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Harry Marnie v. Workers' Compensation Appeal Board (Commonwealth of Pa

June 7, 2012


The opinion of the court was delivered by: Renee Cohn Jubelirer, Judge

Submitted: January 13, 2012



Harry Marnie (Claimant) petitions for review of the July 26, 2011 Order of the Workers' Compensation Appeal Board (Board) that affirmed the order of a Workers' Compensation Judge (WCJ) denying Claimant's Petition for Review of Compensation Benefits Offset (Review Petition). The Board held that the actuarial methodology of the State Employees' Retirement System (SERS) presented on behalf of the Commonwealth of Pennsylvania/Department of Attorney General (Employer) was legally sufficient to establish Employer's offset/credit (offset) in accordance with the Notice of Workers' Compensation Benefit Offset (Notice of Offset). (Notice of Offset, R.R. at 1a-2a.) On appeal, Claimant argues that the SERS actuarial methodology does not support the offset as a matter of law because it does not calculate the offset of benefits "to the extent funded by the employer" as required by Section 204(a) of the Workers' Compensation Act (Act).*fn1

Claimant sustained an injury on February 23, 1998, in the course of employment and for which he subsequently received workers' compensation benefits pursuant to an Agreement for Compensation. Claimant began receiving a disability pension from SERS on January 14, 2005. Employer notified Claimant through the Notice of Offset that it would offset, or reduce, Claimant's workers' compensation benefits by the amount of SERS benefits attributable to Employer. On March 21, 2006, Claimant filed the Review Petition challenging Employer's entitlement to the amount of the offset. Before the WCJ, Claimant presented the testimony of his actuary, Frank Iannucci, in support of the Review Petition. In opposition, Employer presented the testimony of SERS Director of Benefits Determination, Linda Miller, and SERS actuary, Brent Mowery. The WCJ found the testimony of Ms. Miller and Mr. Mowery to be clear, unequivocal, logical and coherent, demonstrative of prudence in the management of the SERS Plan, and more persuasive than the testimony of Claimant's actuary, Frank Iannucci. The WCJ credited the testimony of Ms. Miller and Mr. Mowery to the extent there were any inconsistencies with Mr. Iannucci, and held that Employer met its burden of establishing its entitlement to the offset as set forth in the Notice of Offset. (WCJ Decision, October 24, 2007, Findings of Facts (October 2007 FOF) ¶¶ 1-8, 20; Conclusion of Law ¶ 2.) Claimant appealed the WCJ's decision.

On appeal, the Board concluded that the WCJ did not err in determining that Employer was entitled to an offset, but concluded that the WCJ erred "in fully accepting [Employer's] actuarial evidence as presented." (Board Decision, August 28, 2008, at 7.) The Board remanded the matter to the WCJ to reopen the record as necessary. On remand, Mr. Mowery and Mr. Iannucci testified by depositions dated May 24, 2009 and October 2, 2009, respectively. The WCJ again credited Employer's actuarial evidence and denied Claimant's Review Petition. (WCJ Decision, January 19, 2010, Findings of Fact (January 2010 FOF) ¶¶ 6, 15, 25, Conclusion of Law ¶ 3.) Claimant appealed to the Board, which affirmed the WCJ, and held that the legal sufficiency of the evidence was governed by the Supreme Court's recent decision in Department of Public Welfare v. Workers' Compensation Appeal Board (Harvey), 605 Pa. 636, 645, 993 A.2d 270, 276 (2010), and no error was committed. (Board Decision, at 8.) Claimant now appeals to this Court claiming that the formula used inaccurately attributes funds to Employer that should have been attributed to the Claimant in determining the amount of the offset.*fn2 Claimant requests that this Court reinstate Claimant's "benefits to the pre[-]offset level, with the payment of all past due benefits and" ten percent interest. (Claimant's Br. at 20.)

Section 204(a) of the Act provides that benefits afforded under the Act are subject to being offset by retirement benefits "to the extent funded by the employer directly liable for the payment of compensation" and that the pension plan benefits which are received by an employee "shall . . . be credited against the amount of the [workers' compensation] award[.]" 77 P.S. § 71(a). The Board's regulations provide that "[i]n calculating the offset amount for pension benefits, investment income attributable to the employer's contribution to the pension plan shall be included on a pro rata basis." 34 Pa. Code. § 123.8(d).

SERS uses an actuarial formula to determine the extent to which Employer has funded its employees' SERS pensions. (October 2007 FOF ¶ 14.) The credited actuarial formula derives the total present value of the employee's pension benefit through the use of actuarial assumptions. [T]he amount of the employee's actual monetary contributions . . . [are] determined and . . . an assumed investment rate of 8.5% is added to that amount. [T]he resulting figure is then subtracted from the total present value of the employee's pension, and [] the remainder is considered to be the portion of the employee's retirement benefit contributed by employer.

(October 2007 FOF ¶ 14.) However, Claimant contends that the SERS formula inaccurately attributes funds to Employer which should be attributable to employees. Specifically, Claimant argues that the SERS formula improperly credits Employer for the investment returns in excess of 4% on projected refunds to employees who will separate from state service before their retirement benefits have vested-the non-vesting employees. Noting that the SERS projected refunds include the 4% interest that is required by law,*fn3 Claimant argues that there still remains a difference between the actuarially projected refunds to the non-vesting employees that include the 4% interest and the SERS actuarially assumed investment rate of return of 8.5% on total accumulated contributions-a difference of 4.5% ("the retained investment returns"). Claimant contends that the retained investment returns must be isolated out of the Employer's portion of the offset calculation. Surmising that the retained investment returns should be attributable to employees rather than to Employer, Claimant contends that Employer's failure to exclude the retained investment returns from its offset calculations impermissibly credits Employer with contributions in violation of Section 204(a) of the Act. For this reason, Claimant concludes that Employer's actuarial evidence is neither competent nor legally sufficient.

In Harvey, the Supreme Court considered the similar, if not identical, issue of whether "the use of the actuarially assumed rate of return in the Section 204(a) offset calculations is inconsistent with the statutory limitation of the credit to the employee-funded portion of a pension." Harvey, 605 Pa. at 645, 993 A.2d at 276. The Supreme Court examined whether Section 204(a), as a matter of statutory construction, contemplated a precise allocation of actual, existing employer funding to specific pension accounts, thereby eschewing actuarial input. Id. at 653, 993 A.2d at 281. In its analysis, the Supreme Court cited The Pennsylvania State University v. Workers' Compensation Appeal Board (Hensal), 911 A.2d 225, 232 (Pa. Cmwlth. 2006), and affirmed this Court's position that, in the context of a defined-benefit plan, where an employer cannot provide evidence of actual contributions for the use of an individual member "the statute does not explicitly require an employer to prove the amount of its actual contributions" Harvey at 645, 653, 993 A.2d at 276, 281. Further, noting that "the relevant offset provision focuses on the extent to which benefits are funded by the employer," the Supreme Court stated that Section 204(a) was ambiguous as to how the General Assembly "contemplated employer-funding would be assessed." Id. at 653, 993 A.2d at 281. As a result of this legislative ambiguity, the Supreme Court explained that it was appropriate to resort to tools of statutory construction, including "consideration of the occasion and necessity for the statute, the object to be attained, the consequences of a particular interpretation, the contemporaneous legislative history, and administrative interpretations." Id. (citing Section 1921(c) of the Statutory Construction Act of 1972, 1 Pa. C.S. § 1921(c)). In examining these criteria, the Supreme Court concluded that the purpose of the Section 204(a) offset was to foster cost containment in the workers' compensation insurance area, noting that the General Assembly's "clear intention was to afford effective redress." Id. In fact, the Supreme Court stated that "the support by SERS, as the administrative agency charged with administering the state pension system, for the use of actuarial calculations to determine employer funding of pensions militates in favor of a construction allowing it." Id. at 654, 993 A.2d at 281-82. Accordingly, the Supreme Court "f[ound] nothing that precludes the sound use of actuarial principles in evaluating employer funding in defined-benefit pension plans." Id. at 654, 993 A.2d at 282.

Next, the Supreme Court examined whether the employer's expert and consultant testimony provided substantial evidence to support the WCJ's findings, reasoning that: the employer's expert testimony was internally consistent, and the factual basis was provided, inter alia, in the form of investigations and reports performed by SERS's actuarial consultant. While the actuarial evidence contains an inherent predictive element, the arguments of Employer and its amici amply develop that such predictions are a staple of the discipline and a core component of defined-benefit pension-system valuation. Accord Jerry S. Rosenbloom, The Handbook of Employee Benefits 1232 (6th ed. 2005) (explaining that "the very core of the process of costing and funding defined retirement programs is the concept of actuarial present value. This involves computing how much money should be set aside today to pay certain benefits in the future."). This Court recognizes the practical necessity of expert opinion testimony in matters well beyond lay experience, and we hold that actuarial assumptions and calculations may form the basis for a reasoned determination of the employer-funded component of a defined-benefit pension.

Id. at 655-656, 993 A.2d at 282. In arriving at its holding in Harvey, the Supreme Court noted that "the WCJ properly credited the consultant's testimony that the nature of a defined-benefit plan impedes direct tracing and quantification of employer funding, and that actuarial science offers a rational alternative consistent with the nature of this type of plan." Id. The Supreme Court further noted that an employer may use actuarial evidence to establish the offset without the necessity of proving actual contributions and, "if the actuarial testimony is accepted as credible, it is legally sufficient to establish the extent of an employer's funding for offset/credit purposes." Id. (quoting City of Philadelphia v. Workers' Compensation Appeal Board (Grevy), 968 A.2d 830, 839 (Pa. Cmwlth. 2009)). In fact, in Hensal, we had recognized that "the extent to which an employer funded a particular employee's defined benefit pension can only be determined by an actuarial formula." Hensal, 911 A.2d at 232 (emphasis added).

Recent decisions of this Court have reversed WCJ findings that an employer's actuarial evidence was not credible. In School District of Philadelphia v. Workers' Compensation Appeal Board (Davis), 38 A.3d 992, 993 (Pa. Cmwlth. 2011), this Court again analyzed Harvey and Hensal in reviewing a denial of an Employer's petition to review a benefit offset where the WCJ did not credit a portion of Employer's testimony that did not quantify the value or amount of the investment returns that may be retained in the fund after refunds have been paid to the non-vesting employees. We noted the difficulty faced by an employer in demonstrating the extent to which it funds an employee's pension in the context of a defined-benefit plan because "an employee's actual contributions do not determine the amount of monthly benefits a member will receive" when "the pension guarantees a fixed benefit level . . . [and] the employer assumes the risks of investment, inadequate funding, and member longevity." Davis, 38 A.3d at 994 (quoting Hensal, 911 A.2d at 231). In reviewing the WCJ's rejection of the employer's actuarial evidence because of the WCJ's belief that the inclusion of the retained investment returns overstated the employer's contribution to the pension plan, we noted that there was no definitive evidence that the retained investment returns affected the contributions made by the employer to the fund as a whole and highlighted the testimony by employer's actuary that "the formulas employed already reflected a recognition of the impact of Retained Investment Returns remaining in the fund upon the termination of non-vesting employees." Id. at 996. We further noted that the employer had argued in Harvey that retained investment returns were not one of the three material sources of pension funding and the employer's actuarial consultant, deemed credible by the WCJ, was aware of the issues concerning the retained investment returns yet still concluded that the underlying methodology and offset were appropriate within a reasonable degree of actuarial certainty. Id. at 997. Therefore, we concluded in Davis that the WCJ erred by overlook[ing] the fact that a primary goal of Section 204(a) of the Act, and the actuarial methods the Supreme Court has approved, are designed not only to ensure that a claimant does not fund his own workers' compensation benefits, but also that an employer should not have to pay a Claimant, in essence, "double" compensation for his work-related injuries. The actuarial formula the Supreme Court accepted in Harvey seeks to arrive at the proper result by excluding other material and identifiable sources of fund contributors by determining actual contributions from those sources. Investment return income arising from those identifiable sources may lead to reductions in payment by an employer, but when the return on the Fund's investments is below four percent, or negative, an employer, not an employee, must bear the cost of such losses by increasing its contributions. The formula, as indicated in Harvey, also recognizes the imprecision inherent in the analysis.

Id. at 998. In Glaze v. Workers' Compensation Appeal Board (City of Pittsburgh), 41 A.3d 190, 199-200 (Pa. Cmwlth. 2012), another recent case of this Court involving pension benefit offset calculations in the context of a defined-benefit plan, the WCJ questioned whether the employer's calculations were based upon reliable data related to investment income of the pension fund and whether it was attributable only to Employer or, in some part, to the non-vesting employees. We concluded that, in the context of a defined-benefit plan, it was a fundamental error for the WCJ to reject ...

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