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March 27, 1997

Push on for Sponsors of Nondiscrimination Relief Legislation

Senators Orrin Hatch (R-UT) and Kent Conrad (D-ND) are committed to introducing nondiscrimination legislation in a few weeks. We had expected them to drop the bill in before the Easter recess, but they decided to wait and try to get more cosponsors. At this point, they will likely introduce it during April. The legislation will be identical to S. 2047, which they introduced during the last Congress.

Tentative cosponsors include Senators Baucus (D-MT), Cochran (R-MS), D'Amato (R-NY), Enzi (R-WY), Gregg (R-NH), Inouye (D-HA), Kyl (R-AZ), Moseley-Braun (D-IL), and Reid (D-NV). As in 1996, Congressmen Rob Portman (R-OH) and Ben Cardin (D-MD) have agreed to serve as the House sponsors of the legislation. They will be circulating a letter shortly seeking support of other House members, after which they will introduce the legislation. Tentative House cosponsors include Representatives Blumenauer (D-OR), Ensign (R-NV), Pomeroy (D-ND), and Weller (R-IL). Last year, Congressmen Portman and Cardin introduced H.R. 4099, the House companion to S. 2047. In addition, Senator Tom Daschle (D-SD), the Senate Democratic Leader, introduced in January the Retirement Security Act of 1997 (S. 14), a wide ranging pension bill, which contains language identical to the Hatch-Conrad/Portman-Cardin bills.

If your Senator or House Member is not listed above and you'd like to write them about the need for him/her to cosponsor the bill, please contact Cindie Moore.

Portability Effort Moves Forward with NCTR Member Help

A number of NCTR members have expressed concern about the conflict between the right of participants in their retirement systems to purchase service credit and the Section 415 defined contribution limits. IRS interprets Section 415 as limiting such purchases to the IRC's defined contribution limits. Those limits restrict a participant's annual purchase of service to $30,000 or 25% of a participant's compensation, whichever is lower. We are proposing to exempt purchase of service credit from the defined contribution limits of Section 415 in order to ensure that public employees may buy the entire amount of credit to which they are entitled under state law. This effort is being inaugurated this year. (Note: the 415 legislation enacted in 1996 involved the problems state and local plans have with the defined benefit limits, not the defined contribution limits, of Section 415.)

NCTR members have provided Cindie Moore feedback on a draft she distributed to them. She is using the comments to develop an issue brief that will be circulated in Congress.

CPI Attracting Attention

In December, a federal commission concluded that the consumer price index (CPI) overstates inflation by 1.1% a year. Because the CPI is used to set the cost of living adjustments (COLAs) for Social Security and other federal programs, this finding has led to discussions about whether the CPI should be adjusted downward. This issue has direct impact in the many states that use the CPI to set the COLAs for retirement benefits.

A group of moderate House Democrats, known as the "Blue Dogs," have proposed to correct the CPI's overstatement of inflation. If adopted, the proposal would produce considerable savings in Social Security and other federal programs that use the CPI as a measure to adjust benefits. The CPI formulas affect around 30% of the federal budget. The savings would slow Social Security and other federal payments, thereby helping to reduce the federal deficit. The proposal is extremely controversial, especially among senior citizen groups whose membership would be directly affected by any reduction in Social Security COLAs. The Administration and many in Congress say that the Bureau of Labor Statistics (BLS) should continue to set the CPI. Federal Reserve Chairman Alan Greenspan has recommended that Congress establish an independent national commission to set annual COLA factors. Republican Senate Leader, Trent Lott (R-MS), has called on the President to establish an independent commission on the issue. The President has declined to do so, saying he was unable to build bipartisan support for the idea.

Wisconsin and California Courts Make Key Pension Rulings

1997 has thus far been a great year for significant legal rulings that protect public retirement systems and their members.

Wisconsin. The Wisconsin Supreme Court ruled as "an unconstitutional taking of private property without just compensation" legislation that required the retirement system to pay supplemental benefits to certain retirees out of the trust fund. Wisconsin Retired Teachers Association v. ETF Board, Appeal No. 94-0712 (Wis. Sup. Ct. 1997). Previously, the retirees had received the supplements from the general fund. The Court also found that the retirement system's fiduciaries did not violate their duties when they implemented the legislation. The Wisconsin Retirement System has prepared a summary, which is attached. An unconstitutional taking has not been commonly used to challenge legislative "raids" of pension funds. This case establishes a strong ruling that can be used as guidance in other states.

California. The California legislature's passage of acts that delayed state employer contributions to the Public Employees Retirement System (PERS) unconstitutionally impaired PERS members' contractual right to an actuarially sound retirement system, as articulated by the state's Supreme Court in Board of Administration v. Wilson, C020118, (Calif. Sup. Ct. 1997). The PERS Board filed suit against Governor Wilson in 1994, challenging the delayed funding.

1. SB 1107, enacted in 1992, provided that state employer contributions would be paid for the General Fund employees in PERS "semiannually, six months in arrears" (page 7). SB 240, enacted a year later, set pension financing to be paid "annually, 12 months in arrears" (page 8). Until 1990, the State's employer contributions were transferred to the retirement fund on a monthly basis. Between then and 1992, the legislature spread out the payment period, culminating in the passage of SB 1107, and later, SB 240. Before the enactment of the "in arrears" financing, a "level contribution" system was used, whereby payments flowed to the retirement fund as liability was incurred for future pension obligations.

2. The key issues with which the Court dealt were: first, whether PERS members have a contractual right to an actuarially sound retirement system; and second, whether such rights were impaired by SB 1107 and SB 240.

3. On the first issue, the Court held that PERS members have a contractual right to an actuarially sound retirement system. Specifically, "the PERS statutes set up a retirement system to pay pension rights of state employees. Actuarial soundness of the system is necessarily implied in the total contractual commitment, because a contrary conclusion would lead to express impairment of employees' pension rights" (page 29). The Court based its reasoning on Valdes v. Cory, 139 Cal.App.3d 773 (1983). There, the Court said that a contractual pension right accrues when the employee accepts employment. The contract "right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity" (page 29, quoting Valdes).

4. The Court pointed to the following rationales as demonstrating that the statute implied a contractual commitment of actuarial soundness. First, the statute calls for periodic adjustment of employer contribution rates in accordance with actuarial valuations (pages 29-30). Second, the legislature acknowledged the need to "preserve the actuarial integrity of [the retirement system]" when it passed legislation in 1982 affecting PERS (pages 30-31). The Court also pointed out that case authority exists to support "the proposition that employee pension beneficiaries have a vested interest in the integrity and security of the source of funding for the payment of benefits" (page 31).

5. On the second issue, the Court ruled that PERS members' vested contractual rights in an actuarially sound retirement system were, in fact, impaired by the legislature's actions. Specifically, the Governor failed to show any pension reform or pension-related connection to the changes, so the court determined that SB 1107 and SB 240 were enacted simply as budget balancing measures (page 38). As a related matter, the legislature may, under California law, modify retirement system members' contractual rights, but only if it provides a comparable advantage. The Court found that, in the absence of any pension reform or pension-related connections, no comparable advantage existed (page 38).

Please contact Cindie Moore if you would like a copy of the cases.