Blogging Employee Benefits

February 1, 2006

Interim Valuation for PERS OKed by State Court

Filed under: Litigation, PERS — Fuguerre @ 5:38 pm

A retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.

The Board for the San Diego County Employees Retirement Association did not act against the interests of members by relying on an interim actuarial valuation, thus did not violate the state constitution, according to a ruling of California’s 4th District Court of Appeal. [Bandt v. Board of Retirement, San Diego County Employees Retirement Association, D044999, 1/30/06]

Enhanced retirement benefits that were effective in March 2002 increased the system’s liability by approximately $1.1 billion. Although the County planned to voluntarily reduce the unfunded liability associated with the benefit enhancements by issuing $550 million in pension obligation bonds, the bond issuance was delayed due to unrelated litigation. Thus, the system’s usual actuarial valuation prepared as of June 32, 2002, included the additional $1.1 billion liability without including the $550 million assets anticipated from the pension obligation bonds. The result being that the valuation recommended an increase in the County’s employer contribution rate from 0.81% of payroll for the 2002 fiscal year to 32.06% of payroll for the 2003 fiscal year.

In October 2003, the County made the $550 million voluntary payment to the pension fund from the proceeds of its sale of pension obligation bonds. After review by the County and the Board, a Board subcommittee directed the actuary to prepare an interim valuation with an effective date of October 3, 2002, recognizing the additional asset of $550 million, as well as additional offsetting liabilities of $200 million that were incurred after the June 30 valuation. In addition, the interim valuation lengthened the amortization period for unfunded accrued actuarial liability from 10 years to 15 years. Adoption of the interim valuation had the net effect of lowering the County’s employer contribution for the 2003 fiscal year from 32.06% to 22.51% of payroll, saving the County about $70-$80 million.

Two retirees filed suit, claiming that the interim valuation violated the state constitution, and that the Board should have required the County to contribute the full amount determined by the June 30 valuation. At the center of the dispute was article XVI, section 17 of the California Constitution, specifically the final sentence of subdivision (b), which I’ve quoted at the beginning of this post. This case being an issue of first impression, the appellate court discussed the intent and application of the board’s duty requirement to some depth, in the end failing to find the retirees’ arguments compelling. “The final sentence of section 17, subdivision (b),” stated the court with reference to three duties detailed in the preceding sentence of that subdivision, “does not expressly define the duty a retirement board owes to its beneficiaries that must be given precedence.” So let’s back up and quote that first sentence of section 17, subdivision (b) –

The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system.

In that context, the court recognized that the final sentence could be interpreted as stating that a board’s duty to its participants trumps any other duty whatsoever. Rather, the court turned to constitutional genealogy and history of section 17 subdivision (b) to read the final sentence as prioritizing the three specific duties cited in the subdivision’s first sentence. After further discussion, the court concluded that the language of the subdivision was ambiguous, but that none of the ambiguities were material to a decision in this case.

“Neither party has offered a constitutional standard by which this court should determine whether a retirement board has violated its constitutional mandate by acting in a manner contrary to the interests of its members,” according to the court. Even then, the court found it unnecessary to develop a precise standard, because the court concluded that under the broadest sense of the requirement, the retirement board had not acted unconstitutionally, since the court did not find the interim valuation to have materially affected members’ benefit security. Indeed, the court concluded that the retirement board’s decision to recognize the county’s voluntary contribution benefited the members. Finding the retirees’ remaining arguments unpersuasive, the appellate court affirmed the lower court’s dismissal of the complaint.

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