Pennsylvania State University v. Workers' Compensation Appeal Board

DISSENTING OPINION BY

Judge SMITH-RIBNER.

I respectfully dissent from the majority’s conclusion that the proofs offered in this matter, if credited by the Workers’ Compensation Judge (WCJ), are sufficient to meet the burden of The Pennsylvania State University/PMA Insurance Group (Employer) to show its entitlement to offset against workers’ compensation benefits for pension benefits “to the extent funded by the employer directly liable for the payment of compensation” under Section 204(a) of the Workers’ Compensation Act (Act), Act of June 2, 1915, P.L. 736, as amended, 77 P.S. § 71(a). In my view the method adopted for determining Employer’s contribution to the “defined benefit plan” at issue is too speculative, yields results that do not comport with the statutory mandate and unfairly penalizes the affected injured employee. The Workers’ Compensation Appeal Board was correct in determining that Employer failed to meet its burden to prove entitlement to a pension offset.

A “defined benefit plan” such as the State Employees’ Retirement System (SERS) is one under which no separate account is maintained for any employee *234 (apart from a record of his or her contributions), but the formula for benefits due at retirement (or disability) is known, and the employee is entitled to receive that benefit for life with the employer making contributions annually as actuarially determined to be necessary to fund its overall obligations. 34 Pa.Code § 123.2. Under a “defined contribution plan,” separate accounts are maintained for each employee, and his or her contribution and those of the employer and earnings determine the amount available at retirement. There is no question that deciding the amount by which an employer “funded” a defined benefit plan is much more difficult than deciding for a defined contribution plan, but that does not mean that no attempt to define the amount with some precision should be made.

When an employer claims a right to an offset against workers’ compensation liability under the pension offset provision of Section 204(a), SERS calculates such an offset according to a formula, as stated in the testimony of Linda Miller, its Director of Benefits Determination Division, and of Brent Mowery, an actuary and Senior Consultant of the Hay Group, which performs actuarial services for SERS. The only sources of funding are the employee contributions with their earnings and the employer contributions and earnings.

Using a method proposed by the Hay Group, SERS calculates the offset by first determining the overall obligation of the system to an individual when he or she goes on retirement or disability. This figure is derived from the single life annuity (2% x the years of service x the final average salary x the class of service multiplier) times the annuity factor (or life expectancy) to yield the calculated total obligation. See Deposition of Miller, pp. 27-28; R.R. 47a~48a. This amount is discounted to present value using the figure of 8.5%, Deposition of Mowery, p. 38; R.R. 116a, and SERS then subtracts a measure of the accumulated employee contributions and interest thereon over his or her career. What is left is deemed to be the employer’s contribution, which is converted to a monthly figure. Id. p. 27; R.R. 105a.

The actual rates of earnings on investment and the rate used for calculation are central to the issue involved in this case. In the 15th Investigation of Actuarial Experience (15th Investigation) submitted to SERS by the Hay Group, covering the period January 1, 1996 through December 31, 2000, Ex. Mowery-2, p. 6; R.R. 165a, it is stated that “an increase in investment earnings will directly reduce the employer contributions needed to pay the benefits.” The current economic assumptions as stated in the 15th Investigation include an investment return rate of 8.5%. Id., Table III — 1. Table III-2 of the same document, depicting annual rates of growth in investment return both nominal and real and salary growth both nominal and real back to 1981, shows a large range of nominal investment returns over that period with an overall average nominal investment return of 13.2% and an average from 1996 through 2000 of 14.5%. Id., p. 7; R.R. 166a. The 2003 Actuarial Report submitted by the Hay Group to SERS, Ex. Mow-ery-3, on p. 5; R.R. 202a, includes another table of annual rates of growth from 1984 through 2003, showing a nominal investment return average over that period of 10.9%.

In calculating the pension offset, SERS applies its figure of 8.5% to the employee contributions to determine the total amount of such contributions plus earnings. Mowery testified that 8.5% was in use before the 15th Investigation and it is still used. Thus regardless of what the actual earnings were on the employee’s *235 contributions through his or her career, the employee’s credit under the SERS method is based on an assumed rate of earnings of 8.5%. Although Mowery asserted that the method is actuarially sound, he conceded that the actual rate of return probably will not ever be precisely 8.5%. Deposition of Mowery, p. 39; R.R. 117a.

When asked repeatedly why 8.5% was chosen, Mowery stated the actuarial firm considered it to be “appropriate” to measure the employee’s share, id. p. 38; R.R. 116a. He acknowledged that it is a “temptation” to use a formula such as an average over a five-year period or a twenty-year period rather than a flat rate of 8.5%, but he stated that there was an element of judgment involved by the actuaries and by the parties with fiduciary responsibility to be prudent and mindful of advantages and disadvantages of the rates that they might select for the future. Id. p. 40; R.R. 118a. The 15th Investigation stated, p. 7; R.R. 166a: “An 8.5 percent assumption is conservative given the high investment returns during the past 20 years. However, that 20-year period is considered to be one of significantly high investment returns. The low investment return for 2000 may be the beginning of a period of less favorable investment returns.”

Mowery never provided any empirical basis for the selection of the figure 8.5% as opposed to 8% or 9% or some other figure. Nevertheless, the rigid application of this figure when the reports issued by the Hay Group show a higher average historical return results in a lower than accurate calculation of the employee contribution toward the overall obligation. A lower estimate of the employee’s share means a higher estimate of the employer’s share and a consequent higher dollar figure of the offset. Employer is receiving a higher offset than the amount “funded” by Employer, which means that more money is taken from the claimant/retiree’s pocket in the present circumstances than should be. This analysis shows violation of the requirement of Section 204(a) of the Act without regard to complications of attempting to calculate Employer contributions either before or after the employee’s retirement and to assign them in some way to the individual.

Amicus Commonwealth posits two employees with largely identical histories and careers but "with slightly different periods of service, with one period having overall higher returns than the other so that the employer had to make lower contributions to fund the system. It asserts that the offset calculated for them should be the same and that no rational basis exists for disparate treatment. This view illustrates the fallacy of applying a single earnings percentage rate without regard to actual performance. The offset calculation applies to an individual, not to an aggregate. If an individual was fortunate to have served during a period of largely high returns and to have accumulated a high contribution, that fact should not be undercut by artificially low calculations of his or her share intended to compensate for expected periods of lower returns in the future.

SERS has performed a calculation pursuant to its formula that results in an excessively high pension offset to the advantage of Employer and to the disadvantage of the affected employee. Although SERS has attempted to provide more evidence than the showing held to be insufficient in Department of Public Welfare/Polk Center v. Workers’ Compensation Appeal Board (King), 884 A.2d 343 (Pa.Cmwlth.2005), the method employed still does not calculate an offset that adequately reflects the amount “funded by the employer” as required by *236 Section 204(a) of the Act. See also Pittsburgh Board of Education v. Workers’ Compensation Appeal Board (Schulz), 840 A.2d 1078 (Pa.Cmwlth.2004).

The WCJ found that Mowery admitted on cross-examination that SERS could verify the amount of contributions that Employer made on behalf of employees in a class at the time of contribution and that at times the amount paid by the fund would be less than that originally determined to be the present value of the account. I note the testimony from Linda Miller, Director of the Benefit Determination Division of SERS that Employer made no contributions to the fund in the years 2000 and 2001 and that Employer’s contributions have “trended” down during the years 1984 through 2002. The WCJ mentioned that Miller had no records of the amounts contributed by Employer to the fund.

It is clear from this record that the WCJ was correct in concluding that Employer failed to meet its burden of proof and that Employer’s proposed method of calculation for its pension offset was neither equitable nor appropriate. The majority has committed fundamental error by endorsing Employer’s inherently flawed methodology for determining appropriate offsets pursuant to Section 204(a) and in the process has reached a result that is unfair and unjust and not intended by statutory or case law authority. Rather, it should assist in determining how such offsets may properly be determined, but it has failed to do so. In King this Court acknowledged that the purpose of the Act is to benefit injured workers, citing Gallie v. Workers’ Compensation Appeal Board (Fichtel & Sachs Indus.), 580 Pa. 122 , 859 A.2d 1286 (2004). Agreeing with the Board that the employer failed to meet its burden of proof, the Court concluded that the employer is “only entitled to a credit to the extent it funded the plan.... ” King, 884 A.2d at 348 . Because Employer here failed to meet its burden of proof, I therefore dissent.

Judge FRIEDMAN joins.