WRITTEN BY: Just Wondering
If you bought Pension Service Credits or PSCs like me and hundreds of other City employees, between August 15th and November 1, 2003, be prepared to open your wallet again and fork over more of your hard earned, and ever dwindling take home dollars.
On June 7, 2010, the COURT OF APPEAL, FOURTH APPELLATE DISTRICT ruled against SDCERS and in favor of the City of San Diego with regard to the SDCERS appeal of a local court ruling on the value of purchased service credits.
The court said the question that needed to be answered was, “Did SDCERS have the right to charge the City of San Diego (City) for SDCERS's underfunding of pension service credits DURING THE TIME PERIOD OF AUGUST 15, 2003 THROUGH NOVEMBER 1, 2003, when the authorizing statute states that the employees purchasing such service credits were and are to pay the full cost of service credits purchased? We conclude, as did the trial court, that this action by SDCERS was contrary to law and thus exceeded its authority to administer the pension system's assets and the trial court properly set aside its decision to charge the City for the underfunding.”
The Purchase of Service Credit program (PSC) allows eligible members, which are active employees, to purchase up to five additional years of service credits.
Originally implemented in 1993, the PSC program was designed to allow employees to purchase periods of time when the member did not contribute to SDCERS, such as
• Military Leave
• Long-Term Disability Leave
• Family and Medical Leave (FMLA) periods
• Special leaves of absence without pay, with your job to be saved
• Any period before reinstatement by the Civil Service Commission
• Certain probationary periods
In 1996, during the Jack McGrory era, about the same time DROP was being concocted by City leaders, they, the City, added the ability for employees to purchase up to five years of general service credits. The City emphasized that employees "would pay into the retirement fund an amount, including interest, equivalent to the employee and employer full cost of such service." In 1997 the PSC program was expanded to include periods of time not actually worked when the City Council passed Ordinance No. 0-18383, "General Provision for Five Year Purchase of Service Credit," allowing employees to purchase up to five years of general service credit, or what is referred to as “air time credits” along with the original reasons listed above.
Because your retirement benefit is based in part on your years of service credit, a PSC will increase your lifetime pension payment.
Many of you, like me, purchased these so-called “air time” pension credits to add time to your years of service to the City. Some purchased the maximum, five years, others, like me, bought varying amounts to reach certain milestones for retirement purposes. By purchasing service credits employees carefully planned to remain chronologically and financially on track for their goals on a retirement date and percent of pay.
SUBSTANTIALLY EQUAL STRIKES AGAIN
Here’s where the problem lies. City Charter section 143, states that employees who contribute extra money for their pensions are only "entitled to receive the proportionate amount of increased allowances paid for by such additional contributions." With regard to the City's obligation toward its employees' pensions, Charter section 143 also states that the City "shall contribute annually an amount substantially equal to that required of the employees for normal retirement allowances, as certified by the actuary, but shall not be required to contribute in excess of that amount, except in the case of financial liabilities accruing under any new retirement plan or revised retirement plan because of past service of the employees."
In 1997, SDCERS's actuary advised the board that a two-tiered rate structure, 15 percent for general member employees and 26 percent for safety member employees, would be sufficient to meet the requirement that the purchase price for service credits. SDCERS's board approved the rate structure and employees were then permitted to purchase service credits at the rates the board established.
But then between 1997 and 2002 the City made changes, through negotiated meet and confer sessions and labor agreements. These enhancements to your retirement retroactively gave you credit for past years of service. In 2002, then SDCERS administrator, Larry Grissom, commented that under pricing of the PSC program costs to employees was creating an unfunded liability that the City was not supposed to bear.
Grissom told the board that it had a fiduciary duty to increase the purchase price of the service credits: "But now we are aware of this problem it seems like it is our fiduciary duty to fix it [be]cause every time somebody signs a purchase of service contract, or almost every time it seems like, we're increasing the liability to the plan sponsor, which isn't right. And the Board doesn't have the authority to allow subsidizing for the member's purchase. . . . [W]e need to fix the bleeding."
An actuarial study in August 2003 recommended the Board raise rates upwards to 27 percent for general members and 37 percent for safety members. The actuary noted the 1997 rates were outdated because "they were set by the Board prior to certain negotiated benefit increases by the City and the program was not cost neutral as required by law.
At the August 2003 the Board of Administration adopted the new rates but delayed implementation of the cost increase for 60 days, thus allowing employees to purchase credits at the old rates. When questioned, then Board Member and SD Fire Local 145 President Ron Saathoff, that the cost of the purchase during the 60-day period would be borne by the employees. SDCERS then notified 10,000 city employees of the impending change and the flood gates opened. During the window 5,726 years of service were purchased by 1609 general members and 828 years we bought by 412 safety members. It’s interesting to note that during the so called window of opportunity general members purchased more credits then they has purchased since the inception of the program in 1997.
WHAT DID SDCERS DO?
In 2007 the unfunded liability from the PSC program had grown to 146 million dollars. Public meetings were held. Some of you may recall going to the Convention Center to listen or even testify. During the hearings SDCERS Counsel informed the board that they had:
1. A duty to preserve and protect the fund; to pay benefits that are promised and earned and collect sufficient contributions to support the benefits.
2. But they also had a duty to correct errors when appropriate and not perpetuate erroneous interpretations of the plan."
The fiduciary counsel opined that SDCERS could legally take several courses of action to remedy the underfunding, including:
• voiding contracts
• collecting arrears payments
• offering rewritten contracts
• spreading out additional payments
• reducing benefit levels
• and continuing to collect the shortfall through the amortization of the system's unfunded liability.
The Board voted unanimously to saddle the City with the bill, prioritizing its fiduciary duties to the members and their benefits to the first position. And this is where the Appellate Court says they erred.
In very simple terms, the issue was not the entire PSC program. The court narrowly focused on the period between August 15, 2003, when SDCERS'S board adopted the new pricing of PSC rates, and November 1, 2003, when those rates went into effect. Oh, if you haven’t made the connection yet, it’s the period of time when over 6,100 years of “air time” were purchased, and the gigantic majority of the underfunding happened. When SDCERS failed to maintain the cost neutrality of the program as required by Charter and Ordinance and knew it or should have known it. The court added, “Charter section 143 thus confirms that the City must only contribute payments substantially equal to those of the employee for normal retirement allowances. The employee must bear the cost of any additional contributions. SDCERS allowed employees to purchase service credits at a discounted rate between August 15, 2003 and November 1, 2003. It was that action that caused the deficiency SDCERS later tried to charge to the City." The court say, SDCERS argument citing the decision in Hittle v. Santa Barbara County Employees Retirement Assn. did not support this case. In our matter, City employees were NOT entitled to purchase service credits at a rate that did not reflect the full cost of those credits. SDCERS did not have a duty to inform employees of a benefit to which they were not entitled and certainly had no duty to allow them a 60-day window to purchase service credits at a price it knew was below the full cost of the benefit.
Further, SDCERS argued the statue of limitations had run out but the court overruled that argument using the logic the City was dealing with the Board’s action in 2007 to have the City foot the bill, not the actual selling of Credits in 2003. It was not until November 2007 that SDCERS voted to charge the City, as opposed to employees, for the underfunding. The City's petition was filed four days after the board's November 2007 vote. Thus, it was unquestionably timely. Moreover, the unfunded liability was not created as of 2003. It occurred over several years and may have been avoided entirely if, for example, the retirement fund experienced better than expected investment returns, or, as stated above, SDCERS had taken action to ensure employees were responsible for the full cost of service credits purchased during the 60-day period in 2003. It was not until August 2007 that SDCERS announced a shortfall existed and the amount of the shortfall.
In addition, the Court said, “…in 2003 when SDCERS voted to allow service credits to be purchased at the old rates for a period of 60 days and a concern was raised as to who would pay the cost of purchases made during that time period, board member Saathoff confirmed the cost of the benefit would be borne by the employees. (Thanks Ron) There was no indication at that 2003 meeting that the City would bear any of the cost of purchases made at the old rates. There was also no decision made to charge the City for any resultant underfunding.
DANGER – DANGER
A portion of one sentence in bold face above concerns me and may have an affect over the City’s newest litigation concerning Substantially Equal and investment losses. That litigation will determine if you may be responsible for a substantially equal portion of losses to the system. While the Court holds SDCERS accountable for not pricing PSCs correctly, it adds a caveat of investment return experience into the substantially equal argument. Everyone needs to keep an eye on this.
SO WHAT HAPPENS NOW
SDCERS must decide if it will appeal the Appellate ruling or accept it. If an appeal is made the status quo is maintained. But the City will most likely reduce its Actuarially Required Contribution or ARC by a few million dollars. However, an editorial in Sunday’s SDUT Pension Delimma goes further. Attacking the Board for its litigation and praising City Attorney Goldsmith for his accomplishments. Then it warns employees that Substantially Equal ruling regarding investment losses is also within Goldsmith’s grasps.
If SDCERS accepts the Appellate ruling affirming the Trial Courts ruling the Board acting unlawfully, then because of its fiduciary duty to the members, and advice of fiduciary counsel the Board will be forced to choose an option or combination of option outline earlier. And those options mean you either lose your PSCs purchases, adjust the time purchased or pay the amount that makes them cost neutral to City of San Diego.
To read the full Appellate decision.
