Allan H. Heilbrunn, Petitioner
State Employees' Retirement Board, Respondent
Argued, December 8, 2014
Appealed from No. SERB Docket No. 2008-14. State Employees' Retirement Board.
Jonathan H. Rudd, Harrisburg, for petitioner.
Nicholas J. Marcucci, Harrisburg, for respondent.
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER,
Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE MARY HANNAH LEAVITT, Judge.
Allan H. Heilbrunn (Heilbrunn) has petitioned for review of an adjudication of the State Employees' Retirement Board (Retirement Board) that refused to recalculate the present value of his retirement annuity benefit. Before the Retirement Board, Heilbrunn contended that the assumed rates of return on investments in the State Employees' Retirement Fund, which were used to calculate the present value of his annuity benefit, were too aggressive and improperly compounded. Had the Retirement Board accepted Heilbrunn's contentions, the present value of his annuity benefit would have been considerably higher upon his retirement. The Retirement Board held that its assumed rates of return were established in accordance with sound actuarial principles and practice, as required by statute. Indeed, the Retirement Board concluded that the present value of Heilbrunn's annuity benefit had been calculated in strict compliance with the General Assembly's directives. We agree and affirm.
Heilbrunn worked for different Commonwealth agencies during two different periods of time. His first period of state service began on August 11, 1977, and it ended on May 14, 1986, with his retirement. At this retirement, Heilbrunn elected a lump sum payment of $16,766.54, which represented the total of his contributions
to the State Employees' Retirement Fund, and a monthly annuity of $102.34. On December 14, 1992, Heilbrunn returned to state service. His monthly annuity ceased, and the present value of his remaining annuity benefit was frozen at $24,533.90. His second period of state service lasted from December 14, 1992, to June 28, 2007. On June 29, 2007, he retired for the second time.
During Heilbrunn's second period of state service, the General Assembly revised the methodology for calculating the present value of the retirement annuity benefit of a state employee who suspends his retirement and returns to state service. Prior to these amendments to the State Employees' Retirement Code (Retirement Code), the present value of the employee's annuity benefit at second retirement was calculated by adding the frozen value of his annuity, which was $24,533.90 in Heilbrunn's case, to the value of his annuity benefit earned during the second period of state service. Under the 1994 amendments, the present value of the second retirement annuity account is calculated in one of two ways, whichever yields the higher number. The first uses the calculation in effect prior to the 1994 amendments. The second uses a methodology called the " thawed" frozen present value calculation.
Under this methodology, first, the present value of the member's annuity is calculated as if he had never retired from state service and collected an annuity. Stated otherwise, it is assumed that the member's contributions had remained in the Fund and continued to generate earnings until the second retirement. Next, all payments, plus interest, made to the member between his first retirement and his return to state employment is calculated; these payments include the lump sum refund of the retired member's contribution, if one was made. The total of payments plus interest determines what is sometimes termed the " frozen present value debt." In the final step, this debt is deducted from the hypothetical present value that was calculated by assuming no retirement between the two periods of state service. This calculation produces the " thawed present value," i.e., the value of the member's annuity benefit at the time of his second retirement.
On April 30, 2007, the State Employees' Retirement System (SERS) informed Heilbrunn that the " thawed present value" of his annuity benefit was $371,732.58. This number included an actuarial adjustment of $122,010.55, i.e., the payments previously made to him plus interest. The interest represented the amount that would have been earned by the Fund had Heilbrunn never received the refund of his contribution or any monthly annuity payments. Notably, the 1994 amendments to the Retirement Code replaced the frozen present value of his first annuity of $24,533.90 with a value of $103,875.
The interest SERS applied to calculate his debt was compounded at the following rates: from May 15, 1986, to June 30, 1991: 5.5%; from July 1, 1991, to June 30, 1996: 9.9%; and from July 1, 1996, to June 30, 2007: 8.5%. These interest rates were adopted by the Retirement Board in consultation with its actuarial consultant, the Hay Group, and represented the expected earnings on the Fund's assets during each five-year fiscal period of time.
At Heilbrunn's second retirement, he elected to receive a lump sum payment of $44,111.98 and monthly payments of $2,002.69. Because Heilbrunn disagreed with SERS' thawed frozen present value of his annuity benefit, he requested that it be
recalculated. SERS denied his request, and Heilbrunn appealed to the Retirement Board.
The matter was assigned to a hearing examiner, who conducted a hearing on November 16, 2011. At the hearing, Heilbrunn and Joseph Torta, Director of the Bureau of Member Services with SERS, testified in Heilbrunn's case. SERS presented the testimony of Mark McGrath, its managing director of fixed income; William Truong, its senior investment analyst; and Brent Mowery, supervising actuary with the Hay Group.
On July 25, 2012, after receiving post-hearing briefs, the Hearing Examiner recommended that the Retirement Board deny Heilbrunn's request to recalculate the thawed frozen present value of his retirement annuity benefit. The Retirement Board adopted the Hearing Examiner's recommendation and denied Heilbrunn's request for a recalculation in an adjudication of February 24, 2014. Heilbrunn then petitioned for this Court's review.
On appeal, Heilbrunn raises three issues. First, he contends that the interest used to calculate his frozen present value debt was improperly compounded. Second, Heilbrunn argues that the Retirement Board abused its discretion in choosing its assumed rate of return on its investments; Heilbrunn argues that it should have been 7.5% for all years in question. Third, Heilbrunn requests treble damages and attorney's fees under authority of the statute commonly known as the Loan Interest and Protection Law, Act of January 30, 1974, P.L. 13, as amended, 41 P.S. § § 101 - 605. We address the issues seriatim.
Heilbrunn contends that SERS lacked the statutory authority to use compounded interest in calculating his debt to the Fund upon his second retirement. He argues that interest can never be compounded without an " unequivocal contractual or statutory statement providing for compound interest." Heilbrunn Brief at 25. According to exhibits prepared by Heilbrunn, using simple interest would have produced a " frozen present value debt," or actuarial adjustment, much lower than SERS' actuarial adjustment of $122,010.55. For example, using the rates of return used by SERS, but without compounding them, yields a " frozen present value debt" of $66,156.36.
The Retirement Board maintains that because the statute requires interest to be computed in accordance with general actuarial principles, the legislature expressly authorized the use of compounded interest
when establishing the thawed frozen present value of Heilbrunn's annuity account.
We begin with the statute that governs the calculation of the annuitant's debt to the Fund. Section 5706(c) of the Retirement Code ...