Blogging Employee Benefits

January 25, 2006

Former PA Legislator Granted Pension Increase

Filed under: Litigation, PERS — Fuguerre @ 11:53 pm

[I]f allowing Claimant and others similarly situated to convert their prior Class A service to Class AA service requires further adjustments to the pension system, the legislature may make appropriate adjustments as needed in the future.

Equal protection rights were violated when a former state legislator was not offered the same rights to a 25% pension benefit increase with respect to his service as legislator as the rights given to legislators who were in active service in that role at the time the benefit increase was offered under the state’s employee retirement system, according to a divided decision of the Pennsylvania Commonwealth Court.  [Kelly v. State Employees’ Retirement Board, Commonwealth Court of Pa., 850 C.D. 2005, 1/24/06]

Finding its state retirement system with surplus assets based largely on experience during the late 1990s (that is, before the weak post-2000 asset returns and sagging interest rates had been recognized in the system’s actuarial valuations), in 2001 the Pennsylvania enacted legislation boosting pension benefits for various member classes. A stated purpose of the legislation was to correct the margin between the high investment returns that had been experienced by the pension fund assets during the previous years versus the 4% statutory interest rate that had been credited on members’ contributions to the system. Among the classes favored under the system change were members who were in active service state legislators in mid-2001.

James Kelly had accumulated over 14 years of service as a state legislator through 1988, but was a judge of the Commonwealth Court of Pennsylvania in mid-2001, the eligibility point targeted by the legislation. When Kelly retired as a judge at the end of 2001, his request to convert his previous Class A service as a legislator to the new Class AA legislator’s service was denied by the system, thereby precluding him from receiving the benefit improvement being granted to active legislators.

Relying on the legislation’s stated purpose of reflecting realized returns on members’ contributions, the Commonwealth Court majority reasoned that Kelly’s own contributions likewise contributed toward the surplus that had given rise to the legislated benefit improvement. With respect to that stated purpose, the majority then found no relevant distinction between former legislators and those active in mid-2001. Although Kelly’s benefits attributable to his public service as a judge were relatively greater than those as a legislator, the majority saw no justification in that disparity for denying Kelly the benefit increase with respect to his service as a legislator.

Dissenting opinion protested that “[t]he core flaw in the majority’s argument is that it looks to the reason behind the enactment of the legislation which is entirely different from the reason why the General Assembly made the classifications at issue.”

Coming back to the quote leading off this post, the system’s surplus that was used to get the pension improvements enacted has now long ago been spent or vanished in less high-flying market returns. “Further adjustments” to recognize the class represented by Kelly are no longer a matter of “if,” rather a matter of “how.” And since state law will prevent the “appropriate adjustments” from involving elimination of some or all of the 2001 benefit increases for any of the affected members, where active in mid-2001 or former members similarly situated to Kelly, the first “appropriate adjustments” are no doubt going to have to be in terms of higher state taxes. Further “appropriate adjustments” may be registered in terms of Commonwealth citizens’ votes against any remaining legislators who pushed the 2001 legislation through, although that would not put the system back in balance.

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