitigate Insurance, State Law Indemnities, Working with Service Providers 33

34 Future: Plan Benefits Activity: Defined Benefit and Defined Contribution Plans Plan Interpretation and Benefit Calculations Role of Estimates and Plan Language Class Actions and Worker Classification in an Era of Privatization 34

35 Future: Defined Benefit Investments and Vendor Selection Activity: Fiduciary Process and Oversight ESG Positions Monitoring Process Documentation Who is a Fiduciary? Staff? Consultants? Board? 35

36 Future: Ways to Potentially Mitigate Liability Insurance State Law Indemnities Looking to ERISA as Analogy Working with Service Providers (Actuaries and Lawyers) 36