Agenda Item 10
April 27, 2010
Public Hearing
MEMORANDUM
TO:
FROM:
SUBJECT:
County Council
Robert H. Drummer, Senior Legislative Attorney
(\
fltt"j
Public Hearing:
Expedited Bil116-1 0, Personnel- Retirement - Imputed
Compensation Limit
Expedited Bill 16-10, Personnel - Retirement Imputed Compensation Limit, sponsored
by Councilmember Andrews, was introduced on April 6, 2010. A Management and Fiscal
Policy Committee worksession is tentatively scheduled for April 29 at 2:00 p.m.
Background
Although the general wage adjustments for FYI0 negotiated with each of the 3 County
employee unions representing police, fire, and general government workers were "postponed"
last year, Expedited Bill 18-09 required that the calculation of regular earnings used to determine
a retirement benefit include the FYlO general wage adjustment as if the employee had received it
on July 1, 2009.
1
This imputed compensation is scheduled to carry over into the calculation of
regular earnings used to calculate a defined benefit pension for the rest of an employee's County
career. Expedited Bil116-1O would amend the retirement laws to limit the effect of the imputed
compensation to the calculation of regular earnings for FYlO only.
Last year, the County's actuary, Mercer, estimated that this imputed compensation would
require the County to increase its annual contribution to the Employees' Retirement System
Trust Fund by $8.589 million per year for the next 40 years. A copy of Mercer's April 27, 2009
report is at ©5-7 and a memorandum reviewing it from the Council's actuarial advisor, Thomas
Lowman of Bolton Partners, Inc. dated May 6, 2009, is at ©8. Mr. Lowman currently estimates
that the actual savings from limiting this imputed compensation to FYIO is $7.2 million for
FYIl. Annual savings would continue for a total of 40 years.
Issues
1. How would this Bill affect employees in the 3 bargaining units?
The County has three different retirement plans for its employees.
2
All public safety
employees (police, fire, corrections, and deputy sheriffs) are members of the Employees'
Employees of the Montgomery County Public Schools also agreed to "postpone" a negotiated general wage
adjustment for FY 10, but did not receive this imputed compensation.
2
The County has a separate Elected Officials Retirement Plan that would not be affected by this Bill.
I
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Retirement System (ERS). Although pension benefits differ between different ERS plans for
public safety employees, each is a defined benefit plan with a pension benefit calculated using a
formula based upon years of credited service and regular earnings. Non-public safety employees
hired before October 1, 1994 are also in the ERS defined benefit plan. All non-public safety
employees hired after October 1, 1994 are eligible for the Retirement Savings Plan (RSP) or the
Guaranteed Retirement Savings Plan (GRIP). The RSP is a defined contribution plan where the
County contributes 8% of an employee's salary and the employee contributes 4% of salary to a
self-directed investment account?
An
employee's RSP benefit is based upon the value of the
account at retirement. RSP participants may elect to participate in the GRIP instead of the RSP.
The GRIP is a cash balance plan that creates a separate account for each employee funded by an
8% employer contribution and a 4% employee contribution. However, an employee's GRIP
account is invested by the County Board of Investment Trustees (BIT). The County credits each
account with a return on investment of 7.25% without regard for the actual returns received by
the BIT.
The imputed GWA enacted by Expedited Bill 18-09 last year will provide a one-time
payment of .36% of salary to members of the RSP and GRIP, averaging $186 per member. The
total cost of this one-time additional payment is $919,750. Bill 16-10 would not affect the
pension benefit received by these employees.
The imputed GWA provided a much larger benefit for ERS employees. Bill 18-09
included the GWA that employees did not receive in FYlO in the calculation of an employee's
regular earnings for FYlO and compounded this imputed GWA into the calculation of regular
earnings for each future year of an employee's County career. As noted above, the County's
actuary estimated that this provision would cost $8.6 million per year for up to 40 years. Most
of these costs are due to the compounding of this imputed GWA in future year salaries. In short,
it requires the County to pay a defined pension benefit based, in part, on regular earnings that
were never paid. Bill 16-10 would not eliminate the use of the imputed GWA in FY10
earnings, but it would limit its use to the calculation of FY10 earnings.
An
employee's
defined benefit pension is based upon the highest earnings over either 12 months or 36 months.
If an employee's FYlO regular earnings are part of the employee's highest 12 or 36 months of
earnings, then the employee would receive the benefit of the imputed GW
A.
However, Bill 16­
10 would prevent the compounding of the FYIO imputed GWA in the calculation of future
earnings. Therefore, if an employee's FYlO regular earnings are not part of the employee's high
12 or 36 months, the employee would not benefit from the imputed GW
A.
The breakdown of employees in each retirement group broken down by bargaining unit
The 8% employer contribution should be compared with the average County contribution for ERS employees,
which is currently almost 35% of salary.
4
The following chart was provided by the Office of Human Resources at the request of Council staff.
3
2
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County Employees
Retirement Enrollment
By Plan as of April 1, 2010
ERS - Employees Retirement System
GRIP - Guaranteed Retirement Income Plan
RSP - Retirement Savings Plan
The Council's actuarial adviser now estimates that limiting the provision to FYlO would
save $7.2 million not only in FYll but for future years as well. Total savings could exceed $200
million. These savings from
Bill
16-10 would not affect the pension benefit for 65% of the
employees (3283 of 5046) represented by MCGEO or 54% of the unrepresented employees (921
of 1694).5
5
The 10 furlough days in the Executive's FYII Recommended Budget are limited to non-public safety employees,
which overwhelmingly targets RSP and GRIP employees who do not benefit from the ghost GWA after FY 10.
3
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2. Legal Authority.
Bill 16-10 would modify a law that was enacted to implement collective bargaining
agreements with each of the 3 County employee unions. This raises the question as to the
Council's legal authority to enact this Bill. The County Attorney and Council staff agree that
Bill 16-10 would not violate the Contract Clause of the United States Constitution because it
does not substantially impair vested legal rights. The Bill would apply prospectively to the
calculation of regular earnings in future years that have not yet occurred. A copy of the County
Attorney's Opinion dated April 18, 2010 is at ©9-12, and a copy of a Council staff legal opinion
dated April 1, 2010 is at ©13-17.
This packet contains:
Expedited Bill 16-10
Legislative Request Report
Mercer Report
Bolton Partners Memorandum
County Attorney Opinion dated April 18, 2010
Council Staff Legal Opinion dated April 1, 2010
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Expedited Bill No. _1..c.::6=--1-'-'0'--_ _ __
Concerning: Personnel - Retirement ­
Imputed Compensation Limit
Revised: April 1! 2010 Draft No.
b1
Introduced:
April 6, 2010
Expires:
October 6, 2011
Enacted: _ _ _ _ _ _ _- _ _
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date:
.....1.N~o~n~e
_ ___,._ _- _
Ch. _ _, Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Councilmember Andrews, Trachtenberg, and Berliner
AN EXPEDITED ACT
to:
(1)
amend the definition of regular earnings to limit certain imputed compensation
under the employees' retirement system to FYIO only; and
(2)
generally amend the law regarding the employees' retirement system.
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
. Sections 33-35
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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Expedited Bill 16-10
1
Sec. 1. Section 33-35 is amended as follows:
Sec. 33-35 Definitions
2
3
In this Article, the following words and phrases have the following
meanmgs:
4
5
*
*
*
6
7
8
Regular earnings:
Except as otherwise provided, gross pay for actual hours
worked, not including overtime. To calculate regular [Regular] earnings-,- for FYI 0
only, a Group A, E, or H member who is employed on July 1, 2009 and
participates in the integrated or optional plan must include amounts as if the
member had received an increase of 4.5% in the member's gross pay as of July 1,
2009, except for the purpose of calculating a member's contribution under Section
33-39. To calculate regular [Regular] earnings-,- for FYIO only, for a Group F
member who is employed on July 1, 2009 and participates in the integrated or
optional plan must include amounts as if the member had received an increase of
4.25% in the member's gross pay as of July 1, 2009, except for the purpose of
calculating a member's contribution under Section 33-39. To calculate regular
[Regular] earnings-,- for FYIO only, for a Group G member who is employed on
July 1, 2009 and participates in the integrated or optional plan must include
amounts as if the member had received an increase of 4% in the member's gross
pay as of July 1, 2009, except for the purpose of calculating a member's
contribution under Section 33-39. Regular earnings for an elected official is gross
pay for services rendered to the County. Regular earnings must not exceed the
limit under Internal Revenue Code Section 401 (a)(17), as adjusted by the Internal
Revenue Service. Gross pay must be used to determine benefits even if the County
implements a pick-up plan under Section 414 of the Internal Revenue Code. Gross
pay must be used to determine benefits even if a member has agreed to a reduction
in earnings under:
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
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Expedited Bill 16-10
28
29
(a)
the County's deferred compensation plan under Section 457 of the
Internal Revenue Code; or
30
31
(b)
any statutory fringe benefit program sponsored by the County and
permitted by the Internal Revenue Code.
32
33
34
35
*
*
*
Sec. 2. Expedited Effective Date.
The Council declares that this Act is
necessary for the immediate protection of the public interest. This Act takes effect
on July 1,2010.
Approved:
36
37
38
Nancy Floreen, President, County Council
Date
39
Approved:
40
Isiah Leggett, County Executive
Date
41
This is a correct copy ofCouncil action.
42
Linda M. Lauer, Clerk ofthe Council
Date
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LEGISLATIVE REQUEST REPORT
Expedited Bill 16-10
Personnel-Retirement-Imputed Compensation Limit
DESCRIPTION:
Bill 18-09 required that the calculation of regular earnings used to
determine a retirement benefit include the general wage adjustment
for FYI0 as if the employee had received it on July 1, 2009. This
imputed compensation is scheduled to carryover into the calculation
of regular earnings used to calculate a defined benefit pension for the
rest of an employee's County career. Expedited Bill 16-10 would
amend the Retirement Laws to limit the effect of the imputed
compensation to the calculation of regular earnings for FYI 0 only.
The County has experienced a severe reduction in revenue and must
reduce its FYIl expenditures in order to balance the budget.
The estimated savings of $7.2 million for FYIl would partially offset
the need to use furloughs or a reduction-in-force to reduce
expenditures.
Human Resources, County Attorney
To be requested.
To be requested.
To be requested.
To be researched.
Robert H. Drummer, Senior Legislative Attorney
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMP ACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
Not applicable.
Not applicable
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Douglas L.
R",we.
FSA, MAAA, EA
Principal
MERCER
1:":":1
~
MARSH MERCER KROll
GUY CARPENTER OLIVER WYMAN
120 East Baltimore Street, 20th Floor
Baltimore, MD 21202-1674
4103472806 Fax 410 7273347
douglas.rowe@mercer.com
www.mercer.com
April 27, 2009
Mr. Wes Girling
Montgomery County Government
101 Monroe Street, Seventh Floor
Rockville, MD 20850-2589
Confidential
Via Electronic Mail
Subject:
Imputed Compensation Pension Cost
DearWes:
This letter summarizes the cost calculations you requested for the imputed compensation bill. The
calculations are based on .the July 1, 2008 actuarial valuation data for group A, E, F, G and H
members. The actuarial assumptions and methods and plan provisions are the same as those used in
our July 2008 actuarial valuation report except for the assumptions and incentive provisions noted
below. Please note that actual cost of the imputed compensation will differ based on the number of
individuals that are active as of July 1, 2009.
We have projected all costs frOm the July
1,
2008 valuation date to the effective date of July 1, 2009
using standard actuarial approximation techniques. By cost/savings, we mean the change in Normal
Cost and an amortization of any changes in unfunded liability unless otherwise indicated.
Cost/savings will change over time as experience develops.
Cost Calculated From Two Viewpoints
We have calculated the cost of imputing pay from two viewpoints - just the legislation (which
increases benefits by imputing pay) that we were provided, and as a package which takes away
previously negotiated pay increases, but then calculates pensions as if those pay increases had
occurred. The cost for the second viewpoint is that employee contributions are not made on the
imputed pay.
Other Considerations - Legislation Only Viewpoint
We have recommended that the County consider a shorter amortization period for future plan
improvements in order to restore the funded ratio more quickly following a benefit improvement and in
order to better align the cost of the improvement with the service of participants receiving an increase
for service already performed. Applying that concept to this retirement program might result in a 10 to
20 year amortization period. We show detailed results below for the County's traditional 40 year
amortization period.
The dollar impact of the Normal Cost increase on the County's contribution will tend to increase as
employees near retirement, but decrease as the number of affected employees decreases over time.
Please let me know if you would like a projection to quantify this pattern. Everything else being equal,
the cost impact will increase (decrease)
if
actual future pay increases exceed (trail) assumed pay
Consulting. Outsourcing. Investments.
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MERCER
[I
~
MARSH MERCER KROLL
GUY CARPENTER OLIVER WYMAN
Page 2
April 27, 2009
Mr. Wes Girling
Montgomery County Government
increases. The amortization payment will remain level for the chosen period - 40 years unless a
shorter period. is chosen.
Other Considerations - Package Viewpoint
Lower employee contributions also reduce "refund" benefits (e.g., the return of employee contributions
to nonvested terminated employees) but this impact is negligible compared to the contributions
themselves. Employee contributions are subtracted from the total required contribution each year to
determine the County's contribution. The reduced subtraction (which results in a higher County
contribution) due to the package will decrease over time as employees on July 1, 2009 leave
employment.
Plan Provisions
• Employees on July 1, 2009 in groups A, E, and H would receive benefits as if their gross pay
increased 4.50% on July 1, 2009 and remained 4.50% higher than actual pay for the remainder of
their careers. This does not include benefits that are based on employee contributions.
• Employees on July 1, 2009 in group F would receive benefits as if the.ir gross pay increased
4.25% .on July 1, 2009 and remained 4.25% higher than actual pay for the remainder of their
careers. This does not include benefits that are based on employee contributions.
• Employees on July 1, 2009 in gro.up G would receive benefits as if their gross pay increased
4.00% on July 1,2009 and remained 4.00% higher than actual pay for the remainder of their
careers. This does not include benefits that are based on employee contributions.
• This legislation does not apply to Retirement Savings Plan or Guaranteed Retirement Income
Plan participants.
Estimated Costs of Proposed Changes
Annual Costs using 40-year amortization for represented and non-represented members.
Legislation Alone
Package
A
E
F
Group G
Group H
Total
$1,656,000
$ 975,000
$2,233,000
$1,938,000
$1,787,000
$8,589,000*
$155,000
$ 90,000
$185,000
$190,000
$155,000
$775,000
Numbers may not add up due to rounding.
* The total would increase to $10,673,000 if a 15 year amortization period is used.
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MERCER
r:-:-:t
MARSH MERCER KROll
~
GUY CARPENTER OLIVER WYMAN
Page 3
April 27, 2009
Mr. Wes Girling
Montgomery County Government
Presumably, you want to use one column above or the other, depending on the viewpoint. You would
not want to add the columns.
Increase in Actuarial Accrued Liability for represented and non-represented members
Legislation Alone
Package
$14,166,000
$ 7,094,000
$16,968,000
$14,962,000
Group H
Ins.ignificant
Decrease
$15,058,000
$68,248,000
Total
Numbers may not add up
Please let me know if you have any questions or need any further information. I can be reached
at
410 347 2806. I meet the Qualification Standards of the American Academy of Actuaries to render the
actuarial opinion contained in this letter. I am not aware of any direct or material indirect financial
interest or relationship, including investments or other services that could create a conflict of interest
that would impair the objectivity of our work
Sincerely,
Principal
~. ~we~
MAAA,
EA
Copy:
Aquil Ahmed, Mercer
The information contained in this document (including any attachments) is not intended by Mercer to
be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue
Code that may be imposed on the taxpayer.
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MEMORANDUM
DATE:
May 6, 2009
Management and Fiscal Policy Committee
Thomas Lowman, Bolton Partners, Inc. -,-
TO:
FROM:
SUBJECT:
L
Comments on the Pension Amendment/definition of compensation
I have reviewed the May
4th
memo from Joseph Beach to Phil Andrews, and Mercer's April 27
th
letter to Wes Girting. These both addressed the pension cost associated with changing the
definition of compensation due to elimination of previously negotiated wage increases. The
higher annual pension cost of $8.589 million looks reasonable, given that the active liability is
about $1.5 billion.
I was asked to comment on the amortization period. I agree with the fourth paragraph of
Mercer's April 27th letter that a 10-20 year amortization period would be more appropriate.
Basically, there is no good reason to fund this beyond the time when those benefiting from the
change will be working. Thus, Mercer's 15 year amortization cost of $10.673 million is more
appropriate.
My understanding is that this change is permanent for all current employees; this means that
someone retiring 20 years from now, will have their pension based on a higher pay amount then
they actually will be receiving in 17-20 years (however, someone hired on
7/1/09
will not have
such an advantage). There are reasons to argue an alternative position: any change of this sort
should apply as an add-on but only to pay earned during the duration of the union contract (when
the additional pay increase was eliminated). This more limited design would have a materially
lower cost and can legitimately be said to addresses the same issue (even if leaving open the
need to have future negotiations over whether the pay levels have "returned" to the appropriate
level).
My understanding is that Montgomery County is not alone in considering this issue. Anne
Arundel County has also prepared proposed legislation. However, Anne Arundel County's
proposal only increases compensation in FYIO. If someone's final average pay does not include
pay in FYIO (most will leave far enough into the future that it will not include FYIO), there
would be no impact on their pension. This makes the cost materially less than what Mercer
determined for the more generous proposal.
My main concern is over the funded status of the plan and the projected contribution increases.
The plan's recent serious investment losses will start showing up in FYl1 contributions and be
fully reflected by FYI5. The current FYI0 contribution of $115 million, will likely climb by
tens of millions. I appreciate the reason for passing a bill of this nature, but it should not be
passed without a full appreciation of the future funding demands that will arrive shortly (and
ideally a belief that these increases can be handled).
(f)
Bolton Partners, Inc.
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OFFICE OF THE COUNTY ATTORNEY
Isiah Leggett
County Executive
Marc P. Hansen
Acting County Attorney
MEMORANDUM
TO:
Wes Girting
Office of Human Resources
Marc Hansen
JlY)a:",.,.
~
Acting County Attorney
April 18,2010
Bill 16-10, Retirement-Imputed Compensation Limit
FROM:
DATE:
RE:
Kathleen Boucher, Assistant Chief Administrative Officer, has asked this Office to review for
legal sufficiency Bill 16-10. The Bill, which limits an imputed compensation increase for
retirement benefits calculation purposes to FY 2010, raises the issue of whether the Bill violates
the contract clause of the United States Constitution. I conclude that Bill 16-10 does not violate
the contract clause, because the legislation operates prospectively.
Contract Clause
Analysis
Article I,
§
10, clause 1 of the United States Constitution provides that "No State shall... pass any
Law impairing the Obligations of Contracts..." Courts have held that this clause does not
prohibit governments from impairing contracts, but limits a government's right to do so. A
violation of the contract clause occurs only if the government substantially impairs a party's right
under the contract. Legitimate expectations of the parties detennine whether the impainnent was
substantial. However, a government may substantially impair a contract if reasonable and
necessary to serve a legitimate public purpose. Courts generally defer to the government in
detennining the reasonableness and necessity of a particular measure, unless the government
seeks to impair its own contracts.
But where the government acts to impair its own contracts, the courts apply a more rigorous
analysis to determine if the impainnent is appropriate. A court will not uphold legislation that
101 Monroe Street, Rockville, Maryland 20850-2540· amy.moskowitz@montgomerycountyrnd.gov
240-777-6793 • TID 240·777·2545 • Fax 240·777·6705
1 •
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impairs a government's own contracts unless the impairment is both reasonable and necessary.
Reasonableness is determined in light of whether the contract had "effects that were unforeseen
and unintended by the legislature". Necessity means that the government did not have a less
drastic modification available and the government could not achieve its goals without altering
the contractual terms.
l
Maryland courts have held that pension plans statutes establish contractual rights between
employees and the government. Although the pension plans constitute contractual benefits,
under certain circumstances, governments can modify the terms of a pension plan as long as the
changes do not adversely affect the benefits, or if adversely affected, are
r~laced
with
comparable benefits? In
Baltimore Teachers Union v. Mayor and City Council,
the Fourth
Circuit Court of Appeals noted that the Supreme Court provided little guidance as to what
constitutes substantial impairment, but concludes that a substantial impairment occurs "where the
right abridged was one that induced the parties to contract in the first place . .. or where the
impaired right was one on which there had been reasonable and especial reliance.,,4 Following
the Fourth Circuit's decision in
Baltimore Teachers Union,
the United District Court for
Maryland found that the diminution of pension benefits is more likely than not a substantial
impairment because individuals plan their lives based on pension benefits. s
The Contract Clause Prohibits Retroactive Impairment
Generally a contract clause issue only exists if the legislation operates retroactively, not
prospectively. There can be no expectation that pension plans can not be altered as to future
benefits to be earned by future service. As the United States District Court for Maryland noted
in
Maryland State Teachers Association, Inc. v. Hughes
6 ,
a government cannot enter into a
contract binding subsequent legislatures to pay govenunent employees a specified level of
compensation in the future. The Court stated,
In fact, the plaintiffs [the Teachers Association], presumably recognIztng the
preposterousness of a position that a contract of this type is irrevocable, admit that the
contract asserted to exist here may be altered.
Under Maryland law, the State has reserved the power to amend or alter pension
contracts, and that reserved power " ... is part of each pension plan which a legislature
enacts, whether explicitly or not." [Citations omitted}
7
Hughes
involved a number of prospective changes to the Maryland teachers' retirement system
that included a change to the formula used to calculate retirement benefits from 1.8% of average
United States Trust a/New York v. New Jersey,
431 U.S. 1 (1977);
Allied Structural Steel Co. v. Spannaus, 438
U.S. 234.
2
City a/Frederick v. Quinn,
371 A.2d 724 (1977).
36 F.3d 1012 (4
th
Cir. 1993).
4
Id.,
1017.
5
Andrews v. Anne Arundel County,
931 F.Supp. 1255 (1996),
affirmed without opinion,
114 F.3d 1175 (1997),
cert.
denied
522 U.S, 1015 (1997)
~
594 F. Supp. 1353, 1362 (1984).
·See also, Howell v. Anne Arundel County.
14 F. Supp. 2d 752 (D. Md. 1998).
'Id.• 1362.
I
101
Monroe
StTeet,
Rockville,
Maryland
20850·2540·
amy.moskowitz@montgomerycountymd.gov
240·777·6793 • TID 240·777-2545 • Fax 240·777·6705
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final compensation to .8% of average final compensation for years of service earned after the
effective date ofthe legislation. The Court upheld these changes because they were prospective.
Impairment Permitted if Necessary and Reasonable
If there is a retroactive impairment, the necessity and reasonableness of a particular legislative
act is a factual inquiry. In
Baltimore Teachers Union v. Baltimore,s
the Fourth Circuit held that
a mid-year City salary reduction plan adopted to meet immediate budgetary shortfalls did not
violate the contract clause. Although the court found that Baltimore City had substantially
impaired its contract with its employees, the Court concluded that the City's action was
reasonable and necessary. Preserving the City's financial integrity was a significant public
purpose justifying City action.
Although the US District Court in
Hughes
held that the plaintiffs did not suffer any impairment
because the changes to the pension plan were prospective, the Court discussed whether the
changes were reasonable and necessary had there been an impairment. The Court concluded that
due to the financial circumstances of the pension system and the State, the non drastic nature of
the impairment and the unavailability of a more moderate course of action, the changes would be
permitted.
On the other hand, in
Andrews v. Anne Arundel Count!,
which involved retroactive changes to a
pension plan, the Court did not find the County's action to be reasonable and necessary.
Although the County argued the legislation was necessary for the restoration of the actuarial
soundness of the A&E Plan, the Court ruled that the County "has failed to make a sufficient
showing that the means which it has adopted to address the problem is the least drastic
available."lo The Court also noted that the County acknowledged that an emergency did not
exist and that courts have typically upheld "such extreme modifications only in the face of an
emergency or temporary situations". ll
Application to Bill 16-10
The Montgomery County Code creates a contract by providing the terms of the defined benefit
retirement plan (ERS). The ERS provides a monthly retirement benefit generally based on the
highest average consecutive 36 months of earnings and years of credited service. Last year, in
accordance with the collective bargaining agreements, the Council amended the definition of
earnings to provide that a member's benefit would include a 4.5% cost of living adjustment
(COLA) for FY 201O-even though the COLA was not, in fact paid to employees. This means
that, unless amended, any future increase in earnings would include the 2010 COLA and could
impact a member's retirement benefit regardless of the year a member retired. The proposed
legislation limits the 2010 COLA to 2010 earnings. This means that only members who retire
with 2010 included as their highest average consecutive 36 months of earnings would benefit.
F.3d 1012
(4
th
eir.
1993),
cert. denied,
510 U.S. 1141 (1994).
9
See
fn
5,
supra.
'
w
931 F.Supp. at 1266,
IJ
ld.
B
6
101 Monroe Street, Rockville, Maryland 20850·2540' amy.moskowjtZ@montgomer:ycountvmd.gov
240-777-6793' ITD 240-777-2545' Fax 240-777-6705
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All other members would no longer have the COLA included in their earnings for the purpose of
calculating their pension benefit.
In order for a contract clause violation to occur in a pension plan statute, the legislation must
operate retroactively. Bill 16-10 operates prospectively because the effective date is July I,
2010, and earnings would include the imputed COLA for fiscal year 2010. The imputed COLA
would not apply to future earnings and any member whose highest average consecutive
36
months of earnings includes 2010 receives the imputed COLA.
One might argue that the legislation does have a retroactive effect because the majority of
members will no longer have the imputed COLA included in their earnings for years of service
earned before June 30, 2010. For example, without the proposed legislation a member whose
imputed COLA equaled $1,000 would have that $1,000 included in the member's benefit even if
that member retired in 2020. Under the Bill, the member no longer receives that $1,000 COLA
even with regard to service earned before the change in law. But this argument assumes
continued COLA's that will build on top of the elevated base created by the imputed COLA
granted in FY 2010. Employees have no contractual right to expect compensation increases in
the future. In fact, no legal principle would prevent
a
future Council from nullifying the effect of
the imputed COLA by offsetting a future COLA by an appropriate amount. Basing an argument
for retroactivity on some perceived right to future compensation increases is flawed for the
reason pointed out in
Hughes-the
power to amend pension contracts is reserved to the
government.
Because
I
have concluded that the Bill does not have a retroactive effect,
I
have found that it is
not necessary to determine whether the change made by Bill 16-10 would constitute a necessary
and reasonable impairment. Nevertheless, because litigation has been threatened by at least one
employee union,
I
recommend that significant information concerning the depth of the current
budget crisis that has overtaken the County should
be
included in the legislative history of Bill
16-10 so that an alternative argument can be made that the change proposed by Bill
16~10
is
reasonable and necessary.
Please let me know if you have any questions or concerns about this advice.
Cc:
Kathleen Boucher
Amy Moskowitz
Joe Beach
Joe Adler
Ed
Lattner
Bob Drummer
101 Monroe Street, Rockville, Maryland 20850·2540· amy.rnoskowitz@montgornervcountymd.gov
240-777 -6793 • TID 240-777-2545 • FaJ( 240-777·6705
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MEMORANDUM
April!, 2010
TO:
FROM:
SUBJECT:
Steve Farber, Council Staff Director
Robert H. Drummer, Senior Legislative Attorney
Council's Authority to Amend the Imputed Compensation Law
You have requested an opinion concerning the Council's authority to amend the changes
to the retirement laws enacted in Expedited Bill 18-09, Personnel-Retirement-Imputed
Compensation. Specifically, you have requested a review of the Council's authority to amend
the retirement laws to limit the effect of the imputed compensation to the calculation of regular
earnings for FY 10 only.
Background
Bill 18-09 was introduced at the request of the Executive to implement collective
bargaining agreements with the 3 County employee unions last year. Each of these agreements
contained a provision to "postpone" a previously negotiated general wage adjustment, but also
provided that the calculation of regular earnings used to determine a retirement benefit must
include the general wage adjustment for FYI0 as if the employee had received
it
on July 1,2009.
This imputed compensation is scheduled to carry over into the calculation of regular earnings
used to calculate a defined benefit pension for the rest of an employee's County career.
1
The
County's actuary estimated that this imputed compensation would require the County to increase
its annual contribution to the ERS Trust Fund by $8.589 million per year for the next 40 years.
2
Issues
1. Can the Council, without further collective bargaining, enact a Bill that would modify
laws which resulted from collective bargaining agreements or involves issues that are
within the scope of collective bargaining?
For the reasons discussed below, Council staff concludes that the Council has complete
authority to enact legislation which involves a mandatory topic of collective bargaining or
amends a law that was enacted to implement a collective bargaining agreement.
Bill 18-09 also provided an imputed compensation increasing the Employer's contribution to the Retirement
Savings Plan and the Guaranteed Retirement Income Plan for FY 10 only. .
2
The actual savings from limiting this imputed compensation to FYIO is estimated to be $7.2 million for FYIl.
I
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Delegation of legislative authority. The current County Charter was adopted by the
voters in 1968, as authorized by Article XI-A of the Maryland Constitution. Article XI-A, §3
provides that:
Every charter so formed shall provide for an elective legislative body in which
shall be vested the law-making power of said City or County.
Such legislative
body in the City of Baltimore shall be known as the City Council of the City of
Baltimore, and in any county shall be known as the County Council ofthe County.
... the
County Council of said County,
subject to the Constitution and Public
General Laws of this State,
shall have full power to enact local laws ofsaid City
or County including the power to repeal or amend local laws of said City or
County enacted by the General Assembly,
upon all matters covered by the express
powers granted as above provided, and, as expressly authorized by statute.
(Emphasis added)
Charter § 101 vests all ofthe County's legislative powers in the County Council:
All legislative powers which may be exercised by Montgomery County under the
Constitution and laws of Maryland, including all law making powers heretofore
exercised by the General Assembly of Maryland but transferred to the people of
the County by virtue of the adoption of this Charter, and the legislative powers
vested in the County Commissioners as a District Council for the Montgomery
County Suburban District, shall be vested in the County Council ...
.. (emphasis
added)
The Maryland Court of Appeals has consistently restricted the delegation of the
legislative power assigned to a county council in a home rule charter county. See
Mugford
v.
Baltimore,
185 Md. 266 (1945) (agreement with union to deduct dues from employees was an
unlawful delegation of governmental power);
MCEA
v.
Anderson,
281 Md. 496, 508 (1977)
(arbitration to determine public employees compensation was an unlawful delegation of
legislative authority);
Baltimore
v.
AFSCME,
281 Md. 463 (1977) (MOD between union and
employer could not bind the employer to propose certain budget appropriations for employee
salaries). In
Office
&
Professional Employees
v.
Mass Transit Administration,
295 Md. 88, 97
(1982), the Court opined with regard to collective bargaining:
It
is established in this State that, absent express legislative authority, a
*
*
*
government agency cannot enter into binding arbitration or binding collective
bargaining agreements establishing wages, hours, pension rights, or working
conditions for public employees.
The express legislative authority for a County to enter into binding collective bargaining
agreements must flow from either a public general law enacted by the General Assembly or the
County Charter. In this County it derives from the Charter. Charter §51 0 authorizes the Council
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to enact a collective bargaining law with binding arbitration for police officers.
3
§510A does the
same for career fire fighters, and §511 authorizes the Council to enact a collective bargaining law
for other County employees that may include binding arbitration.
The legislative history of the first collective bargaining law for police officers in 1982
(Bill 71-81) indicates that the Council interpreted Charter §51O to authorize arbitration of
collective bargaining impasses that binds the Executive, but not the Council. Both the Executive
and the police union (Fraternal Order of Police Lodge 35) agreed that §510 required the new
collective bargaining law to include interest arbitration of collective bargaining impasses, but
disagreed on whether the Council, as well as the Executive, must be bound by an arbitration
award. The FOP argued at the Council worksessions that if interest arbitration was not binding
on the Council
it
could not be considered classic interest arbitration. The Council ultimately
rejected this argument, and the interest arbitration included in the enacted law did not bind the
Counci1.
4
The Council enacted a separate collective bargaining law under each of these Charter
amendments (Police: County Code §§33-75 through 33-85; County employees: County Code
§§33-101 through 33-112; Fire and Rescue employees: County Code §§33-147 through 33-157).
Each collective bargaining law provides that the Executive, as the employer, must bargain with
the certified employee representative over certain mandatory topics of bargaining. Under each
law the Council must approve -- and retains the authority to reject -- any term or condition of a
collective bargaining agreement that requires an appropriation of funds or enactment, repeal, or
modification of a County law or regulation.
In none of these laws did the Council delegate its
legislative power to enact and amend County legislation.
The Executive has a duty under
each collective bargaining law to bargain with a certified employee representative; the Council
does not.
For example, the collective bargaining agreement executed by the Executive and
MCGEO in 2008 provided that
"the parties shall submit legislation
to the County Council that
would establish a one-time irrevocable choice between the Retirement Savings Plan (RSP) and
the Guaranteed Retirement Income Plan (GRIP) for non-public safety employees hired on or after
July 1, 1994."
(emphasis added)
The agreement did not bind, and could not have bound, the
Council to enact the proposed legislation.
(The Executive submitted this proposed legislation
and the Council enacted
it
as Bill 11-08.)
The Council's exercise of its legislative power to implement a collective bargaining
agreement necessarily includes the power to repeal or amend the same legislation at any point in
A recent reported decision by the Court of Special Appeals in
Wicomico County FOP v. Wicomico County,
No.
2034 (February I, 20 I 0) calls into question the legality of the Montgomery County Charter provisions requiring the
Council to enact collective bargaining laws for police and fire with binding arbitration. The Court held that a charter
provision requiring the Council to enact a collective bargaining law with binding arbitration violated the Maryland
Constitution because
it
was tantamount to enacting legislation in the Charter. The Court held that the collective
bargaining law enacted by the Wicomico Council was therefore invalid. Montgomery County Charter §510 (police)
and §51OA (fire) each requires the Council to enact a collective bargaining law with binding arbitration.
4
This legislative history is detailed on pages 66-70 of Office of Legislative Oversight Report No. 2009-5, released
December 2, 2008, written by Leslie Rubin of aLa.
3
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the future. This legislative power exists without regard to whether the law involves a mandatory
topic of bargaining under the collective bargaining laws or was enacted to implement a collective
bargaining agreement executed by the Executi:ve and an employee representative; nothing in the
Charter or the collective bargaining laws limits it in those cases.
2. Would a law limiting the imputed compensation to the calculation of regular earnings
for FYIO impair a County employee's contractual rights in violation of the Contract Clause
of the United States Constitution?
The Executive agreed with each of the 3 County employee unions during collective
bargaining in 2009 to submit legislation to the Council providing for the imputed compensation.
Each collective bargaining agreement was transmitted to the Council for approval of items
requiring funding or legislation. The Council enacted Expedited
Bill
18-09 to implement the
imputed compensation. Therefore, it is important to determine if a law limiting this imputed
compensation to FY10 only would impair a County employee's contractual rights in violation of
the Contract Clause of the United States Constitution
(Art.
I, §10). In
Parker
v.
Wakelin, 123
F3d
1
(1s1 Cir.
1997),
cerl. denied, 140
L.
Ed. 2d
813, 118
S.
Ct.
1675 (1998), the Court
summarized the analysis necessary to determine this question:
The Supreme Court has elaborated an analysis under which a court must first
ascertain whether a change in state law has resulted in "the substantial impairment of
a contractual relationship."
General Motors Corp.
v.
Romein, 503 U.S.
181, 186, 112
S.
Ct. 1105, 1109,
117
L.
Ed. 2d
328 (1992) (quoting
Allied Structural Steel Co.
v.
Spannaus,
438
U.s.
234, 244, 98
S.
Ct.
2716, 2722, 57
L.
Ed. 2d
727 (1978)). Next,
the reviewing court must determine whether the impairment is nevertheless justified
as "reasonable and necessary to serve an important public purpose."
United States
Trust Co.,
431
U.S.
1
at
25, 97
S.
Ct.
1505 at
1519, 52
L.
Ed. 2d
92.... The first
step described above can be further broken down into "three components: whether
there is a contractual relationship, whether a change in law impairs that contractual
relationship, and whether the impairment is substantiaL"
In
Bd. of Trustees.
v.
Mayor
&
City Council ofBaltimore City,
317 Md. 72, 100 (1989),
the Maryland Court of Appeals held that "under Maryland law, pension plans create contractual
duties toward persons with
vested
rights under the plans."
(emphasis added)
Therefore, a County
retirement plan can create a contractual duty toward an employee with a vested right under the
plan. However, a law enacted by the Council during FYI 0 that limits the imputed compensation
to the calculation of regular earnings for FYlO would only apply prospectively. In
Howell
v.
Anne Arundel County,
14 F. Supp. 752 (D. Md. 1998), the Court held that a County law
decreasing the maximum cost of living adjustment to a County pension that only applied to
benefits accrued after the effective date of the law did not violate the Contract Clause because
it
did not retroactively reduce a member's vested benefits. Similarly, a law enacted in FYlO that
limits the imputed compensation to FYlO only does not retroactively reduce a vested benefit.
It
only affects the calculation of regular earnings for future years. Therefore, the law would not
impair a contractual relationship in violation of the Contract Clause.
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Even, assuming
arguendo,
if an employee's contractual rights have vested, every
modification of a contract does not result in an unconstitutional impairment.
5
The legislative
body always retains the right to make reasonable modifications to vested rights for an important
public purpose.
In
Baltimore Teachers Union, et al
v.
Mayor and City Council of Baltimore, 6
F.3d 1012 (4
th
Cir. 1993), the Court held that a furlough imposed during a fiscal year did not
violate the Contract Clause even though it was a substantial impairment of vested contractual
rights because the modifications made by the City were reasonable under the circumstances. The
Court relied on evidence of reductions in State funding that caused a budget deficit for the City.
The Court held that the City's decision to use furloughs to help balance its budget was a
reasonable alternative to more detrimental actions, such as layoffs.
The County's historic reduction in revenue in the past two years and its recent reduction
in reserve funds would provide strong factual support for a Court to conclude that a law limiting
the imputed compensation to FYIO was a reasonable modification for an important public
purpose. The recent decision in
FOP
v.
Prince George's County,
645 F. Supp. 2d 492 (D. Md.
2009), holding that a County-imposed furlough violated the Contract Clause underscores the
importance of evaluating the facts surrounding the decision to modifY a contract. In
FOP
v.
Prince George's County,
the Court held that the decision to impose furloughs on employees soon
after approving pay raises and refusing to dip into a $230 million reserve fund made the County's
decision unreasonable under the circumstances. The facts in
FOP
v.
Prince George's County
are
distinguishable from the facts behind a law which the Council could enact during FYI0 that
would limit the imputed compensation.
For these reasons, a law limiting imputed compensation to the calculation of regular
earnings in FYI0 would not violate the Contract Clause in Article I, §10 of the United States
Constitution.
Since the collective bargaining agreement with the FOP and MCGEO each expires on June 30, 2010, a law limiting
the imputed compensation to FYIO earnings enacted during FY10 may not even modifY an existing contract.
However, the collective bargaining agreement with the IAFF expires on June 30, 2011.
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