July 16, 2012
UNITED POLICE SOCIETY OF MT. LEBANON; RETIRED POLICE OFFICERS; MARK KUBIT, MARY EICHINGER, JOHN MICHALEC, DAVID WHITE, LES PALOMBINE, MARY SUE JOYCE, WILLIAM LAURENCE, KEVIN MACKIN, TOM GIANNI, ROBERT GEHRMANN, PAT O'DONNELL, AND BLAISE LAROTONDA
MT. LEBANON COMMISSION; STEPHEN M. FELLER; MT. LEBANON PENSION PLAN ADMINISTRATOR; MUNICIPALITY OF MT. LEBANON, APPELLANTS
The opinion of the court was delivered by: Renee Cohn Jubelirer, Judge
Argued: April 17, 2012
BEFORE: HONORABLE DAN PELLEGRINI, President Judge HONORABLE RENEE COHN JUBELIRER, Judge HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge
JUDGE COHN JUBELIRER
The Mt. Lebanon Commission (Commission), Stephen M. Feller, the Mt. Lebanon Pension Plan Administrator (Plan Administrator), and the Municipality of Mt. Lebanon (Municipality), (collectively, Mt. Lebanon), appeal from the July 28, 2011 Order (2011 Order) of the Court of Common Pleas of Allegheny County (trial court). The trial court granted the appeal of the United Police Society of Mt. Lebanon (Union) and Retired Police Officers Les Palombine and Robert Gehrmann*fn1 (together, Officers), and directed Mt. Lebanon to apply cost of living adjustments (COLA) to the pension payments of Officers and other participants in Mt. Lebanon Police Officers' Pension Plan of January 1, 2000 (Plan), at the rate of 2% of their Final Average Monthly Compensation (FAMC) per year until that amount reaches 90% of FAMC in accordance with the trial court's interpretation of Section 4.09 of the Plan.*fn2 Mt. Lebanon argues that it strictly complied with the Municipal Pension Plan Funding Standard and Recovery Act (Act 205),*fn3 which governs minimum funding standards for municipal pension plans, including the requirement that an accurate cost estimate must be obtained before adoption of any modification of a pension plan. Mt. Lebanon contends that the interpretation of the COLA cap by the Union and Officers was never studied and, therefore, cannot be adopted pursuant to Act 205.
This matter dates back to July 10, 2006, when thirteen retired officers and an unspecified number of active officers notified the Plan Administrator of a January 24, 2005 grievance "concerning calculation of duration of [COLA] benefits" also known as the COLA cap. (Record from Administrative Proceedings (Record), Exhibit A, Letter from Officers to Plan Administrator, (July 10, 2006), at 1 (Claim Petition).) On January 15, 2007, the Plan Administrator issued a Notice of Denial of the Claim Petition (Notice of Denial) as "not ripe for review" for the unspecified, active officers and as "untimely"*fn4 and, therefore, waived for the thirteen retired officers. (Record, Exhibit B, Notice of Denial by Plan Administrator, January 15, 2007, at 1-2.) On March 1, 2007, an appeal of the Notice of Denial was filed with the Commission. (Record, Exhibit C, Appeal to Commission, March 1, 2007, at 1-3.) The Commission, as the body designated by the Plan to hear appeals from decisions of the Plan Administrator pursuant to Section 8.08(c) of the Plan, affirmed the denials.*fn5 (Record, Exhibit I, Commission Decision, June 11, 2007, at 1-6.)
On appeal, the trial court concluded that the heart of the dispute was the method of calculating the maximum pension benefit for each officer pursuant to the COLA formula. The trial court stated that "the entire matter was ripe," and remanded it to the Commission to correctly calculate the COLA benefits before addressing issues of timeliness. (Trial Court Decision/Order, July 23, 2009, at 6-7.) After hearing testimony and argument, the Commission issued a decision on February 8, 2011, including its findings of fact. The Commission's findings included some background about the COLA provision indicating that this provision was new to the Plan and, therefore, a modification to the pension plan. Specifically, the Commission found:
10. The first time the [Union] requested a cost-of-living adjustment was in 1999 during contract negotiations that resulted in a collective bargaining agreement being entered into in 2000 (hereinafter, the "2000 Agreement"). The 2000 Agreement was effective until December 31, 2003. . . .
12. The COLA provision of the Plan was agreed to in the 1999 Negotiations.
13. The parties to the 1999 Negotiations did not specifically discuss how the COLA provision would apply to the Early Retirement Benefit. Consequently, the 2000 Plan contains no language describing how, if at all, the COLA provision should be applied to retirees who elect the Early Retirement Benefit option.
(Findings of Fact (FOF)
¶¶ 10, 12-13.)
The Commission viewed the question before it as whether:
(a) [A]n early retiree should be treated the same as a normal retiree; that is, they should receive a COLA benefit up to a 15% maximum.[*fn6 ] Thus, an early retiree whose benefit was reduced to 50% of [FAMC] could receive 15% in COLA increases, same as a [n]ormal
[r]etiree, or (b) [A]n early retiree should receive 2% COLA increase per year until the early retiree receives 90% of [FAMC]. Thus, an early retiree whose benefit was reduced to 50% of his [FAMC] could receive 40% in COLA increases, much more than a [n]ormal [r]etiree.
(FOF ¶ 7.) The Commission found that the cost estimate that was performed before the COLA provision was adopted assumed that the COLA was limited to a lifetime cap of 15%, (FOF ¶ 8), and that the cost estimate did not include the interpretation of the COLA provision now proposed by the Union and Officers. (FOF ¶¶ 23-24). The Commission also found that the estimate was based on a good faith belief about how the COLA was to be implemented. (FOF ¶ 26.) Citing Upper Merion Township v. Upper Merion Township Police Officers, 915 A.2d 174 (Pa. Cmwlth. 2006), for the rationale that the Act 205 cost estimate is mandatory, and noting that the only cost estimate performed involved the 15% COLA cap, (FOF ¶ 29), the Commission adopted the interpretation of the COLA as Mt. Lebanon had been administering it-a 15% COLA cap was applied to all retirees, without distinction between "normal" or "early" retirees. Critical to the Commission's decision was the requirement in Act 205 that "a cost [estimate] be performed before any plan amendment can be adopted and the only cost [estimate] that was carried out in this case assumed that the COLA was limited to 15%." (FOF ¶ 8.) The Commission noted that:
[p]ursuant to Act 205, prior to adopting any modifications to a pension plan, a municipality is required to obtain "a cost estimate of the effect of the proposed benefit plan modification." 53 P.S. § 895.305(a). This cost estimate must be "complete and accurate and shall be presented in a way reasonably calculated to disclose to the average person comprising the membership of the governing body of the municipality the impact of the proposed benefit plan, the modification on the future financial requirements of the pension plan and the future minimum obligation of the municipality with respect to the pension plan." 53 P.S. § 895.305(e).
(FOF ¶ 27) (emphasis added). The Commission cited Borough of Ellwood City
v. Ellwood City Police Department Wage and Policy Unit, 573 Pa. 353,
A.2d 617, 622-24 (2003), to highlight our Supreme Court's conclusion
that Act 205 mandates that a plan modification be preceded by a cost
estimate describing its impact to ensure that the plan is and remains
actuarially sound. Therefore, the Commission concluded that "the COLA
provision of the Plan should be limited to 15% in accordance with the
cost [estimate] and the prior administration of the Plan,"*fn7
(FOF Conclusion), noting that the Commission was not at
liberty to adopt any other interpretation. (FOF ¶ 8.)
Union and Officers appealed the Commission's February 8, 2011 order, and the trial court issued its 2011 Order directing the Commission, Plan Administrator, and Municipality to apply COLA increases to the pension payments of the Officers and other early retirees until each such pension payment shall equal 90% of the participant's FAMC. (Trial Ct. Order, July 28, 2011.) The trial court simultaneously filed a Memorandum in Support of Order. Mt. Lebanon filed a Notice of Appeal on August 25, 2011. On December 2, 2011, the trial court issued an Opinion in Support of Order pursuant to Rule 1925(a) of the Pennsylvania Rules of Appellate Procedure (Trial Ct. Op.), finding that the COLA term was agreed upon in the relevant CBA, the CBA was enacted as Resolution No. 5-00, and the unambiguous term in the CBA sets the COLA cap at 90% of FAMC for all participants. (Trial Ct. Op. at 3-4.) The trial court reasoned that the Commission's decision that Act 205 was violated, and that this violation barred the Municipality from honoring its contractual obligations to early retirees, was not in accordance with law; the provisions in the Plan regarding the Plan Administrator's power to make "good faith" interpretations of the Plan do not give the Municipality the power to disregard its unambiguous contractual obligations and, in any event, there was no true interpretation of the Plan because the Plan Administrator's delegate made a mistake by ignoring the plain words of the Plan and applying another, incorrect interpretation of the Plan; and parol evidence cannot be used to alter the unambiguous terms of the CBA and the Municipality's ordinance creating the Plan. (Trial Ct. Op. at 10, 17, 40-41.) Mt. Lebanon now appeals the trial court's 2011 Order.*fn8
Mt. Lebanon argues*fn9 that the trial court erred when it reached a conclusion that was in direct conflict with Act 205, which requires a cost estimate before any benefit enhancement can be implemented. In this case, the cost estimate did not study the financial impact of the Union and Officers' interpretation of the COLA on the future financial obligations of the Municipality with respect to the Plan.*fn10
Mt. Lebanon contends that the Act 205 cost estimate requirement takes precedence over any provisions within the CBA and pension plans, noting that, in Ellwood City, the Pennsylvania Supreme Court reiterated the primacy of Act 205 in the event of a conflict between Act 205 and the collective bargaining process. Ellwood City, 573 Pa. at 362, 825 A.2d at 623-24 (stating that "within the statutory framework, the General Assembly has bounded bargaining over and modification of pension benefits by a requirement of actuarial soundness as contemplated by Act 205 and its interrelationship with Act 600 in police pension funding cases . . . and has constrained the power of the judiciary accordingly.")
Mt. Lebanon further maintains that this Court has required strict compliance with the cost estimate provision of Section 305 of Act 205 and has vacated court orders and arbitration awards that were premised on a modification not supported by such a cost estimate in Shippensburg Police Association v. Borough of Shippensburg, 968 A.2d 246 (Pa. Cmwlth. 2009) and City of Erie v. International Association of Firefighters Local 293, 836 A.2d 1047 (Pa. Cmwlth. 2003). Mt. Lebanon also cites as persuasive authority this Court's recent unreported decision in Falls Township v. Police Association of Falls Township, 1972 C.D. 2010, slip op. at 10, 12 (Pa. Cmwlth. Oct. 19, 2011), wherein this Court affirmed the vacating of an arbitration award on the basis that the cost estimate in the record did not comply with Act 205. Mt. Lebanon additionally argues that the trial court's decision was based upon reasons that have no support in the record, including the trial court's conclusion that the lack of a cost estimate constituted a "mistake" by the Plan Administrator's delegate,*fn11 which constituted improper fact-finding that exceeded the trial court's appellate scope of review.
Union and Officers counter that the principles of statutory construction apply to municipal ordinances, such as the Plan, pursuant to Hankin v. Upper Moreland Township, 503 A.2d 109, 110 (Pa. Cmwlth. 1986). They argue that the clear and unambiguous language of Section 4.09 of the Plan must be applied and the Commission's failure to do so constitutes legal error. Union and Officers note that the Plan was adopted by the Municipality on January 1, 2000 as Resolution No. 5-00 and that, by its terms, the COLA provision of Section 4.09 applies to "[e]ach [p]articipant who shall retire" and does not distinguish among types of participants such as early or normal retirees. By claiming that the Plan does not provide instruction on how to apply the COLA to early retirees, Union and Officers believe that the Commission is reading additional language and conditions into the Plan that do not exist. Union and Officers further note that it is improper to permit extrinsic, parol evidence to alter the plain language of the Plan itself. Commonwealth v. Dugan, 769 A.2d 512, 515 (Pa. Super. 2001) (citing Grom v. Burgoon, 672 A.2d 823, 825 (Pa. Super. 1996)). According to Union and Officers, the Municipality's failure to include the COLA for early retirees in the cost estimate does not excuse it from providing the COLA to the early retirees in accordance with Section 4.09. Union and Officers contend that Mt. Lebanon's reliance on Ellwood City is misplaced because this is not a dispute over the funding of a pension plan, an attempt to escape the funding mandates of Act 205, or a modification of a benefit. They believe that the facts in this case are more like Grottenthaler v. Pennsylvania State Police, 488 Pa. 19, 26, 410 A.2d 806, 809 (1980), in which the Supreme Court held that the Commonwealth's inclusion of benefits in a CBA, after enactment of an inconsistent statutory provision, constituted an express waiver of any bar that the statute otherwise may have posed, and Fraternal Order of Police v. Hickey, 499 Pa. 194, 199, 452 A.2d 1005, 1008 (1982), in which the Supreme Court held that a city was estopped from questioning the legality of a CBA provision that was voluntarily agreed to by the parties and approved by the city council.
We begin our analysis by examining the purpose of Act 205 and the relevant provisions of Act 205. Act 205 was passed "[i]n an effort to strengthen pension plans of municipalities across the Commonwealth." Upper Merion Township v. Upper Merion Township Police Officers, 915 A.2d 174, 175 (Pa. Cmwlth. 2006). "The General Assembly declared its concern that the failure of municipalities to comply with these standards ‗threatens serious injury to the affected municipal pension plan, to the entire system of public employee pension plans in the Commonwealth and to the Commonwealth itself.'" Id. at 176 (citation omitted). Of particular concern, is that there be "actuarial soundness in police pension plans." Id. at 179.
The applicability of Act 205 is set forth in Section 301(a), which provides:
Notwithstanding any provision of law, municipal ordinance, municipal resolution, municipal charter, pension plan agreement or pension plan contract to the contrary, the applicable provisions of this chapter shall apply to any municipality which has established and maintains, directly or indirectly, a pension plan for the benefit of its employees, irrespective of the manner in which the pension plan is administered, and to the respective pension plan.
53 P.S. § 895.301(a). Notably, Section 301(a) includes a preemption provision, explicitly stating that Act 205 shall apply "[n]otwithstanding any  municipal ordinance,  resolution, [or] agreement  to the contrary." Id. In accordance with Act 205's purpose of ensuring actuarial soundness in municipal pension plans, Section 305 of Act 205 requires that:
Prior to the adoption of any benefit plan modification by the governing body of the municipality, the chief administrative officer of each pension plan shall provide to the governing body of the municipality a cost estimate of the effect of the proposed benefit plan modification.
53 P.S. § 895.305(a). In addition, Section 305(e) mandates that:
Any cost estimate of the effect of the proposed benefit plan modification shall be complete and accurate and shall be presented in a way reasonably calculated to disclose to the average person comprising the membership of the governing body of the municipality, the impact of the proposed benefit plan, the modification on the future financial requirements of the pension plan and the future minimum obligation of the municipality with respect to the pension plan.
53 P.S. § 895.305(e) (emphasis added).
In Ellwood City, our Supreme Court articulated the overriding effect of Act 205 when applied to a collective bargaining agreement and noted that "the General Assembly has directed that the terms of Act 205 control over any other provision of law or pension plan agreement." Ellwood City, 575 Pa. at 355 n.1, 362, 825 A.2d at 618 n.1, 622 (2003). The Supreme Court stated that, where there is "an actual conflict between the statute and a collective bargaining agreement, the statute must be given effect." Id. at 362, 825 A.2d at 622. Importantly, the Supreme Court declared that "within the statutory framework, the General Assembly has bounded bargaining over and modification of pension benefits by a requirement of actuarial soundness as contemplated by Act 205 . . . and has constrained the power of the judiciary accordingly." Id. at 364, 825 A.2d at 623-24. Union and Officers argue that Ellwood City is distinguishable because it involved a conflict between Act 205 and an arbitrator's award, whereas the present case involves a conflict between Act 205 and the Municipality's ordinance that enacted the Plan. However, Act 205 by its terms is specifically applicable to every pension plan modification, "[n]otwithstanding any . . . municipal ordinance . . . pension plan agreement or pension plan contract to the contrary." 53 P.S. § 895.301(a). The legislative mandate underlying Act 205, which is to strengthen pension plans and to require actuarial soundness in pension plans, is no less applicable where the proposed benefit change arises from negotiations, as in this case, or from arbitration, as in Upper Merion Township or Ellwood City. We cannot ignore the explicit preemption of Section 301(a).*fn12
Relying on these and other provisions of Act 205, "this Court has repeatedly recognized the prevailing mandate of Act 205." Upper Merion Township, 915 A.2d at 179 (citing Borough of Doylestown v. Doylestown Borough Police Association, 732 A.2d 701, 704 (Pa. Cmwlth. 1999)). This Court has consistently held that, before an arbitrator modifies a police pension plan, there must be a finding under Act 205 that the modification will not affect the actuarial soundness of the pension plan. This Court has interpreted Act 205 to apply to interest arbitration, as well as grievance arbitration awards which change the way a municipality has been administering and interpreting the pension plan.
In Upper Merion Township, this Court concluded that a grievance arbitration award was properly vacated due to the lack of an Act 205 cost study. In that case, a grievance arbitrator directed the township to retroactively increase survivor benefits under a grievance arbitration award. He did so without first obtaining an Act 205 cost study on the retroactive effect of the benefit enhancement. This Court ruled that the pension plan could not be changed in the absence of an Act 205 study. Upper Merion Township, 915 A.2d at 181.
Similarly, in Shippensburg Police Association, this Court vacated an award by a grievance arbitrator who awarded a modification of a police pension plan without an Act 205 cost study. Shippensburg Police Association, 968 A.2d at 252. In that case, the parties agreed that, for the last 25 years, the police pension plan had not included unused vacation pay in the calculation of pension benefits. Id. at 251. The grievance arbitrator's award, however, changed this so that the Borough's pension liability was no longer predictable. Id. Because there was no Act 205 cost study to quantify the effect of this change, this Court determined that the arbitrator exceeded his authority in awarding the pension. Id.
Other cases of this Court with similar holdings include: City of Butler v. Fraternal Order of Police, Lodge # 32, 780 A.2d 847, 855 (Pa. Cmwlth. 2001) (holding that an interest arbitration award that eliminated pension contributions went beyond the powers of the arbitration panel because it failed to adhere to Act 205, which requires a cost estimate before any modification of a pension plan); City of Erie, 836 A.2d at 1052 (holding the arbitration panel's award of a Deferred Retirement Option Program to be illegal when the record failed to contain a proper cost estimate demonstrating actuarial soundness consistent with Act 205); and Northampton Township v. Northampton Township Police Benevolent Association, 885 A.2d 81, 83, 85 (Pa. Cmwlth. 2005) (holding that Act 111*fn13 awards modifying police pension plans must be made in compliance with Act 205 and that the panel's determination that there was a three percent cap on pension contributions exceeded its authority when it did not have the benefit of a proper cost estimate report under Act 205).
Applying these legal principles here, there is no question that Act 205 applies and, as the Supreme Court concluded in Ellwood City, "the statute must be given effect." Ellwood City, 573 Pa. at 362, 825 A.2d at 622. However, we are also very mindful that the Supreme Court has previously cautioned that the Commonwealth's interest in the actuarial soundness of pension plans must be balanced with the need to maintain integrity of the bargaining process in the public sector, as in Grottenthaler, 488 Pa. at 25, 410 A.2d at 809, and Hickey, 499 Pa. at 198, 452 A.2d at 1007. Importantly, Act 205's explicit directive that its provisions apply notwithstanding contrary provisions of law or agreement was not at issue in those cases.*fn14 Ellwood City, 573 Pa. at 362, 825 A.2d at 622.
In the case before us, the request for the cost estimate of the proposed COLA provision of the Plan assumed that it was limited to 15% for anyone to whom the COLA was applicable. (Cost Estimate Request, October 12, 1999, at 1, R.R. at 212.) The actuary who performed the cost estimate, G. Herbert Loomis, testified that the cost estimate that was prepared in this case was premised upon a 15% COLA cap and, had the Union and Officers' interpretation been studied, the cost "definitely would have gone up" and "would have resulted in a significant increase." (Hr'g Tr. at 75, 78, 83, R.R. at 107a-09a.) In fact, Mr. Loomis testified that the cost estimate of the COLA provision took into account any necessary adjustments for service reduction factors "so that you weren't giving something that was more than the approximate actuarial equivalent in cost . . . or something that didn't cost more in relationship to the pension . . . for early retirement than the normal retirement COLA would [cost] in relation to the pension granted for normal retirement." (Hr'g Tr. at 75, R.R. at 107a.) There is no dispute that the cost estimate was performed with these assumptions and at a time when the plan language was not yet in existence. There also is no evidence in the record that the Officers bargained for their particular interpretation of the COLA prior to the adoption of the plan language, although that language can be reasonably interpreted in the manner that they now propose. There is no evidence that any bad faith was involved by the parties or that the Municipality promised to provide the COLA pursuant to the interpretation that Union and Officers are now advocating. In short, there is no evidence in the record that, prior to the adoption of the language in the Ordinance, the Municipality specifically promised to calculate the COLA for early retirees differently than they would for normal retirees. This is, therefore, not a case of fundamental unfairness where a retroactive advantage is attempted to be gained when a fundamental term of an agreement is later found to be altered by an existing statute. See Ellwood City, 573 Pa. at 369, 825 A.2d at 626-27 (Castille, J., concurring and dissenting).
Given that the requirements of Act 205 would not be met were we to require the Municipality to interpret the Plan as Officers request, we are constrained from doing so.*fn15 As in Ellwood City, where there is a direct conflict with Act 205, "the statute must be given effect." Id. at 362, 825 A.2d at 622.
We are, therefore, constrained to reverse the trial court's Order.
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
United Police Society of Mt. Lebanon; : Retired Police Officers; Mark Kubit, : Mary Eichinger, John Michalec, David : White, Les Palombine, Mary Sue : Joyce, William Laurence, Kevin : Mackin, Tom Gianni, Robert : Gehrmann, Pat O'Donnell, and Blaise : Larotonda : v. Mt. Lebanon Commission; Stephen M. : Feller; Mt. Lebanon Pension Plan : Administrator; Municipality of Mt. : Lebanon, : : Appellants :
No. 1602 C.D. 2011 :
NOW, July 16, 2012, the Order of the Court of Common Pleas of Allegheny County, dated July 28, 2011, is hereby REVERSED.
RENEE COHN JUBELIRER, Judge