The opinion of the court was delivered by: Robert Simpson, Judge
BEFORE HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge*fn1 HONORABLE ROBERT SIMPSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge
These consolidated appeals and cross appeals consist of 38 petitions for review from orders of the Workers' Compensation Appeal Board (Board) affirming, due to an evenly divided panel of eight commissioners, two sets of December 2008 orders of Workers' Compensation Judge Pamela L. Briston (WCJ) in pension benefit offset cases. The City of Pittsburgh (City) and its current thirdparty administrator, UPMC Benefit Services (collectively, Employer), seek review of the WCJ's December 2, 2008, orders (Initial Order) that granted petitions to review compensation benefit offsets (review offset petitions) brought by 19 retired fire fighters (Claimants) receiving pension benefits and workers' compensation benefits. The Initial Order directed Employer to begin paying Claimants' weekly workers' compensation benefits without any further reduction for a pension offset. Employer seeks review of the Initial Order.
In response to the Initial Order, Claimants sought clarification as to whether Employer should reimburse them for pension offsets previously taken. In her December 23, 2008, amended orders (Amended Order), the WCJ recognized Employer is entitled to some offset for past and future benefits, and that to require the City to reimburse Claimants for past due benefits could create a significant overpayment that Claimants may be required to reimburse. Amended Order at ¶3. Therefore, the WCJ further ordered, "[Employer] is not required to reimburse [C]laimants for past due benefits at this time." Id. at ¶4. Claimants seek review of the Amended WCJ Order.
For the reasons that follow, we reverse the Board's orders and remand with the direction that the cases be remanded to the WCJ for a definitive determination of Employer's offset rights in accord with Department of Public Welfare v. Workers' Compensation Appeal Board (Harvey), 605 Pa. 636, 993 A.2d 270 (2010) and Pennsylvania State University/PMA Insurance Group v. Workers' Compensation Appeal Board (Hensal), 911 A.2d 225 (Pa. Cmwlth. 2006), appeal denied, 593 Pa. 743, 929 A.2d 1163 (2007), which hold that an employer can meet its burden of proving the extent of its contribution to a claimant's defined-benefit pension by credible actuarial evidence; it need not identify actual contributions to the claimant's pension.
We also ask that the WCJ, in making her determination, consider our recent decision in School District of Philadelphia v. Workers' Compensation Appeal Board (Davis), ___ A.3d ___ (Pa. Cmwlth., No. 166 C.D. 2011, filed December 22, 2011). In Davis, we recognized that if an employer meets its prima facie burden of establishing the extent of its contribution to a claimant's pension by credible actuarial evidence, a claimant challenging the credibility of the employer's actuarial evidence must present evidence demonstrating the materiality and relevance of her challenge.
Further, as a result of our remand for a definitive determination of Employer's offset rights, we dismiss as moot Claimants' challenges to the WCJ's Amended Order denying reimbursement of offsets previously taken.
A. Notice of Offset; Review Offset Petition
By the Act of June 24, 1996, P.L. 350 (Act 57), the Legislature amended Section 204(a) of the Workers' Compensation Act*fn2 (Act) to allow employers to claim an offset against workers' compensation benefits for pension benefits simultaneously received by an employee. Section 204(a) of the Act, 77 P.S. §71(a), pertinently provides (with emphasis added)
The severance benefits paid by the employer directly liable for the payment of compensation and the benefits from a pension plan to the extent funded by the employer directly liable for the payment of compensation which are received by an employee shall also be credited against the amount of the award ....
In 2005 and 2006, Employer, pursuant to Section 204(a), filed benefit offset notices against Claimants, who were receiving workers' compensation indemnity benefits and pension benefits. Thirty days after issuing the notices, Employer reduced the workers' compensation benefits of each Claimant based upon its calculation of its funding of his or her pension. In response, Claimants each filed review offset petitions challenging Employer's offset calculations. Eventually, the 19 cases at issue here were consolidated before the WCJ.
In a review offset proceeding, the employer claiming a pension benefit offset bears the burden of proving its entitlement to a credit. City of Phila. v. Workers' Comp. Appeal Bd. (Andrews), 948 A.2d 221 (Pa. Cmwlth. 2008). The employer bears the burden of proving the extent to which it funded the pension plan at issue. Id. As noted above, an employer in an offset review proceeding is entitled to present actuarial evidence to establish the extent it funded a claimant's defined-benefit pension plan. Harvey; Andrews; Hensal.
Before the WCJ, Employer presented actuarial testimony from Milton Dean Ross (Employer's Expert), a senior consultant with Mockenhaupt Benefits Group, Employer's actuary since 1993. Employer's Expert testified at four hearings.
Employer's Expert explained Employer's Fireman's Relief and Pension Fund (Fire Fighters Fund) is a defined-benefit pension plan. In order to calculate Employer's offset using an actuarial formula, Employer's Expert determined Claimants' monthly benefits attributable to their contributions, which includes investment income from their contributions. This amount is then subtracted from the total monthly benefits Claimants receive, which leaves a balance of monthly pension benefit payments attributable to combined contributions from Employer and the Commonwealth (State). The investment returns on Employer's and the State's respective contributions are determined. Calculations are then performed to determine a ratio of non-employee contributions coming from Employer versus contributions coming from the State pursuant to the Municipal Pension Plan Funding Standard and Recovery Act*fn3 (Act 205). That ratio is then applied to the non-employee contributions to determine the amount of Claimants' monthly pension benefits funded by Employer.
Here, in order to promote the ease of understanding of the pension concepts involved, Claimants agreed the offset calculations for Alfred Glaze (Claimant Glaze), and later in the litigation for Theodore Belajac (Claimant
Belajac), were representative of all Claimants' calculations. Employer hired Claimant Glaze in April 1979. He retired on a disability pension in 2005.
Employer hired Claimant Belajac in 1973. Claimant Belajac retired on a disability pension in 2003. Employer filed offset notices against Claimants Glaze and Belajac in 2005.
2. Investment Return on Claimants' Contributions
Employer's Expert explained that prior to 1985, investment return on an employee's contribution was calculated using the average six-month U.S. Treasury (T-bill) rates. Prior to Act 205, the Fire Fighters Fund operated as a pay as you go plan. The money went out as fast as it came in. As a result, the Fund had only a small cash investment. Therefore, Employer's Expert opined, the six-month T-bill rates were appropriate.
Beginning in 1985, and continuing through 2002, investment return on the employees' contributions was calculated based on the actual earnings from the Fund.
For the years 2003 through 2005, Employer's Expert used an estimate of a 9% return because he did not yet have enough data to calculate the actual return rates.
3. Employer and State Contributions
Employer's Expert also explained how Employer's contributions are separated from the State's contribution. State contributions under Act 205 began in 1984 at a relatively low figure. They increased until 1989, and then began to drop again. The State contribution changes from year to year.
Although Employer's Expert had no record of State contributions before 1987, he estimated Employer's share at approximately 43.8225% of the combined Employer/State contribution. He also stated he could not determine how much Employer contributed to any individual Claimant's pension.
At the February 2007 hearing, Employer's Expert further explained how Act 205 operates. Under Act 205, an annual minimum municipal obligation (MMO) is determined. Also, to obtain additional State aid under an available Act 205 emergency recovery program, Employer's police, fire and municipal pension plans are merged into a Comprehensive Trust Fund.
Employer's Expert further testified that in 1998, Employer issued pension obligation bonds and deposited $77,000,000 in the Fire Fighters Fund. Employer included its debt service and interest payments as part of its contribution.
Also at the February 2007 hearing, Employer's Expert submitted a second revised calculation based on additional information received from Employer's Assistant Director of Finance, Mary Lou Johnston (Assistant Finance Director).
Employer's Expert also submitted a form from the State's Department of Auditor General indicating the amount of State aid to Employer. On crossexamination, Employer's Expert testified that the amount of State aid listed in Employer's Certified Annual Financial Reports (CAFRs) differed from the State aid listed in the Auditor General's reports. For example, Employer's 1981 CAFR had a figure of $1.641 million, while the Auditor General had a figure of $1.729 million. When the CAFR totals did not match the Auditor General's reports, Employer's Expert admitted he used the lower CAFR figure.
At the November 2007 hearing, Claimants presented expert testimony of Thomas D. Hudak (Claimants' Expert), a licensed certified public accountant, a former investment banker and a former benefits plan auditor. He currently works in forensic accounting/litigation support. At Claimants' request, he reviewed Employer's offset calculation for Claimant Belajac.
Claimants' Expert looked at Employer's Expert's model for calculation of Employer's offsets. He opined that the model was reasonable, but he criticized the data Employer's Expert put into the model as being insufficient to establish either an accurate calculation or estimation of Employer's contribution to Claimant Belajac's pension.
2. Investment Return on Claimants' Contributions
Claimants' Expert opined that Employer's Expert investment income calculations for Claimants' contributions prior to 1992 were unreasonably low. Claimants' Expert opined that the use of T-bill rates for the period prior to 1985 underestimated the growth of Claimants' share of the pension contributions. He further explained that actual data would be the best information from which to calculate the actual investment income. If unavailable, a blended combination of equities and bonds could be used. Looking back to 1973 in Claimant Belajac's case, the market's positive years outweighed its negative years. Claimants' Expert opined that the use of the low-yielding T-bill rates would have a compounding adverse effect on income on Claimant Belajac's contributions.
Claimants' Expert explained that Employer's Expert used a different investment return calculation for the years 1985 through 1991. For those years, he no longer used the T-bill rates. From 1985 through 1988, Employer's Expert used a 8.9% rate of return. It is unlikely, Claimants' Expert testified, that investments would return the same rate three years in a row. He further opined Employer could have obtained the actual data for 1985 through 1988.
In addition, Claimants' Expert testified the Dow Jones Industrial Index would have yielded higher rates (15.5%) for investment in equities. He opined that if even half of the investments were in equities rather than bonds, significant investment income would not be captured by the 8.9% rate.
Further, Claimants' Expert explained, from 1989 through 1991, Employer's Expert switched methodologies and used rates ranging from 3.6% to 19.6%.
However, Claimants' Expert opined, Employer's Expert used the actual data from 1992 through 2003. He found this to be reasonable.
3. Employer v. State Contributions
Claimants' Expert further opined that Employer's Expert used a variety of sources to calculate the State's contribution. From 1976 through 1983, Employer's Expert used the Fire Fighters Fund financial statements. Claimants' Expert found this reasonable.
After 1983, Employer's Expert used Employer's CAFRs and the Fire Fighters Fund statements and applied a formula using an aggregate amount for the years 1983 through 1985 to obtain a forced number for the years 1982 through 1985. In the accounting world, Claimants' Expert opined, the use of a forced number raises a red flag that reliable data is not available. In 1984 and 1985 combined, the forced number resulted in a difference of $285,544 less than what the Fund statements indicated regarding the amount of State aid received.
Claimants' Expert further testified Employer should not include investment income from non-vested employees as part of Employer's contribution to the Fire Fighters Fund. At the June 2006 hearing, Joseph E. King (Fund Treasurer) testified that pension contributions are returned to non-vested fire fighters who leave employment before their pensions vest. However, any interest on those contributions remains in the Fund.
Claimants' Expert further opined Employer should not include debt service interest payments to bondholders as part of Employer's contribution to the Fire Fighters Fund. As noted, Employer issued a sizeable bond in 1998 to bolster its pension plans.
Claimants' Expert also opined the Fire Fighters Fund statements would be the best one source to calculate the State contribution. He did not believe Employer's calculations were accurate regarding Employer's contributions because the data was unreliable and because inconsistent sources were used.
Based on the evidence presented, the WCJ granted Claimants' review offset petitions. In so doing, the WCJ reasoned (with emphasis added), "I am not persuaded that [Employer] provided reliable data such that [Employer's Expert] could prepare calculations to show the extent that [Employer] funded [Claimants'] pension benefit." WCJ's Glaze Op., 12/02/08, F.F. No. 11. The WCJ provided the following six reasons for that finding
a. [Employer's Expert] agreed that he could not identify how much [Employer] contributed with regard to any specific individual's pension benefits.
b. For the early years, [Employer] does not have records that would reflect the interest earned, particularly with respect to a claimant's contribution. An understatement of interest, particularly from the early years, would have the effect of understating the employee's contribution to the Fund. [Claimants' Expert] noted that the use of U.S. Treasury bonds is very conservative and would understate the employee's contributions to the [Fire Fighters Fund]. A different method was used to calculate ...