PENSION REFORM AND MOVING FORWARD

PENSION REFORM AND MOVING FORWARD Presented by Richard D. Miller, Esquire Campbell Durrant Beatty Palombo & Miller, P.C. 535 Smithfield Street, Suite 700 Pittsburgh, PA 15222 412-395-1266 Fax: 412-395-1291 Email: rmiller@cdblaw.com

UPDATE ON PENSIONS NOTES I. Forms of Pension Plans There are several different types of pension plans. In the Pennsylvania public sector, there typically are defined benefit plans ("DB"), defined contribution plans ("DC"), and cash balance plans ("CB"). In some cases, municipalities are part of a multi-employer pension plan. A. Defined Contribution Plan (DC): Such plans involved predetermined contributions by an employee or employer or both. The contribution is typically a fixed percentage of pay but can be a fixed amount. The employer's only funding obligation is to make the predetermined contribution to the employee's account. The employee's benefit is based upon the amount in the employee's account when he or she retires. Employers must be wary that there are strict rules and regulations under the applicable tax laws and regulations and the Pennsylvania Fiscal Code regarding what type of DC plan can be set up in the public sector and the funding obligations. B. Defined Benefit Plan (DB): The employer agrees to provide a specific benefit upon an employee's retirement. The exact benefit is based on a formula at retirement based on years of service and average compensation over an averaging period (e.g. 36 months). Typically, employees contribute to their DB plan based on a percentage of their compensation. The employer is responsible for providing and funding the remainder of the defined benefit. C. Cash Balance Plan (CB): These plans are relatively new to the scene in the public sector in Pennsylvania. They appear to be similar to DC plans with employer and usually employee contributions. Unlike a DC plan, however, the employer guarantees a specific investment return percentage each year and that amount builds up over time. The benefit is based on the amount in the CB plan upon the employee's retirement. D. Multi-Employer Plans: Such plans are typically sponsored by a labor union and the employer is required to make a fixed contribution for each employee. This contribution is often based on the hours the employee works. The plan sponsor, 1

not the employer, defines and promises the benefit at retirement. II. APPLICABLE LEGISLATION In Pennsylvania, the type of pension plan that a municipality offers is typically controlled by legislation. The exact legislation that applies depends on the type of municipality and the type of employee at issue. Police employees and fire employees in third class cities are generally required to be participants in a defined benefit plan. Other laws governing plans for non-uniformed employees for each type of municipality are provided in each municipal code. The various forms of pension legislation will be discussed below: A. Act 205 of 1984 (53 P.S. 895.101 et seq. Act 205, known as the Municipal Pension Plan Funding Standard and Recovery Act, applies to the municipal pension plans of every city, borough, town, township and home rule entity. The Act itself does not detail specific pension benefits. It basically controls funding, reporting requirements and related issues. The Act requires such entities to provide actuarial reports for each municipal pension plan and further establishes minimum funding standards for such plans. The Act also provides for the distribution of State Pension Aid and establishes a recovery program for financially distressed municipal pension plans. The Public Employee Retirement Commission (PERC) is the regulatory agency charged with the responsibility of establishing rules and regulations implementing Act 205. 16 Pa. Code Chapters 201-209. (Note: the Governor s proposed 2012 State budget, would place PERC functions under the purview of DCED.) 1. Funding Requirements The municipality s minimum contributions to its pension plans, referred to as the Minimum Municipal Obligation or MMO, is the actuarial cost of funding the retirement system less the anticipated amount of member contributions to the plan. The MMO is established using standardized actuarial reports and methods and must be officially certified by the municipality no later than the last business day in September for the next year s MMO. Failure to fund this MMO may result in the initiation of legal proceedings, including a Mandamus action, forcing the municipality to provide such payments. This, however, is not the process by which eligibility for benefits or existence of benefits is established. 2

2. Actuarial Valuation Reports The Act requires that actuarial valuation reports for each municipal pension plan be submitted to PERC every two (2) years, on or before the last business day of March, following the reporting year. Due to this biennial requirement, certain flexibility exists regarding the report upon which the municipality s annual Minimum Municipal Obligation (MMO) will be based. 3. Required Actuarial Cost Estimates for Benefit Changes Prior to any benefit modification, an actuarial cost estimate must be prepared showing the annual financial requirements of the pension plan before and after the proposed modification, as well as the impact of the proposed modification. For defined benefit pension plans, the cost estimate typically must also include the comparison of the actuarial status of the pension plan, both before and after the proposed modification. a. City of Erie v. Haas Memorial Lodge No. 7, 811 A.2d 1071 (Pa. Commw., 11/1/02), confirmed that an arbitration panel exceeded its authority when it required a deferred retirement option plan be added to the municipality s police pension plan without requiring an actuarial report to determine the cost impact of the benefit. b. North Hampton Township v. North Hampton Township Police Association, 885 A.2d 81 (Pa. Commw., 9/15/05), confirmed that an Act 111 interest arbitration panel acted outside its authority in reducing police officer pension contributions without requiring an actuarial report to determine the cost impact. 4. Notwithstanding any provision of law, municipal ordinance, municipal resolution, municipal charter, pension plan agreement or pension plan contract to the contrary, the applicable provisions of the Act 205 funding standards shall apply. 53 P.S. 895.301(a). a. Always consider this provision in grievance arbitrations concerning interpretation/application of pension benefits. 3

b. In recent decisions, the Pennsylvania Courts have attempted to define Act 205 s actuarial study requirements: (i) City of Scranton v. Fire Fighters, Local Union No. 60, 85 A.3d 594 (Pa. Cmwlth. 2014): The City of Scranton appealed police and fire interest arbitration awards. The awards provided increased pension benefits which were in excess of the benefits allowed under applicable law. The new benefits were not supported by a cost estimate study of the proposed benefit plan modifications as required by Act 205. The Commonwealth Court held that a cost study must be prepared with some involvement "of the Plan s chief administrative officer and address: Impact on the plan by addressing actuarial soundness of the Plan after the proposed changes Impact on the future financial requirements of the plan Impact on the future minimum financial obligation of the municipality The Court did not explain what some involvement means or the extent of the CAO s required involvement. (ii) Muhlenberg Tp. v. Muhlenberg Tp. Police Labor Org., 2014 WL 1779339 (Pa. Cmwlth. 2014). The Commonwealth Court struck down a grievance arbitration award requiring the inclusion of accumulated sick leave in calculation of monthly pension benefits Court found award violated Act 205 because a letter was submitted to the 4

arbitrator, discussing the unfunded liability of the plan preimplementation, and postimplementation (with liabilities increased after implementation), but there was no discussion on the actuarial soundness of the plan, after proposed modification. Court did not address what is needed to prove actuarial soundness of the plan but stated, 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. (iii) United Police Society of Mt. Lebanon v. Mt. Lebanon Comm'n, 104 A.3d 1251 (Pa. 2014): CBA and pension plan provided for caps on COLAs at 90% of any participant s final average monthly compensation, but also provided different accrual rates for each benefit. The Township provided incorrect information to its actuary performing the required Act 205 cost study capping both benefits at a much lower level. The municipality began capping COLAs at the lower level based on the Act 205 actuary reports and not the CBA language. The municipality asserted that it had to follow the Act 205 study. This resulted in COLA benefits well-below the levels called for in the pension plan and CBA A lawsuit followed and the Pennsylvania Supreme ruled that because: the municipality provided inaccurate information to the actuary, it failed to obtain a complete and accurate cost estimate, as required by Act 205; and 5

there was no valid Act 205 cost study, the CBA change could not be implemented and the municipality could not make a unilateral change based on the cost study; the matter had to be remanded to order the municipality to obtain a valid Act 205 cost study. B. The Pennsylvania Municipal Retirement Law (53 P.S. 881.101 et seq.) The Pennsylvania Municipal Retirement System (PMRS) was created by Act 15 of 1974 and provides for three (3) types of municipal retirement systems. 1. Article II of PMRS maintained retirement plans established under the Municipal Employees Retirement Law, which was repealed by PMRS, for the benefit of non-uniformed local government employees. The Article establishes a pension system consisting of both a defined contribution component and a defined benefit component for such local government employees. Other benefits include death benefits, early retirement, disability benefits and vesting. Member contributions are three percent (3.0%) on compensation on which social security benefits are payable, and then six percent (6.0%). 2. Article III of PMRS maintained retirement plans established under the Municipal Employees Retirement law, which was repealed by PMRS, for the benefit of police officers and firefighters of local governments. Similarly, this Article establishes a pension system consisting of both a defined contribution component and a defined benefit component for such local government employees. Other benefits include death benefits, early retirement, disability benefits and vesting. Members contribute up to eight percent (8.0%) of compensation with a reduction for members selecting joint coverage. 3. Finally, Article IV of PMRS authorizes the establishment of agreements between local governments and PMRS for individually designed retirement plans. 6

4. Permanent Part-Time Employee Eligibility As a result of the contentious debate surrounding the requirement from PMRS that all permanent employees (including permanent part-time) be members of the pension plan, Act 169 of 2004 was passed intending to address this controversy. The Act limits the classification of mandatory enrollment, prospectively, to permanent fulltime employees. Accordingly, municipalities are permitted to determine the eligibility rights of permanent part-time employees in the retirement system. This is accomplished by enacting an ordinance and entering into a new agreement with the System reflecting these eligibility requirements. PMRS has interpreted this legislation as applying only to those hired after the effective date of the new agreement. C. Third Class City Employee Retirement Systems 1. Police officers and firefighters have similar legislation controlling their retirement systems. (53 P.S. 39301 et seq. and 53 P.S. 39320 et seq., respectively). a. General Provisions (i) Member contributions may be provided up to an amount of four percent (4.0%) of pay, plus an additional amount of up to one percent (1.0%) of pay for a survivor s benefit. Act 65 of 2002 increased the contribution requirement for the Service Increment proportionately. Effectively, one dollar ($1.00) for every one hundred dollars ($100.00) of additional benefit. (ii) Superannuation Retirement Retirement eligibility occurs after twenty (20) years of continuous service and does not require a minimum age, but if one is established, it must be age fifty (50). (iii) Retirement Benefit A retiree s benefit is computed at one-half (1/2) the final rate of pay, or one-half (1/2) the monthly average pay of the employee during the five (5) highest years, whichever is greater. 7

(iv) Service Increment Pursuant to Act 65 of 2002, the maximum service increment is now five hundred dollars ($500.00). b. Other benefits include: death benefits, disability benefits, cost of living increases, vesting benefits and purchase of military service. c. The optional charter and home rule charter exceptions to the fifty percent (50.0%) benefit limitation. Act 65 also grandfathered those Third Class cities that were optional charter or home rule and which had police or firefighter pension plans which exceeded the fifty percent (50.0%) benefit limitation, prior to the effective date of the Act. (Note the legislative conflict with the Auditor General s interpretation of the Third Class City Optional Charter Law). 2. Non-Uniformed Employee Retirement Systems (53 P.S. 39340, et seq.) a. General Provisions (i) Member Contributions A member with social security coverage pays three and one-half percent (3.5%) of pay on which social security contributions are payable and, five percent (5.0%) of any pay in excess of that amount. An additional one percent (1.0%) may be required for a survivor benefit. (ii) Superannuation Retirement Retirement eligibility occurs at age sixty (60) after twenty (20) years of service. (iii) Retirement Benefit The retirement benefit is computed at fifty percent (50.0%) of the highest average annual salary or wages during any five (5) years of employment with the city. b. Other provisions include: an early retirement benefit, disability retirement and death benefit. D. Retirement System for Non-Uniformed Employees Under the Optional Retirement System Law for Third Class Cities. (53 P.S. 39371, et seq.) A city of the Third Class 8

may establish an alternative retirement system for its non-uniformed employees. 1. General Provisions a. Member Contributions A member with social security coverage pays three and one-half percent (3.5%) of pay on which social security contributions are payable and, five percent (5.0%) of any pay in excess of that amount. An additional one percent (1.0%) may be required for a survivor benefit and, if authorized by city council, a member may contribute an additional one-half percent (0.5%) in order to be eligible for a service increment. b. Superannuation Retirement Retirement eligibility occurs at age sixty (60) after twenty (20) years of service. c. Retirement Benefits The retirement benefit is computed at fifty percent (50.0%) of the highest average annual salary or wages during any five (5) years of employment with the city or fifty percent (50.0%) of the annual salary that would be determined by the rate of monthly pay at the date of retirement, whichever is higher. 2. Other provisions include: an early retirement benefit, cost of living adjustments, disability benefits, death benefits, service increments, vesting and the purchase of prior military service. E. Act 600 of 1955 (53 P.S. 767, et seq.) Act 600, also known as the Municipal Police Pension Law, governs retirement systems in boroughs, towns and townships with three (3) or more full-time police officers, as well as regional police departments. Such municipalities with fewer than three (3) full-time police officers may elect coverage under Act 600. 1. Membership A police officer must be a member of the Police Retirement System, including police chiefs. 2. Member Contributions a. Police officers must pay into the pension trust an amount from five (5.0%) to eight percent (8.0%) of 9

salary. Where an officer is covered by social security, the rate is five percent (5.0%) of salary. Moreover, if the pension plan provides for a social security offset, the contribution rate is reduced on the portion of salary on which social security contributions are payable, by subtracting three percent (3.0%) of the offset percentage from the five percent (5.0%) contribution rate. b. Prior to Act 30 of 2002, police officer pension contributions were based upon the funding requirements of the plan and officers were required to contribute up to their minimum percentage of salaries to meet the funding requirements of the plan before the municipality was required to pay general fund monies into the plan. Act 30 maintained the mandatory contribution by police officers but allowed municipalities to reduce or eliminate officer pension contributions. Collective bargaining agreements and pension plan ordinances may and should continue to reflect the prior statutory scheme for contributions under Act 600. c. Plans which state that they will simply follow the statutory requirements should be avoided. Consider the following language. As a condition of participation in this plan, each active participant must contribute a percentage of his compensation as established each year. In general, this mandatory contribution shall be the maximum percentage of the participant s compensation permitted by law. The employer may reduce or eliminate the contribution required, provided all three (3) of the following requirements are satisfied: (i) a current actuarial study indicates that the condition of the plan is such that contributions may be reduced or eliminated; (ii) contributions by the employer are not required to keep the plan actuarial sound; and (iii) a reduction or elimination of contributions is authorized on an annual basis by an ordinance or resolution by the employer. 3. Superannuation Retirement A police officer may retire after a total of twenty-five (25) years of service at age fifty-five (55). If an actuarial valuation shows it is feasible, the age may be reduced to fifty (50). 10

Intervening military service is a mandatory benefit that is credited, but non-intervening military service is an optimal benefit and not credited unless it is purchased by the officer pursuant to a formula set forth in Act 600. 4. Pension Benefit The monthly pension benefit equals one-half (1/2) of the monthly salary of the officer, averaged over the last thirty-six (36) to sixty (60) months of employment. The exact averaging period is a subject of bargaining between 36 and 60 months. There are no other form of benefit options. 5. Service Increment Pursuant to Act 89 of 2005, Act 600 was amended to increase the service increment cap from one hundred dollars ($100.00) to five hundred dollars ($500.00) per month after five (5) completed years of service in excess of twenty-five (25) years. 6. Surviving Spouse Benefits Act 30 of 2002 provided for increased surviving spouse benefits including an expanded definition of dependents, elimination of the remarriage penalty and a minimum fifty percent (50.0%) survivor benefit. 7. Disability Benefits Act 30 of 2002 increased the disability benefits to a minimum fifty percent (50.0%) of salary benefit. Disability benefits in excess of the superannuation retirement benefit generally result in increased disability pension requests and should be avoided. 8. Killed in Service Benefit Act 51 of 2009 converted the killed in service benefit from a local plan obligation to a state obligation. The benefits is still fixed at one hundred percent (100.0%) of the officer s salary at the time of death, offset by worker s compensation or other pension plan payments. The municipality does not have authority to pay such a benefit out of its pension plan. 9. What is the definition of salary? a. Salary is general defined through case law as base salary and possibly longevity. Other forms of compensation can be included in the definition of base salary through collective bargaining or past practice. Salary generally includes only fixed compensation paid at regular periodic intervals. 11

Borough of Beaver v. Liston, 464 A.2d 679 (1983), When employees are required to make pension contributions from additional forms of compensation, the courts have concluded it would be inequitable not to include such additional compensation in the calculation of monthly pension benefits. See Palyok v. Borough of Weft Mifflin, 586 A.2d 366 (1991) and Borough of Nazareth v. Nazareth Borough Police Association, 680 A.2d 830 (1996). b. See A.G. Bulletin No. 2001-01, and clarification. 10. Other benefits include: early retirement, cost of living adjustment, death benefits, disability benefits, vesting and credit for non-intervening military service. Act 600 does not provide for the portability of pension benefits so an officer cannot carry service time from one municipality to another. A return of pension contributions is not permitted, unless an officer leaves the employ of a police department before vesting. There also is no non-work related disability benefit. F. Borough Retirement Systems 1. Police Officer Retirement Systems with Less Than Three (3) Police Officers (53 P.S. 46131, et seq.) 2. Compensation in Lieu of Joining Another Type of Retirement System (53 P.S. 46105) G. First Class Township Retirement Systems 1. Police Officer Retirement Systems With Fewer Than Three (3) Police Officers (53 P.S. 56409, et seq.) a. General Provisions (i) Member Contributions A police officer generally must contribute a percentage that is uniform up to four percent (4.0%) of salary. (ii) Superannuation Retirement Retirement eligibility may occur after twenty (20) years of continuous service. 12

(iii) Retirement Benefits A benefit cannot be more than one-half (50.0%) of a police officer s pay at the date of death, discharge or retirement. 2. Other First Class Township Code Provisions Relating to Retirement (53 P.S. 55604). H. Second Class Township Retirement Systems 1. Police Officer Retirement Systems with Less Than Three (3) Police Officers (53 P.S. 66910). a. General Provisions (i) Member Contributions A township may generally require a police officer to pay into the police pension trust fund three percent (3.0%) or less of that officer s pay. (ii) Superannuation Retirement - Retirement eligibility may occur after twenty (20) years of continuous service. (iii) Retirement Benefits Benefits must conform to a uniform scale and be based on the rate of monthly pay of the police officer. 2. Other Second Class Township Code Provisions Relating to Retirement (53 P.S. 66512). I. Home Rule Communities Home Rule municipalities may not deviate from the applicable pension law. See Monroeville v. Monroeville Police Department Wage Policy Committee, 767 A.2d 596 (Pa. Commw. 2001) and Attachment B. J. Act 120 (72 P.S. 2263.1, et seq.) Act 120 provides definitions for pension annuity contracts, participating police pension plans and full-time paid police officers. The Act applies in all municipalities, but it is governing legislation for boroughs, towns and townships with less than three (3) police officers that wish to provide pensions only in accordance with annuity contracts. K. Pension Forfeiture The Pennsylvania Pension Forfeiture Act, 43 P.S. ß1311, et seq. disqualifies any elected or appointed member of the State or municipal 13

pension plan who is convicted or pleads guilty or no defense to a crime related to public office or employment from receiving a pension benefit from such plan. 1. A guilty verdict or plea is required. 2. The Act defines a crime related to public employment as a violation of certain specified provisions of the Crimes Code. If the employee is not found guilty or does not plead guilty to one of the specifically listed crimes, the Forfeiture Act does not apply. III. CONSTITUTIONAL ISSUES The Pennsylvania courts have applied the constitutional ban on the impairment of contracts to prevent the reduction of pension benefits in many instances. In such cases, the courts view pension benefits as a form of deferred compensation to be paid in the future. In a recent decision, however, the Pennsylvania Commonwealth Court ruled that the City of Allentown was permitted through collective bargaining to eliminate a Cost of Living Allowance (COLA), change the formula how pension contributions were calculated and eliminate certain pension provisions that were unlawful or unauthorized under the Third Class City Code for active employees. See City of Allentown v. IAFF, Local 302, No. 1802 C.D.2014, August 7, 2015. The Court s decision regarding the pension changes was not appealed to the Supreme Court. IV. UPDATE ON COMMON MUNICIPAL PENSION QUESTIONS AND ISSUES A. What are the major laws that control Local Government Employee Retirement Systems. 1. See Attachment No. 1 (Certain Laws Controlling Local Government Employee Retirement Systems) 2. ERISA? (29 U.S.C.A. 1003(b)(1)) ERISA is a Federal Pension Law. Municipal Pension Plans are not subject to most of the provisions of the Act. On numerous occasions, the Federal Legislature has considered the enactment of a public sector version of ERISA without success. Nevertheless, Municipalities and their advisors may use the ERISA provisions as guidelines for the implementation of certain policies. 14

B. What should be done if a Pension Plan s Ordinance is inconsistent with the relevant collective bargaining agreement or Act 205 Actuarial Valuation Report? All three must be coordinated. In the event the municipality has agreed to benefits in excess of applicable statutory requirements, it should attempt to collectively bargain compliance with the applicable municipal code and, if unsuccessful, challenge any excess benefits through the Act 111 Interest Arbitration process (at least on a prospective basis). It is an absolute must that any Act 111 Interest Arbitration Award which grants retirement benefit in excess of municipal code limits must be appealed. In addition, errors on the Act 205 reports may impact the municipality s receipt of state pension aid. C. Are there benefits in a collective bargaining agreement which may have an indirect effect on pension costs (other than specific pension improvements)? Anything pay related can have an effect on pension costs. Because police plans and many non-police plans may calculate benefits based on total pay, anything that factors into such pay will affect pension costs. Examples include, base salary increases, longevity increases, salary scale changes, and the amount of overtime or the method of scheduling overtime, if you calculate benefits on more than base salary. Consideration of any such modification should be discussed prior to implementation to determine the impact on costs and to ensure that proper funding can be maintained. (Note: Adding or improving retiree medical benefits and other non-pension retirement benefits can affect plan costs by encouraging an employee to retire earlier than anticipated, thus establishing a longer than expected pay-out period with higher costs.) D. Does a municipality have to bargain over the selection of pension plan professionals or the allocation of its state aid? 1. While municipal pensions contain many aspects which are subject to bargaining, Act 111 does not require bargaining over the administration of pension funds. The choice of professionals to assist in the pension plan s administration is clearly within the managerial policy exception to collective bargaining and, thus, constitutes a non-bargainable administrative matter. 15

2. An Act 111 Interest Arbitration Award dictating the method of funding a Municipal Pension Plan would constitute an excess of the arbitration panel s power as limited by Act 205. Act 205 specifically took the power to allocate the pension funds away from an arbitration panel and vested sole discretion with the local municipality, thus removing from an arbitration panel s authority any ability to dictate the allocation of those funds. E. Are there record retention policies relating to Municipal Pension Plans? 1. Pension Plan data sheets submitted to the Public Employee Retirement Study Commission must be retained by municipalities for at least ten years. 2. Pension Plan ledgers and registers must be retained permanently. F. Is a municipality required to have a policy and procedure manual governing the operation of its Municipal Pension Plans? 1. It is not a requirement, but it certainly is a good idea. Such governing policies will transcend changes in personnel including elected officials and administrators. In addition, consider including a dispute resolution process that culminates with a local agency proceeding. 2. In addition, establishing a chief administrative officer is also sound policy. The creation, however, should be by position/title as opposed to an individual, thus eliminating the need to continuously reappoint. G. Is the Act 205 Distressed Municipal Pension Plan Program still valuable even after the end of Supplemental Assistance? 1. In addition to the former Supplemental State Aid which expired almost a decade ago, the Act 205 distress remedies also include: (i) the ability of municipalities to aggregate various pension plan assets to achieve economies of scale; (ii) the ability to increase member contributions up to fifty percent (50%) of the plan s Normal Cost; (iii) the ability to revise a new benefit plan structure for new hires; (iv) special municipal taxing authority to fund pension liability; and (v) the ability to 16

delay implementation of funding standards under Act 205. 2. Act 44 of 2009 simplified the determination procedure for qualifying as a distressed pension plan. It is now based on the ratio of actuarial value of assets to the actuarial accrued liabilities. 3. See, City of Pittsburgh v. PLRB, 653 A.2d 1210 (Pa. 1995), regarding a municipality s management right to participate, but see the statute regarding the duty to bargain over various remedies. H. If a Municipality sponsors a Pension Plan, is it required to have a pension board, or committee, and an investment policy statement? 1. Pursuant to the Third Class City Code, cities are required to establish pension boards for certain plans. Most other municipalities do not have the statutory requirement, but it is permissible. Certainly avoid creation of a board that removes decision making authority from municipal control. (Distressed Municipal Pension Plans that create an aggregated pension trust fund under Act 205 are managed by a board of trustees that includes employee representatives). 2. The municipality should certainly have a written investment philosophy for its Municipal Pension Plans. In addition, a written investment policy statement should be adopted. Such statements may be written in consultation with the Pension Plan s investment manager and/or consultant. These documents will help fulfill the fiduciary responsibilities of the municipality to the Plan. Generally, the obligation set forth in the Fiduciary Code is referred to as the prudent person role. A fiduciary has acted accordingly if purchases or retentions of investments are made by exercising the degree of judgment and care that a person of prudence, discretion and intelligence would exercise in the management of his/her own affairs. Having an Investment Policy Statement helps to fulfill that obligation. 3. For additional Governmental Investment Policy information check out www.gfoa.org. 17

I. Is an actuarial cost estimate required prior to the implementation of any benefit changes? 1. Prior to any benefit modification, an actuarial cost estimate must be prepared showing the annual financial requirements of the plan before and after the proposed modification, as well as the impact of the proposed modification. Courts have not specifically stated that a cost estimate is necessary when reducing benefits and increasing the Plan s funding percentage, but municipalities should err on the side of caution and conduct a study. 2. This cost estimate is also required prior to reducing police officer pension contributions. North Hampton Township v. North Hampton Township Police Association, 885 A.2d 81 (Pa. Commw. 2005). J. Will the funding standards set forth in Act 205 serve as a limit on the authority of an Act 111 Interest Arbitration panel in granting benefits? 1. Notwithstanding any provision of law, municipal ordinance, municipal resolution, municipal charter, pension plan agreement or pension plan contract to the contrary, the applicable provisions of the Act 205 funding standards shall apply. 2. As a result, benefit increases based upon funding standards inconsistent with Act 205 are susceptible to legal challenge. K. May Home Rule Charter and Optional Charter Third Class Cities, provide retirement benefits in excess of the fifty percent (50%) of salary limitation? 1. It depends. Pursuant to Act 65 of 2002, such Home Rule and Optional Charter Third Class Cities which had police or firefighter pension plans exceeding the fifty percent (50%) benefit limitation are grandfathered provided the plan existed prior to the effective date of the Act. 2. As to Optional Charter Third Class Cities, consider also the Auditor General s 1997 opinion concerning the Third Class City Optional Charter Law. 18

L. Following Act 30 of 2002, may Act 600 municipalities still require police officers to contribute up to the statutory minimum percentage of salaries to meet the funding requirements of the plan before the municipalities are required to pay general fund monies? 1. Act 30 still requires a mandatory police officer pension contribution but that contribution can now be bargained to be reduced or eliminated. Nevertheless, collective bargaining agreements and pension plan ordinances may continue to reflect the prior statutory scheme for contributions under Act 600. In other words, it is still permissible, just not mandatory. 2. Please note, however, that language that provides that officers will follow the statutory requirements for contributions under Act 600 is not desirable. Consider the following alternative language. As a condition of participation in this plan, each active participant must contribute a percentage of his/her compensation as established each year. In general, this mandatory contribution shall be the maximum percentage of the participant s compensation permitted by law. The employer may reduce or eliminate the contribution required, provided all three of the following requirements are satisfied: (i) a current actuarial study indicates that the condition of the plan is such that contributions may be reduced or eliminated; (ii) contributions by the employer are not required to keep the plan actuarially sound; and (iii) a reduction or elimination of contributions is authorized on an annual basis by ordinance or resolution by the employer. M. Under Act 600, may a municipality provide disability benefits in excess of fifty percent (50%) of salary? 1. Under Act 600, municipalities must provide disability benefits equal to a minimum of fifty percent (50%) of salary. As a result, through bargaining, or more likely interest arbitration, municipalities may provide disability benefits up to one hundred percent (100%) of an officer s salary. 2. Inevitably, this will result in increased disability pension requests in municipalities where the disability benefit 19

exceeds the value of the superannuation retirement benefit. N. How may a municipality modify its plan to accommodate the state funding the mandatory killed in service (KIS) benefit, which is fixed at one hundred percent (100%) of the officer s salary at the time of death? 1. By now, the old Act 600 KIS benefit should have been eliminated. If not, a municipality should immediately bargain for conversion to the State funded benefit and require conversion through the interest bargaining process. Since Act 51, the KIS benefit can no longer be provided through an Act 600 Plan. O. Can a pension plan be over-funded and still need money? 1. Yes. The annual contribution, or Minimal Municipal Obligation (MMO), for an over-funded plan consists of the normal cost and administrative cost, reduced by employee contributions and ten percent (10%) of the amount of over-funding. Therefore, if the sum of the normal cost and administrative cost is more than the sum of employee contributions and ten percent (10%) of the over-funding, a contribution requirement could result. In fact, this is a common occurrence. It is even possible for the contribution requirement of such an over-funded plan to exceed the maximum state aid available for that plan. 2. Note, however, that if the amount of assets exceeds the total present value of benefits (all accrued liabilities and future costs), no contribution is required. That would mean that the plan is fully funded. P. Does it matter when your biannual Act 205 actuarial valuation report is completed? 1. Yes. It could be critically important. In general, a municipality s MMO is calculated based on the cost components in the most recent actuarial report prepared for filing with the Public Employee Retirement Commission. These reports reflect the funding status of the plan effective January 1 st of odd numbered years. Generally, those reports are due to be filed by March 31 st of the following (even numbered) year. If, however, the report can be prepared before September of the reporting 20

year, the next year s MMO for the municipality can be calculated based on the most current valuation results instead of the prior valuation. In the event there are substantial increases in plan assets (and reductions in benefit liabilities), it certainly makes sense to complete the report in time to develop the next year s MMO because it will likely result in a lower cost to the Municipality. 2. Additionally, State Pension Aid for the following year will use the newly filed valuation report. Since the State Aid is based on the financial need of the plan, this could also mean reduced State Aid for the plan year. As a result, failing to complete the report in time to prepare the next year s MMO, could produce a higher cost, but the State Aid will, nevertheless, be based on the new report resulting in a lower State Aid allocation. Q. What policies should a municipality have to deal with pension fund money allocated to specific retirees (i.e., pension benefits) when the retiree moves or could not be located for some unknown reason (as sometime occurs with superannuation retirement pensions)? 1. Practically speaking, consider sending annual letters to retirees to confirm their present status. 2. Pennsylvania law provides that after seven (7) years you return any money unencumbered back to the Pennsylvania Treasury. In addition, municipalities may consider establishing pension liability accounts. R. Who should be counted as a municipal employee on the AG Form 385 Certification? 1. A municipality s full-time employees (police-40 hours; fire-35 hours) should be registered on the Certification form AG385. 2. Note, however, that such employees must be members for six (6) months before they can qualify. In addition, remember the waiting period before new pension plans may begin receiving State Aid. Regionalizations and subcontracting should be accomplished in a manner to maintain the receipt of State Aid. 21

S. Are Deferred Retirement Option Pension (DROP) benefits authorized and do they cost? 1. Deferred Retirement Option Plans ( DROPs ) were created under Act 44 of 2009. Act 44 lists certain requirements for DROPs. The legality of DROPs and other issues relating to DROPs will be discussed in more detail in a separate presentation. T. May a municipality authorize a police chief to opt out of the Act 600 pension system in order to participate in the Municipality s Non-Uniformed Employee Pension Plan? 1. Police officers of an Act 600 community must be members of the Police Retirement System, including police chiefs. Communities have received audit findings associated with this requirement. Consider, however, the impact of employing a Director of Public Safety. U. What is the definition of salary under Act 600? Under the Third Class City Code? 1. Pursuant to Borough of Beaver v. Liston, 464 A.2d 679 (1983), the term salary as used in Act 600 reflects a base pay concept, thus excluding additional forms of compensation like overtime. Note, however, where employees are required to make pension contributions from additional forms of compensation, the courts have concluded it would be inequitable not to include such additional compensation in the calculation of monthly pension benefits. (See Palyok v. Borough of Weft Mifflin, 586 A.2d 366 (1991) and Borough of Nazareth v. Nazareth Borough Police Association, 680 A.2d 830 (1996). 2. Under the Third Class City Code police and firefighter pension provisions, the term salary is defined as follows: the fixed amount of compensation paid at regular, periodic intervals by the city to the member and from which pension contributions have been deducted. 3. Despite the foregoing, see Auditor General Bulletin No. 2001-01, as clarified. 22

V. What are Act 120 Pension Benefits? 1. Act 120 (72 P.S. 2263.1, et seq.) provides definitions for pension annuity contracts, participating police pension plans and full-time paid police officers. The Act applies in all municipalities, but it is governing legislation for Boroughs, Towns and Townships with less than three (3) police officers that wish to provide pensions only in accordance with annuity contracts. W. May a municipality use pension plan assets to offset administrative costs and expenses associated with the plan? 1. Administrative costs incurred relative to various pension issues may be absorbed by the fund. This may include attorneys fees and the expenses of other plan professionals. An ordinance should be in place following the guidelines of the Auditor General, and the costs must be clearly set forth so that there is no question that the costs pertain to pension issues. X. Should municipalities review pension investment performance? 1. Yes. Analyzing and evaluating the selection of plan investment vehicles and the plan s performance will be part of the fiduciary obligation even for defined benefit plans. Unfortunately, investments of many plans have never been independently reviewed or analyzed. It suffices to say that a periodic check-up is essential. Four or five years between investment reviews is a rule of thumb, but an ultimate determination of the needed frequency of these reviews is dependent upon individual plan needs. Y. What are some of the critical dates relevant to municipal pension plans in Pennsylvania (Attachment No.2)? V. STATUS OF EFFORTS TO LEGISLATE MUNICIPAL PENSION REFORM Due to the high cost of funding pensions, the Pennsylvania legislature is considering legislation to alter the pension benefits that municipal government is required to provide through a DB plan and to possibly limit other pension options. The current legislation is too varied to detail, but generally, such legislation has ranged from requiring a DC plan for certain types of employees to altering the 23

benefits provided through an existing DB plan to changing the current DB plans to CB plans. Such legislation, however, only applies to new employees but some pieces of legislation also prevent the addition of any new optional benefits to existing DB plans. VI. CONCLUSION A basic understanding of Pennsylvania s municipal pension laws is important for managers and elected officials to navigate these highly regulated and costly benefits. Moreover, continued support for the League s efforts to bring about legislative reform will be critical to local governments future. 24

ATTACHMENT NO. 1 Certain Laws Controlling Local Government Employee Retirement Systems 1

Certain Laws Controlling Local Government Employee Retirement Systems Act 205 Municipal Pension Plan Funding Standard and Recovery Act, Act of December 18, 1984, P.L. 1005 No. 205, as amended, 53 P.S. 895.101, et seq. This Act provides for the annual distribution of state aid to municipalities to offset employee pension costs. It also replaces the actuarial reporting requirements of Act 293 of 1972 and establishes a recovery program for financially distressed pension plans. Act 317 Third Class City Code, Act of June 23, 1931, P.L. 932 No. 317, as amended, 53 P.S. 39301, et seq. Third Class Cities must establish retirement systems for its police officers and firefighters and may establish a retirement system for nonuniformed employees pursuant to the provisions of this Code. Act 362 Third Class City Code, Act of May 23, 1945, P.S. 903 No. 362, as amended, 53 P.S. 39371, et seq., Third Class Cities may establish an optional retirement system for non-uniformed employees pursuant to the provisions of this Code. Act 120 Act 600 Act 331 Act 69 Act 581 Governing Legislation For Municipalities With Less Than Three Police Officers, Act of May 12, 1943, P.L. 259 No. 120, as amended, 72 P.S. 2263.1, et seq. This Act provides definitions for pension annuity contracts, participating police pension plans and full-time paid police officers. This Act is applicable to all municipalities, but it is governing legislation for municipalities with less than three police officers that wish to provide pensions only in accordance with annuity contracts. Police Pension Fund Act, Act of May 29, 1956, P.L. (1955) 1804 No. 600, as amended, 53 P.S. 767, et seq. All boroughs, towns and townships with three or more full-time police officers must establish a police pension plan in accordance with the provisions of this Act. In addition, boroughs, towns and townships with less than three full-time police officers may establish their plans in accordance with this Act. First Class Township Code, Act of June 24, 1931, P.L. 1206 No. 331, as amended, 53 P.S. 56409, et seq. First Class townships with less than three full-time police officers that elect to establish a police pension plan must refer to provisions of this Code. Second Class Township Code, Act of May 1, 1933, P.L. 103 No. 69, as amended, 53 P.S. 65595, et seq. Second Class townships that have less than three full-time police officers and elect to establish a police pension plan must refer to the provisions of this Code. Borough Code, Act of February 1, 1966, P.L. 1656 No. 581, as amended, 53 P.S. 46131, et seq. Boroughs with less than three full-time police officers which elect to establish a police pension plan must refer to the provisions of this Code. 2

Act 15 Pennsylvania Municipal Retirement Law, Act of February 1, 1974, P.L. 34 No. 15, 53 P.S. 881.101, et seq. Boroughs, towns and townships may elect to have the Pennsylvania Municipal Retirement System administer their pension plans as an alternative to a plan administered by the municipality. Act 147 Special Ad Hoc Municipal Police and Firefighter Postretirement Adjustment Act, 53 P.S. 896.101, et seq. This Act provides for a postretirement adjustment cost of living increase for eligible police and firefighters. 3

ATTACHMENT NO. 2 Calendar of Events 1

Calendar of Events* The following calendar of events will occur annually, except for the reporting requirements (*) which are required every two years. For municipalities applying for supplemental state assistance under the recovery program for financially distressed municipal pension plans, the reporting requirements(*) will be on an annual basis. Date Topic Event 01/01-12/31 Funding Requirements Minimum municipal obligation due for all pension plans. 01/15 State Aid Approximate date for distribution of state aid Certification Form (Form AG-PF 385) to municipalities by the Department of the Auditor General. 02/01 Ad Hoc Approximate date for distribution of Ad Hoc Certification Form (Form AG-PF 490) to municipalities by the Department of the Auditor General. 03/31 *Reporting Requirements Deadline for the submission of actuarial reports to the Public Employee Retirement Study Commission. 03/31 State Aid Deadline for filing state aid Certification Form (Form AG- PF 385) with the Auditor General in order to receive general municipal pension system state aid. 04/01 Ad Hoc Deadline for filing Ad Hoc Certification Form (Form AG- PF 490) with the Auditor General in order to receive Ad Hoc reimbursement. 05/01 Recovery Program Distribution of reporting form request form (Form PC-200) to all municipalities required to file annual actuarial valuation reports. 2

Calendar of Events* (Continued) Date Topic Event 05/01-06/30 Recovery Program Reporting forms sent to municipalities required to file annual actuarial valuation reports uon receipt of a reporting form request form (Form PC-200) by the Public Employee Retirement Study Commission. 06/30 Recovery Program Deadline for filing letters of intent to participate in the recovery program for the subsequent year with the commission in order to receive a distress determination. Letter is not required from municipalities already participating in the recovery program. 08/15 Recovery Program Public Employee Retirement Study Commission sends a notification of distress determination to each municipality participating in the recovery program and to each municipality that requested a distress determination. An election form for participation in the recovery program in the subsequent year is sent with the notification of distress determination. 09/01 Ad Hoc Approximate date for distribution of Ad Hoc reimbursements by the Department of Auditor General. 09/30 Funding Requirements Deadline for the governing body of the municipality to receive certification of the subsequent year financial requirement and minimum municipal obligation for each pension plan. 10/01 State Aid Approximate date for distribution of annual General Municipal Pension System State Aid to municipalities by the Department of the Auditor General. 3