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MATTER CENTRAL SCHOOL DISTRICT NO. 2 TOWNS COEYMANS v. NEW YORK STATE TEACHERS' RETIREMENT SYSTEM ET AL. (11/21/68)
COURT OF APPEALS OF NEW YORK
1968.NY.43620 <http://www.versuslaw.com>; 244 N.E.2d 1; 23 N.Y.2d 213
decided: November 21, 1968.
IN THE MATTER OF CENTRAL SCHOOL DISTRICT NO. 2 OF TOWNS OF COEYMANS, NEW SCOTLAND, BETHLEHEM AND NEW BALTIMORE ET AL., APPELLANTS,v.NEW YORK STATE TEACHERS' RETIREMENT SYSTEM ET AL., RESPONDENTS
Matter of Central School Dist. No. 2 v. New York State Teachers' Retirement System, 27 A.D.2d 265, affirmed.
John P. Walsh, James B. Donovan and Raymond J. Messina for appellants.
Bruce Bromley, Alan J. Hruska and Donald Strauber for respondents.
Judges Scileppi, Bergan and Keating concur with Chief Judge Fuld; Judge Breitel dissents and votes to modify in a separate opinion in which Judges Burke and Jasen concur.
Matter of Central School Dist. No. 2 v. New York State Teachers' Retirement System,
Judges Scileppi, Bergan and Keating concur with Chief Judge Fuld; Judge Breitel dissents and votes to modify in a separate opinion in which Judges Burke and Jasen concur.
This appeal poses important and far-reaching questions as to the administration of the New York State Teachers' Retirement System. More particularly, it concerns the power of the System's Retirement Board to take certain factors into account in computing and fixing the rates of employers' contributions.
The petitioners are local school districts which initiated this proceeding, pursuant to article 78 of the CPLR, on behalf of the more than 800 such districts which participate in the system. Their petition, containing five separate counts, challenges as excessive the rates of contribution imposed on them as employers for the fiscal years 1959 through 1965.*fn1 The respondents attacked the sufficiency of the petition and, in addition, charged that the proceeding was barred by the Statute of Limitations and by laches. The court at Special Term agreed with the defendants on both scores; the Appellate Division, not passing on the merits of the controversy, affirmed the dismissal of the petition on the ground that the proceeding was not timely brought. Since the court has concluded that the board acted within permissible statutory limits in arriving at each of the challenged determinations, we find it unnecessary to consider the respondents' further contention as to whether the proceeding was time-barred.
At the outset, it will be not only helpful to understand the structure of the Retirement System as established by the Education Law (art. 11) but important to bear in mind that it is the Retirement Board's primary responsibility to insure that all of the liabilities of the system to its teacher beneficiaries can be met when they accrue.*fn2
The Teachers' Retirement System is actually a congeries of separate funds, under the administration of the Retirement Board (Education Law, § 504, subd. 1; § 508), which are used to provide various benefits for public school teachers throughout the State. Some of these benefits -- called annuities -- are financed out of the teachers' own contributions to an "Annuity Savings Fund" (§ 516), while the remainder -- termed pension benefits -- are paid for by the local school districts through their contributions to a "Pension Accumulation Fund."*fn3 In the present case, we are concerned only with the employers ' contributions and the methods used by the board to compute their amounts.
In accordance with the statutory scheme, the employers' payments to the Pension Accumulation Fund were made up of three components, namely, a "normal contribution" (§ 517, subd. 2, par. b), a "deficiency contribution" (§ 517, subd. 2, par. c) and a "special deficiency contribution" (§ 517, subd. 2, par. c). Each of these was computed at a different rate and designed to achieve a different purpose but, taken together, they were meant to be sufficient to enable the fund to meet all of the obligations imposed upon it -- the "total pension liability." If the amounts collected were insufficient for this purpose, and the fund did not build up sufficient reserves, then, the board would be required to assess the employers directly in the year that the unanticipated and unaccounted for liabilities had to be paid (§ 517, subd. 2, par. d). On the other hand, if the board were to collect more than it needed, then, the excess would eventually be returned to the employing school districts in the form of reduced contribution rates in later years. It should, therefore, be made clear that, in the long run, the overall contributions of the employers will always equal the amount necessary to finance the fund's liabilities regardless of the outcome of this case.
Each of the five causes of action set out in the petition challenges the board's assessment of one of the three types of contributions. Before discussing these claims, we deem it desirable to consider the nature of the contributions, how they are computed and the purposes they serve.
The normal contribution is the principal source of revenue for the Pension Accumulation Fund. Its rate of assessment is determined on a "level percentage" basis -- that is, the rate is expressed in terms of a percentage of the teachers' salaries which will, theoretically, remain unchanged from year to year.*fn4 In actual practice, however, the rate is not level at all but is constantly adjusted to account for changes in the fund's liabilities and the inevitable inaccuracies in actuarial estimates of their costs. Although the statute requires that such adjustments be made every five years (§ 508, subd. 5), the board has actually made it a practice to reassess the rate annually.
Section 517 (subd. 2, par. b) provides for two different methods of determining the liabilities which are to be financed through the normal contribution: a "first method," used concurrently with the deficiency contribution, and a "second method," to come into effect after the deficiency contribution has ceased.*fn5 The first method only provides for a limited portion of the fund's liabilities -- the death benefits and retirement pension payments for "new entrants" (teachers who joined the system after it was established in 1921). The amount collected was, therefore, insufficient to provide (1) for these benefits for teachers who were employed at the inception of the system, denominated "present teachers", and (2) for other liabilities of the fund, some of which are discussed below, on account of all teachers over and above their death and retirement benefits. These additional liabilities were to be financed through the deficiency contribution.
The second method, which is to be employed after the termination of the deficiency contribution, was originally intended to be used at a time when the normal contribution would be the sole source of revenue for the Pension Accumulation Fund. The statute provides that the rate is to be computed at a level sufficient to meet the "total liabilities of the pension fund" (§ 517, subd. 2, par. b). The second method was utilized for the first time in the fiscal year 1965.
The Deficiency Contribution
Because of the limited nature of the normal contribution as computed under the first method, there existed, from the beginning, an "amount of the total pension liability on account of all contributors and beneficiaries [which was] not dischargeable by the * * * normal contribution" (§ 517, subd. 2, par. c). This amount, called the "deficiency balance", was to be provided for through the deficiency contribution. The rate at which this contribution was to be assessed was computed in a manner completely unlike that used for the normal contribution. Instead of striving for a relatively constant percentage of the teachers' salaries, the deficiency contribution rate was designed to provide, at least, a certain dollar amount of revenue each year until the entire deficiency balance was eliminated.*fn6 The termination of the deficiency contribution was governed by section 517 (subd. 2, par. e); that provision reads in this way:
"The deficiency contribution shall be discontinued as soon as the accumulated reserve in the pension accumulation fund shall equal the present value, as actuarially computed and approved by the retirement board, of the total liability of such fund less the present value, computed on the basis of the normal contribution rate then in force, of the normal contributions to be received on account of teachers who are at that time contributors."
In other words, the deficiency contribution was to cease and terminate when the normal contribution and the assets of the fund were sufficient to finance its "total liabilities" and the deficiency balance was thereby liquidated.
The Special Deficiency Contribution
When the system was first established in 1921, it was contemplated that all of the liabilities of the fund would be covered either by the normal or the deficiency contribution. In 1956, however, the Legislature enacted an amendment to the statute which substantially increased the pension benefits to be accorded to the teachers (L. 1956, ch. 730). Financing these additional benefits through the methods then provided would have resulted in either a sharp increase in the normal contribution rate or a major extension of the deficiency contribution which, by then, had grown quite high due to the requirements of section 517 (subd. 2, par. d). In order to alleviate this burden, the Legislature created a special deficiency contribution, designed to provide a lower rate by amortizing the additional liability over an extended period of time.
Another large increase in the fund's liabilities arose from the decision of this court in Birnbaum v. New York State Teachers Retirement System (5 N.Y.2d 1). In that case, we held that a teacher's annuity benefits must be determined on the basis of mortality tables in effect when he joined the system, and could not be subsequently decreased.*fn7 Since the teachers' own contributions were insufficient to provide these benefits, the burden of this additional liability fell upon the Pension Accumulation Fund. Once again, the Legislature acted to lessen the burden upon the employers by providing that the amount of this new liability could be added to the special deficiency and amortized at the extended rate (L. 1959, ch. 141, § 2).
The most notable feature of the special deficiency contribution, aside from its low rate, was its limited flexibility and scope. It was used solely to finance the two liabilities just discussed -- the added benefits enacted in 1956 and the Birnbaum liability -- and, after the initial estimates of the cost of these liabilities, there was no provision for altering the rate in order to account for any inaccuracies in the estimates. The rate was initially fixed at a level which would have amortized the estimated cost of the liabilities over a 30-year period and, once determined, that rate continued to be assessed against the employers without change.
As already noted, each of the five causes of action in the petition challenges as excessive the board's assessment of one or another of the three types of contributions. The first and second counts charge that the board's continuation of deficiency contributions for the fiscal years 1963 and 1964 was contrary to section 517 (subd. 2, par. e). The third and fourth counts allege that the special deficiency contribution rate set by the board in 1958 exceeded the rate authorized by section 517 (subd. 2, par. c). And the fifth cause of action asserts that the normal contribution rate fixed by the board for 1965 was excessive in that it included components not authorized by section 517 (subd. 2, par. b). Study of each of these claims demonstrates that the challenged determinations were all within the scope of the board's authority and consistent with the statutory scheme and that, accordingly, no one of the counts states a valid or sufficient cause of action.*fn8
The First Cause of Action
As discussed above (supra, p. 221), section 517 (subd. 2, par. e) provides that the deficiency contribution was to terminate when the deficiency balance -- the value of the liabilities not dischargeable by the normal contribution and the assets on hand in the fund -- was eliminated. Based upon the items which had traditionally made up the deficiency balance in previous years, this situation (the termination of the deficiency balance) came about some time during the fiscal year 1963. The petitioners claim that the board, by assessing the full deficiency, had collected a substantial excess which ought to be returned. More specifically, the first cause of action alleges that the deficiency balance at the beginning of 1963 was about $20,000,000 but that the board had collected over $32,000,000 in that year through the deficiency contribution.
Even if we were to accept the petitioners' hypothesis that an excess was collected in the fiscal year 1963, it is clear that they would not be entitled to its return. As noted in the previous discussion of the deficiency contribution (supra, p. 221, n. 6), the amount to be collected from the employers through the deficiency contribution was in no way dependent upon the amount of the deficiency balance. As long as the deficiency contribution was still in effect, the board was required to assess, in each year, a minimum of 3% more than it collected the preceding year (§ 517, subd. 2, par. d). Thus, not only was it within the board's power to collect the amount it did in 1963 but, in point of fact, it would have been impermissible for it to have collected less.
Because of the minimum rate requirement, it was virtually inevitable that, in the final year, the deficiency contribution would exceed the amount of the deficiency balance and an excess would be collected. The statute imposes no requirement that the amount of this excess be directly returned to the contributing school districts, as the petitioners urge, but, presumably, contemplates that it would be added to the fund's assets, thereby reducing the amount of the normal contribution. Consequently, even assuming that the deficiency balance had been eliminated during the year 1963 and an excess collected, the petitioners have not established any right to the return of this excess. The first cause of action was, therefore, properly dismissed.
The Second Cause of Action
As stated (supra, p. 224), the deficiency balance, as it had previously been computed, would have been eliminated during the fiscal year 1963. By that year, however, the board had decided that this customary method of computing the deficiency balance failed to take into account a substantial liability of the Pension Accumulation Fund which was not being discharged by the normal contribution -- the liability for future interest deficits. If this liability were to be recognized, there would be a substantial increase in the deficiency balance which, the board concluded, justified extending the collection of the deficiency contribution through the fiscal year 1964. The petitioners maintain that the liability for future interest deficits could not properly be considered in the valuation of the deficiency balance and, in the second cause of action, question the validity of the continuation of the deficiency contribution for 1964 and demand the return of the entire amount of such deficiency contribution assessed in that year.
Before this question may be resolved, it is necessary to understand the cause and nature of the interest deficit liability of the Pension Accumulation Fund. Since 1921, when the system was first established, the board has been required to annually credit the accounts of the teachers in each of the system's funds at a "regular interest" rate -- defined as 4% for teachers who joined the system prior to July 1, 1948 and 3% for those who joined after that date (§ 501, subd. 9) -- even though the actual earnings on the system's investments were insufficient to provide such interest. Realizing that there would be years in which the system would not be able to pay regular interest out of its investment earnings and that additional payments would have to be made to meet this liability, the statute provided, from the very inception of the system, that the difference between the amount earned and the amount which had to be credited to the teachers' accounts -- namely, the "interest deficit" -- would be paid for by the employers through the Pension Accumulation Fund (§ 508, subd. 2).*fn9
Although the fund's obligation to pay for interest deficits was clearly a part of its total liability which was not dischargeable out of the normal contribution, no attempt was made to estimate the cost of this liability in advance, and interest deficit payments were added to the deficiency balance only in the year in which they had to be paid. However, in 1958, after interest deficits had occurred regularly for more than 10 years, the State Insurance Department recommended that the board begin planning for the financing of future interest deficits by adding their estimated cost to the deficiency balance before they accrued. By 1964, when the deficiency balance as it had previously been computed had been fully liquidated, the board was faced with the choice of either adopting the Insurance Department's recommendation or ceasing to assess any deficiency contribution. The former path was chosen for that year and, accordingly, the deficiency contribution was continued.
The contention that the board was required to ignore the anticipated liability of the fund for interest deficits in computing the deficiency balance is not borne out by the statute; there is simply nothing in the legislation to support such a contention. Although it was true that the primary item which made up the deficiency balance prior to 1964 was the fund's liability on account of "present teachers" -- those who had been employed before the system was established in 1921 -- there is no substance to the argument that the deficiency contribution was to be confined to meeting this "initial" or "historic" purpose. Indeed, the language of the statute points the opposite conclusion. It requires the board to determine the deficiency balance on the basis of the " total pension liability on account of all contributors and beneficiaries not dischargeable by the * * * normal contribution" (§ 517, subd. 2, par. c) and states that the contribution is to continue until "the present value, as actuarially computed and approved by the retirement board, of [such] total liability" is equaled by the fund's assets and future normal contributions (§ 517, subd. 2, par. e). The use of the words, "all contributors and beneficiaries", negates the notion that the deficiency contribution was designed solely to furnish funds for "present teachers," and the language of usection 517 (subd. 2, par. e) unmistakably gives the board the authority to "approve" the computation of liabilities and to adjust the amount of the deficiency balance accordingly.
We can only conclude that the words, "total liability," as they appear in the statute mean just what they say -- "total liability" -- and that the board was acting within the scope of its power when it decided to include the statutory liability for interest deficits in its computation of the deficiency balance. Since, as of 1964, the liability for interest deficits was not accounted for in the normal contribution and since it was, without question, a liability of the Pension Accumulation Fund, the board was thoroughly justified in adding that liability to its deficiency balance for the fiscal year 1964 and, on that basis, extending the deficiency contribution into that year.
The Third and Fourth Causes of Action
By their third and fourth causes of action, the petitioners challenge the special deficiency contribution rates which were assessed in each year since 1959 and seek an order directing the board to assess the rate differently in the future. It is urged that the board has failed to comply with the portion of section 517 (subd. 2, par. c), set forth below, which prescribes the method of fixing the rate:
"The actuary shall determine the annual payment which if made in each fiscal year commencing with the year beginning the first day of July, nineteen hundred fifty-eight, for a period of thirty years will provide for [the] special deficiency and the per centum of the total compensation of all contributors during the preceding school year which is ...