Opinion
HHBCV176036697S HHB-CV-18-6043023-S
12-31-2019
David G. Carter v. State Employees Retirement Commission et al. Richard Kay v. State Employees Retirement Commission et al.
UNPUBLISHED OPINION
Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Huddleston, Sheila A., J.
MEMORANDUM OF DECISION
Sheila A. Huddleston, Judge
These two administrative appeals challenge the determination of the defendant State Employees Retirement Commission (commission) that the plaintiffs’ pensions are limited by the application of two provisions of the Internal Revenue Code (Code) that govern qualified defined benefit pension plans provided by governmental employers. In each case, the plaintiff was a Tier I Plan B member of the state employees retirement system (SERS), and each had accrued more than forty years in state service before retiring. In each case, however, the plaintiff’s highest three-year average salary exceeded the compensation limit imposed by § 401(a)(17) of the Code, codified in 26 U.S.C. § 401(a)(17). The commission concluded that SERS is intended to be a qualified defined benefit plan and that § 401(a)(17) limits the compensation that can be considered in calculating the plaintiffs’ pension benefits. Application of § 401(a)(17) compensation limits substantially reduced the pension benefits the plaintiffs expected to receive. In addition, the commission concluded that even if the § 401(a)(17) compensation limits did not apply, the plaintiffs’ annual pension benefits would be limited by § 415 of the Code, codified in 26 U.S.C. § 415, which establishes maximum benefit payments for qualified plans.
The plaintiffs in the two appeals are represented by the same counsel. Because all parties have treated the legal issues in the two appeals as essentially the same, the appeals were consolidated for argument.
Pursuant to General Statutes § § 5-192e and 5-192f(e), a "Tier I" member is a member of the plan set out in General Statutes § § 5-157 to 5-192d, inclusive, which generally encompasses employees who became members of SERS before July 1, 1984. Pursuant to General Statutes § 5-157(a), "Part B" members are state employees who are SERS members and are also covered under Social Security in accordance with the Social Security Agreement between the state and the Secretary of Health and Human Services.
The plaintiff in each appeal challenges the application of the § 401(a)(17) and § 415 limits, claiming that the statutes governing SERS contain no provisions that require or allow the imposition of those limits. The commission claims, to the contrary, that various collective bargaining agreements between the state and the State Employees Bargaining Agent Coalition (SEBAC) superseded the applicable statutes and indicate that SERS is intended to be a qualified defined benefit plan. Qualified plans receive favorable federal tax treatment, including but not limited to the deferral of taxation on accrued benefits. Qualified plans must comply with all applicable Code requirements, including but not limited to § 401(a)(17) and § 415, or risk disqualification by the Internal Revenue Service. Plan disqualification would result in the forfeiture of significant tax benefits for all SERS members.
These appeals present unusual challenges for construction of the relevant statutes. Pursuant to General Statutes § 5-278, properly approved collective bargaining agreements, including SEBAC agreements, can supersede specific statutes, including pension statutes, but § 5-278 does not require that the superseding changes be codified to be effective. Because the terms of the agreements are negotiated through collective bargaining, some of the usual presumptions guiding statutory construction do not readily apply, and resources for resolving ambiguities may be more limited.
Notwithstanding these interpretive challenges, and for the reasons discussed herein, the court concludes that the SEBAC agreement for the period 1988-1994, as reflected in the Interest Arbitration Award and Opinion issued on September 25, 1989 (SEBAC I) applies to limit the plaintiffs’ pension benefits as provided by § 415 of the Code. The court further concludes that application of the § 415 limits to the plaintiffs does not improperly strip them of vested benefits and does not violate their constitutional rights.
The commission’s conclusion as to the applicability of § 401(a)(17) is not adequately supported by the commission’s analysis. The commission concluded that § 401(a)(17) was not addressed in SEBAC I but applies to the SERS plans through a resolution adopted by the commission in 1996. It makes a preemption argument, asserting that in light of the general intent to maintain a qualified plan, federal law requires the application of the Code limits. The commission does not cite persuasive authority for the proposition that a specific substantive change to a statute can be inferred from a general intent to maintain a tax-favored status. Nor is the court persuaded that the commission has statutory authority to "amend" SERS by a resolution. But the court is also not persuaded that SEBAC I did not include the § 401(a)(17) compensation limits. Although there is no express citation to § 401(a)(17) in SEBAC I, there are two provisions that incorporate the then-existing compensation limits of § 401(a)(17). The commission did not engage in any analysis of the significance of those provisions, nor did it, apparently, seek out additional evidence concerning the understanding of the parties who negotiated SEBAC I or the arbitrator who issued the award. Given the importance of the resolution of this issue to the parties and to the pension system as a whole, the court remands these cases to the commission to consider the significance of these two provisions in SEBAC I and to determine whether additional evidence is available to resolve any ambiguity therein.
I
THE COMMISSION’S FINDINGS AND CONCLUSIONS
Although these two appeals present virtually identical legal issues, the appeals arise from separate declaratory rulings. In each declaratory ruling, the commission made findings of fact regarding the individual plaintiff’s employment and salary history as well as findings regarding the statutes and collective bargaining agreements that govern SERS. It then drew legal conclusions from the facts found. Certain of the findings regarding SERS are made in one but not both of the decisions; certain of the findings address the same event but characterize it differently. No party has argued that such differences require a different outcome in the two cases.
A
CARTER APPEAL
On February 16, 2017, the commission issued a "Decision and Declaratory Ruling" in response to the petition for a declaratory ruling filed by David G. Carter. It found that Carter commenced employment with the state of Connecticut on September 1, 1977. He was most recently employed by the state as chancellor of the Connecticut State University system. As chancellor, he was not a member of a bargaining unit. He was a Tier I Plan B member of SERS.
Carter applied for retirement benefits at the age of 68.3 years on February 4, 2011, requesting an effective retirement date of March 1, 2011. At the time of his retirement, Carter had accrued 43 years and 9 months of credited state service, including the purchase of credit for ten years of service to other public systems, including the State Teachers Retirement System of Ohio and the Pennsylvania State University.
Carter’s highest annual earnings were $398,275, for the period from March 1, 2008 through February 28, 2009; $410,392 for the period from March 1, 2009 through February 28, 2010, and $424,273 for the period from March 1, 2010 through February 28, 2011. He also received a credit of $25,423 for vacation and longevity accruals. His average salary for the three highest years, including the vacation and longevity credit, was $419,454.33.
On or about March 1, 2011, the Retirement Services Division (division) estimated that Carter would receive a monthly benefit of approximately $30,410.21, or $364,922.54 annually, a sum that would subsequently be reduced by the Part B option. This calculation did not apply the limitations set forth in § 401(a)(17) or § 415. Carter claimed that he was never advised that his benefit would be subject to any such limitations.
The Retirement Services Division is a division of the Office of the Comptroller. "The execution of the directives and regulations of the [retirement] commission are delegated to the retirement division of the comptroller’s department. The retirement division maintains records and processes transactions in connection with the retirement system administered by the retirement commission." Regs., Conn. State Agencies § 5-155-7.
At the time of his retirement, it was determined that Carter would receive a monthly annuity of $16,021.25, payable as a 50 percent contingent annuity with his spouse. This calculation reflects the application of the limitations set forth in § 401(a)(17). The commission concluded that at the present time, Carter’s benefits are not limited by the provisions of § 415 but solely on the basis of § 401(a)(17). The commission further concluded that if the § 401(a)(17) limits did not apply, the § 415 limits would apply to limit Carter’s benefits.
Carter filed a timely appeal to this court from the commission’s declaratory ruling. While the appeal was pending, Carter died in Arizona, where he resided after retirement. His widow, Sandra Cavanaugh Holley, was appointed as his personal representative by an Arizona court and was substituted as party plaintiff before oral argument of his appeal.
The court had begun drafting this decision before the parties filed the supplemental briefs. The court has reviewed the briefs but its conclusions have not been altered by the arguments therein. The court does note, however, that the declaratory ruling issued in response to Lena Carter’s petition includes an exhibit that was not part of the administrative record in Carter’s appeal to this court and is relevant to the issues herein. That exhibit is a copy of Management Personnel Policy No. 89-1, signed by the state’s director of personnel labor relations, the commissioner of the Department of Administrative Services, and the Secretary of the Office of Policy and Management, which policy extends the provisions of SEBAC I to "employees exempt from the classified service or not included in any prevailing bargaining unit contract and employees of state-aided institutions as defined in Section 5-175, effective July 1, 1988." On November 13, 2019, months after these appeals had been argued, the commission filed a supplemental brief, arguing that the substituted plaintiff Holley had taken a position in another pending matter before the commission that conflicts with the position taken in this appeal. In opposition to a petition for declaratory ruling by Carter’s first wife, Lena Carter, who was seeking entitlement to contingent annuitant benefits under Carter’s pension pursuant to a domestic relations order approved by the court in a divorce action in 1997, Holley argued that she is entitled to Carter’s contingent annuitant benefits pursuant to a spousal waiver requirement established by SEBAC I. On November 26, 2019, the commission submitted a second supplemental brief, attaching the declaratory ruling issued by the commission in response to Lena Carter’s petition. On December 3, 2019, counsel for Holley filed a reply to the commission’s supplemental brief, arguing that Carter may be subject to the SEBAC agreements for certain purposes but that the SEBAC agreement cannot be used to strip Carter of his vested pension rights.
B
KAY APPEAL
On January 18, 2018, the commission issued a "Decision and Declaratory Ruling" in response to the petition for a declaratory ruling filed by Richard Kay. The commission found the following material facts concerning Kay’s employment history.
Kay commenced employment with the state in September 1974. He was most recently employed as a professor and associate dean at the University of Connecticut School of Law. He is a Tier I Plan B member of SERS.
During his employment, Kay made contributions to SERS through pre-tax payroll deductions. He also elected to make contributions to deferred compensation plans under Internal Revenue Code § § 403(b) and 457(b).
On June 28, 2016, Kay applied for retirement benefits, requesting an effective retirement date of September 1, 2016. He elected the 100 percent annuitant option. At the time of his retirement, Kay was 69 years old and had accrued 41 years and 6 months of credited state service.
Kay’s highest annual earnings were $308,771.48 for the period from August 2015 through July 2016; $290,332.52 for the period from August 2014 through July 2015; and $252,515.25 for the period from August 2013 through July 2014. His average salary for the three years was $283,873.08. For two of the years, these amounts were reduced by application of the § 401(a)(17) limits, so that Kay was credited with earnings of $265,000 for the period from August 2015 through July 2016 and $260,000 for the period from August 2014 through July 2015. Accordingly, Kay’s final average annual salary for purposes of determining pension benefits was $259,171.75.
The division estimated that Kay would receive a monthly benefit of approximately $17,889.33, or $214,671.96 annually, which would be reduced by his election of the Part B 100 percent annuitant option. Accordingly, Kay’s benefit was estimated at $15,151.97 per month. After a final audit, Kay was advised that he was entitled to an annual pension of $183,523.08, payable at $15,293.59 per month.
Kay also receives benefits from the § 403(b) and § 457(b) deferred compensation plans due to contributions he made to those plans. He currently receives the required minimum distributions from those plans. On November 20, 2017, for the 2017 calendar year, Kay withdrew the gross amount of $17,819.19 from the § 403(b) plan and the gross amount of $12,276.18 from the § 457 plan.
C
THE COMMISSION’S FINDINGS REGARDING SERS
The commission made the following findings regarding SERS in one or both of the decisions at issue in these appeals.
The commission’s Decision and Declaratory Ruling in the Carter case, issued on February 16, 2017, is cited herein as "Carter Decision," and the Commission’s Decision and Declaratory Ruling in the Kay case, issued on January 18, 2018, is cited herein as "Kay Decision."
Plan provisions governing Tier I are found in General Statutes § 5-160 et seq., and in various collective bargaining agreements between the state and SEBAC, pursuant to General Statutes § § 5-278(b) and 5-278(f). (Carter Decision, ¶4; Kay Decision, ¶4.)
The commission is responsible for the general administration and proper operation of SERS pursuant to General Statutes § 5-155a. In carrying out this responsibility, the commission "may adopt ... regulations ... as are necessary and may establish rules and regulations which it deems necessary or desirable to facilitate the proper administration of the retirement system." General Statutes § 5-155a(e). (Kay Decision, ¶5.)
SERS is a governmental plan as defined by § 414(d) of the Code, codified in 26 U.S.C. § 414(d). SERS is intended to qualify as a defined benefit retirement plan under § 401(a) of the Code. It is required to comply with Code provisions applicable to governmental plans to maintain its tax qualified status, which allows SERS members to accrue benefits over many years with no taxation on accrued benefits until the members begin receiving retirement payments. (Carter Decision, ¶6; Kay Decision, ¶6.) The tax-qualified status of the plan provides SERS members with a substantial tax benefit during their working years. (Kay Decision, ¶6.)
Under certain circumstances, the Commissioner of Administrative Services may issue orders that provide that positions not in a bargaining unit receive the same benefits as employees in bargaining units. See General Statutes § 5-200(p). (Carter Decision, ¶7.) On July 14, 1982, the Department of Administrative Services issued Management Personnel Policy 82-1, which extended pension provisions negotiated between the state and the Pension Coordinating Committee to employees who were exempt from the classified service, employees not included in any bargaining unit, and employees of state-aided institutions, effective as of July 1, 1982. (Carter Decision, ¶8.)
The Pension Coordinating Committee was a committee comprising representatives from several unions. It preceded and was effectively replaced by SEBAC.
When the state and SEBAC negotiated SEBAC I, they evidenced their "mutual intent and understanding" that SERS qualifies as a governmental plan and a defined benefit retirement plan by negotiating the manner in which Code § 415(b) would be adopted by the plan. The § 415(b) limit was adopted by operation of the 1989 arbitration award. (Kay Decision, ¶7.)
In 1996, the commission addressed the applicability of § 401(a)(17) of the Code. The Carter and Kay decisions describe the commission’s action differently. The Carter decision states: "On November 21, 1996, the [c]ommission amended SERS to apply a salary cap ..." (Carter Decision, ¶9.) The Kay decision states: "On November 21, 1996, in an effort to further the plan’s compliance with federal limitations for qualified defined benefit plans, the [c]ommission passed a resolution acknowledging the applicability of a salary cap to governmental plans." (Kay Decision, ¶8.) Both decisions quote the resolution passed on November 21, 1996, as follows: "The resolution stated that ’for plan years beginning on or after January 1, 1996, the annual compensation of each employee taken in to account under the plan shall not exceed the Omnibus Reconciliation Act of 1993 ("OBRA 1993") annual compensation limit.’" (Carter Decision, ¶9; Kay Decision, ¶8.) The Kay decision further states that this action was taken pursuant to the commission’s authority under § 5-155a(e). (Kay Decision, ¶8.)
Additionally, in 2011, the division and the commission took steps to fully apply Code limitations for qualified tax exempt plans, including the § 401(a)(17) limit, to the calculations of retirees’ benefits under SERS for members who retired on or after January 1, 2011. It was their intent to comply with federal tax law. The commission found that this was a "rational decision because, at the time the [d]ivision and [c]ommission started applying Code § 401(a)(17) it was their intent to comply with federal tax law." (Carter Decision, ¶10; Kay Decision, ¶9.) The Kay decision explains that their intent was to "comply with federal tax law requirements for governmental defined benefit plans and maintain the tax qualified status of the plan so as to protect the benefit of the tax deferred status of member contributions to SERS and benefits paid from SERS." (Kay Decision, ¶9.)
D
THE COMMISSION’S CONCLUSIONS OF LAW
The commission concluded that (1) SERS is a governmental plan, as defined under § 414(d) of the Code, and it is intended to qualify as a defined benefit retirement plan under § 401(a); (2) SERS is not permitted to pay Carter and Kay benefit amounts in excess of the § 401(a)(17) and § 415 limits because excessive payments would result in disqualification of the plan, to the significant detriment of all participants in SERS; (3) the state does not offer an excess benefit arrangement under § 415(m) of the Code, to allow a benefit to Carter in excess of the § 415 limits; (4) there is no contractual agreement between the state and Carter or Kay that obligates the commission to pay either Carter or Kay an excess benefit under § 457(f) of the Code; (5) the commission properly applied the § 401(a)(17) compensation limits to determine benefits for Carter and Kay. The commission further concluded that if the compensation limits of § 401(a)(17) did not apply, the benefit limits of § 415 would nevertheless apply.
II
THE ISSUES IN DISPUTE
The plaintiffs’ principal arguments on appeal are that the limits required by § 401(a)(17) and § 415 of the Code have never been incorporated into SERS, and retroactive application of these limits to the plaintiffs is impermissible because each plaintiff was fully vested in the pensions provided under § 5-162 by 2002, when they reached twenty-five years of service and age fifty-five. They also claim that application of the Code limits to their pension benefits violates their constitutional rights to equal protection and due process and constitutes a taking without just compensation.
The commission argues, to the contrary, that the intention to maintain SERS as a qualified defined benefit plan has been manifested in various SEBAC agreements and by the deferral of taxation on accrued pension benefits for active employees. To maintain the qualified status of SERS, the Code limits must be applied. The commission concedes ("not without trepidation") that it failed to apply the limits before 2011 and, as a result, some employees who retired before 2011 are receiving benefits in excess of the § 401(a)(17) and § 415 limits. Its counsel represents that the commission is seeking to negotiate a voluntary correction plan with the Internal Revenue Service which could possibly allow it to "grandfather" the plaintiffs, but unless and until a correction plan is accepted, the commission must apply the limits. The commission denies that application of the limits deprives the plaintiffs of vested rights or violates any of their constitutional rights.
III
SCOPE OF REVIEW
These are administrative appeals from declaratory rulings issued by the commission pursuant to General Statutes § 4-175 in the Uniform Administrative Procedures Act (UAPA). The scope of review is governed by General Statutes § 4-183(j) and is generally limited. "Under the UAPA, it is [not] the function ... of this court to retry the case or to substitute its judgment for that of the administrative agency ... Even for conclusions of law, the court’s ultimate duty is ordinarily only to decide whether, in light of the evidence, the [agency] has acted unreasonably, arbitrarily, illegally, or in abuse of its discretion." (Citation omitted; internal quotation marks omitted.) Chairperson, Connecticut Medical Examining Board v. Freedom of Information Commission, 310 Conn. 276, 281, 77 A.3d 121 (2013).
General Statutes § 4-183 provides in relevant part: "(j) The court shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact. The court shall affirm the decision of the agency unless the court finds that substantial rights of the person appealing have been prejudiced because the administrative findings, inferences, conclusions, or decisions are: (1) In violation of constitutional or statutory provisions; (2) in excess of the statutory authority of the agency; (3) made upon unlawful procedure; (4) affected by other error of law; (5) clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record; or (6) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion. If the court finds such prejudice, it shall sustain the appeal and, if appropriate, may render a judgment under subsection (k) of this section or remand the case for further proceedings. For purposes of this section, a remand is a final judgment."
The courts ordinarily afford "deference to the construction of a statute applied by the administrative agency empowered by law to carry out the statute’s purposes ... Cases that present pure questions of law, however, invoke a broader standard of review than is ... involved in deciding whether, in light of the evidence, the agency has acted unreasonably, arbitrarily, illegally or in abuse of its discretion ... Furthermore, when a state agency’s determination of a question of law has not previously been subject to judicial scrutiny ... the agency is not entitled to special deference." (Internal quotation marks omitted.) Dept. of Public Safety v. Freedom of Information Commission, 298 Conn. 703, 716, 6 A.3d 763 (2010).
"[I]t is the function of the courts to expound and apply governing principles of law." State Medical Society v. Board of Examiners in Podiatry, 208 Conn. 709, 717, 546 A.2d 830 (1988). While our Supreme Court has held that a time-tested agency interpretation of a statute will be afforded deference, it has also held that such deference is appropriate "only when the agency has consistently followed its construction over a long period of time, the statutory language is ambiguous, and the agency’s construction is reasonable." Id., 719. The reasonableness of an agency’s construction is determined by applying "our established rules of statutory construction." (Internal quotation marks omitted.) McCullough v. Swan Engraving, Inc., 320 Conn. 299, 305, 130 A.3d 231 (2016). If a statute is not ambiguous, or if the agency’s construction of the statute is not consistent, time-tested, and reasonable, the court’s review of the agency’s construction of the statute is de novo.
In these appeals, the principal issues are questions of statutory construction, complicated by an overlay of collective bargaining agreements that, if properly approved by the legislature, supersede the relevant statutes. The commission’s interpretation of the statutes and agreements at issue is not time-tested and has not previously been subjected to judicial review. The court’s review is therefore plenary.
IV
ANALYSIS
A
General Statutes § 5-162
The plaintiffs’ argument is straightforward. They rely on General Statutes § 5-162 as codified. Since the last codified amendment in 1985, § 5-162 has provided as follows:
(a) The retirement income for which a member is eligible shall be determined from his retirement date, years of state service and base salary, in accordance with the schedule in subsection (c) or (d) below, whichever is appropriate.
(b) As used in this section: (1) "Base salary" means the average annual regular salary, as defined in subsection (h) of section 5-154, received by a member for his three highest-paid years of state service, disregarding any general temporary reduction or any reduction or nonpayment for illness or other temporary absence; "retirement date" means the date on which a member is retired from state service; "Social Security earnings" means that portion of the member’s base salary up to and including the sum of forty-eight hundred dollars on which the state made contributions under the Social Security Agreement, or would have made contributions had the member been covered under Social Security by the state during the years used in determining his base salary; "excess earnings" means that portion of the member’s annual base salary in excess of his Social Security earnings, provided, if the member has no Social Security earnings because the state has made no Social Security contributions for him, his excess earnings shall equal his base salary. (2) Notwithstanding the provisions of subdivision (1) of this subsection, on and after January 1, 1984, "base salary" means the average covered earnings received by a member for his three highest-paid years of state service, disregarding any general temporary reduction or any reduction or nonpayment for illness or other absence which does not exceed ninety days; and "covered earnings" means the annual salary, as defined in subsection (h) of section 5-154, received by a member in a year, limited by one hundred thirty percent of the average of the two previous years’ covered earnings. The limit does not apply to earnings for calendar years before 1984 or for the first three full or partial years of employment. The Retirement Commission may adopt regulations in accordance with chapter 54 determining the procedure to be followed for a member who was not employed on a full-time basis for the entire two previous years used to develop such limit.
(c) Schedule 1- Twenty-five or more years of state service.
(1) Except as provided in section 5-163a, each member who has completed twenty-five or more years of state service shall be retired on his own application on the first day of the month named in the application, and on or after the member’s fifty-fifth birthday.
(2) Each member who has completed twenty-five or more years of state service and has reached his seventieth birthday and who is in an appointive position shall continue in service and shall be retired on the first day of the month on or after his seventieth birthday, upon notice from the Retirement Commission to the member, to the executive head of his agency and the Comptroller.
(3) Each member referred to in subdivisions (1) and (2) of this subsection shall receive a monthly retirement income beginning on his retirement date equal to one-twelfth of (A) plus (B): (A) Twenty-five percent of his Social Security earnings, plus fifty percent of his excess earnings; (B) the number of years, if any, taken to completed months, of his state service in excess of twenty-five years multiplied by one percent of his Social Security earnings, plus the number of such years multiplied by two percent of his excess earnings.
(d) Schedule 2- Less than twenty-five years of state service.
(1) Except as provided in section 5-163a, each member who has completed less than twenty-five years of state service shall be retired on his own application, on the first day of the month following his application, if the member has completed ten years of state service and reached his fifty-fifth birthday.
(2) Each such member in an appointive position who has reached his seventieth birthday shall continue in service and shall be retired on the first day of the month on or after his seventieth birthday, upon notice from the Retirement Commission to the member, the executive head of his agency and the Comptroller.
(3) Each member referred to in subdivisions (1) and (2) of this subsection shall receive a monthly retirement income beginning on his retirement date equal to one-twelfth of (A) plus (B): (A) The number of years of his state service, taken to completed months, multiplied by the applicable percentage of his Social Security earnings determined from the table below for the appropriate age and years of state service; (B) the number of such years multiplied by the applicable percentage of his excess earnings determined from the table below for such age and years of service.
Age of Member Years Percentage Excess On His Of State Of Social Security Earnings Retirement Date Service** Earnings 70 and over 5 and over* 1.25% 2.50% 65 to 70 10 1.00 2.00 64 10 .94 1.88 63 10 .88 1.76 62 10 .82 1.64 6110 .76 1.52 60 10 .70 1.40 59 10 .65 1.30 58 10 .60 1.20 57 10 .56 1.12 56 10 .53 1.06 55 10 .50 1.00
* Not more than 20 years may be counted for this age and percentage group.
** Between the ages of fifty-five and sixty, the minimum service requirement is ten years of actual state service.
For each full year of service beyond ten, the percentage of Social Security earnings shall be increased by one-fifteenth of the difference between one and the percentage shown in the above table opposite the age of the retiring employee, and the percentage of excess earnings shall be increased by one-fifteenth of the difference between two and the percentage shown in the above table opposite the age of the retiring employee.
(e) Each retirement application shall be made to the Retirement Commission and, upon its approval, shall be forwarded to the Comptroller, who shall draw his orders upon the Treasurer for any amounts the applicant is entitled to receive.
(f) Pension contributions made by a member on any earnings excluded from his base salary when calculating the member’s retirement income, pursuant to the maximum limitations on covered earnings in subsection (b) of this section, shall be refunded to the member by the Retirement Commission at the time of his retirement.
The plaintiffs claim that they were fully vested in their statutory pensions in 2002, when each attained twenty-five years of service and fifty-five years of age. They contend, moreover, that the commission consistently applied the formula set out in § 5-162 until 2011, when it decided that it was required to apply the compensation and benefit limits of § 401(a)(17) and § 415 of the Code. They argue that application of the § 401(a)(17) and § 415 limits to them is not authorized by any state statute and violates their statutory and constitutional rights.
The commission’s argument is more complicated. It asserts that § 415 was made applicable to SERS in 1989, through legislative approval of SEBAC I. It argues that adoption of § 415 indicates a legislative intention to maintain SERS as a qualified defined benefit plan. It argues that a plan either is qualified or is not qualified- a binary decision- and if a plan is to be qualified, federal law mandates compliance with all applicable Code requirements, including the compensation limits of § 401(a)(17). The commission states that § 401(a)(17) is not mentioned in SEBAC I. The commission nevertheless asserts that the commission itself took action to make § 401(a)(17) applicable to SERS members, when, in 1996, it "amended" SERS by passing "a resolution acknowledging the application of a salary cap." It relies on various other indications of the state’s intent to maintain SERS as a qualified defined benefit plan, such as a provision in a 1997 SEBAC agreement (SEBAC V) in which the state agreed to "pick up" mandatory employee contributions under § 414(h)(1) of the Code (a provision available only to qualified plans that allows for deferral of taxes on the contributions) and a provision in the 2011 SEBAC agreement adopting the § 415 limitation. It concedes that the compensation and benefit limits of § 401(a)(17) and § 415 were not applied in practice before 2011, but contends that it can and must correct its prior noncompliance by enforcing the limits as to anyone who retired after January 1, 2011.
The plaintiffs respond that a general "intent" to maintain a qualified plan is insufficient to amend the statutory pension scheme. They point out that the legislature expressly made § 401(a)(17) and § 415 applicable to the Teachers Retirement Fund in 2008, in an amendment to General Statutes § 10-183b, but has never made the same change to SERS. They further assert that the adoption of § 415 limits in the 2011 SEBAC agreement must mean that such limits did not apply when each of them became fully vested in 2002. Carter additionally points out that he retired effective March 1, 2011, before the 2011 SEBAC agreement was effective.
If § 5-162 were the only relevant provision in the general statutes, the plaintiffs’ arguments might be compelling. As discussed herein, however, other statutory provisions impose an overlay of collective bargaining agreements upon the pension statutes, and the collective bargaining agreements reflect the federal tax underpinnings to the state’s pension system.
B
Historical Overview
To begin to untangle the web of statutory and collective bargaining provisions at issue in these appeals, it is useful to consider the origins of those provisions. Connecticut has had a statutory retirement act since 1939. See Pineman v. Oechslin, 195 Conn. 405, 416, 488 A.2d 803 (1985). In the 1970s, a ruling by the State Board of Labor Relations mandated that the state engage in collective bargaining with state employees’ bargaining units over retirement benefits. See State of Connecticut and State Employees Bargaining Agent Coalition, Interest Arbitration Award & Opinion (Sept. 25, 1989) (SEBAC I), Introduction, p. 2. As summarized in SEBAC I, in 1980, the state entered into pension negotiations with the Pension Coordinating Committee (PCC), a group of nine bargaining units; other bargaining units chose to bargain separately. After submission of certain issues to factfinders, an agreement between the PCC and the state was reached and approved by the legislature for the period 1982-1988. That agreement resulted in the creation of Tier II and the revision of Tier I benefits. As the expiration of that agreement approached, the legislature mandated that all bargaining units for state employees form a coalition to bargain for a new agreement. See Public Acts No. 86-411, codified at General Statutes § 5-278(f) (Rev. to 1987).
The administrative records in these appeals contain a copy only of Issue 87 from the SEBAC I award. The entire SEBAC I award, however, is available at the Connecticut State Library.
Negotiations between the state and SEBAC began in 1988, but nearly a hundred issues were eventually submitted to last best offer interest arbitration before a single arbitrator, James J. Healy. SEBAC I, pp. 5-6. Between September 1988 and June 1989, more than twenty arbitration sessions were held, with testimony from dozens of witnesses, and thousands of pages of exhibits were introduced. Id. The arbitrator issued the award and opinion in SEBAC I on September 25, 1989. The award was submitted to the clerks of the House of Representatives and the Senate on October 4, 1989, and was approved by a vote of the Appropriations Committee on October 12, 1989. See Carter Record, pp. 303-04; see also Singer v. State Employees Retirement Commission, Superior Court, judicial district of New London, Docket No. 518955 (June 22, 1994) (referring to the Appropriations Committee approval); and Appropriations Committee Meeting, October 12, 1989, Clerk’s Record.
The record of the Appropriations Committee meeting of October 12, 1989, available in the Connecticut State Library, indicates that the committee voted by a margin of 25 to 15 to approve SEBAC I, after an hour-long discussion of the fiscal note that accompanied it.
In Part I of the SEBAC I award, the arbitrator recounted significant changes that had occurred between 1982 and 1989. Some of the most significant changes concerned federal tax law. More particularly, the federal Tax Reform Act of 1986 (TRA) modified several Code requirements that were "clearly applicable to governmental as well as private pension plans." SEBAC I, Part I, p. 8. The arbitrator observed that "[t]hese, of course, as well as other statutory revisions applicable to public plans, must be reflected in the Connecticut SERS plan." Id. The arbitrator commented that his assessment of the applicability of the 1986 changes to the Code would be "guided considerably by the views of Mr. Joseph G. Metz, whose articles were introduced by both the State and Sebac." Id., p. 9.
SERS is a "governmental plan," which is defined in relevant part by § 414(d) of the Code as "a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing ..." In The Federal Taxation of Public Employee Retirement Systems: A Handbook for Public Officials (August 1988), Joseph G. Metz provided an extensive overview of the effects of the TRA on governmental plans. As Metz explains, a governmental plan must meet the requirements of Code § 401(a) if it is to be treated as a "qualified" pension plan. The principal tax benefit of qualification, with respect to plan participants, is that "a contribution made by the employer to a pension or profit-sharing plan on behalf of an employee is not currently taxable to the employee, even if the employee is vested. Rather, tax will be deferred until benefits are actually received by the employee. The significant value of tax deferral lies in the fact that employees ordinarily will not receive distributions from the plan until retirement. At that time, their overall earnings are generally less and their tax brackets may be lower. In addition, participants in qualified plans may be entitled to certain favorable tax treatment upon receiving a retirement benefit[.]" Id., p. 7.
The administrative record does not further identify the specific Metz articles on which the arbitrator substantially relied. The publication cited in the text above, Joseph G. Metz, The Federal Taxation of Public Employee Retirement Systems: A Handbook for Public Officials (August 1988), was published in August 1988 by the Public Pension & Benefits Consortium, Government Finance Research Center of the Government Finance Officers Association. This publication was essentially contemporaneous with the SEBAC I negotiations, was written by the author on whom the parties and arbitrator relied, and addressed the issues summarized by the arbitrator in his introduction to the SEBAC I award.
The benefit of deferred taxation and favorable tax treatment "makes qualification a necessity for governmental plans. If a government plan does not maintain its qualified status, the governmental employees who are members of the plan could be subject to current income taxation on employer contributions and on asset earnings to the extent that the members are vested." Metz, supra, pp. 7-8. "In theory, a plan that fails to meet the various qualification rules is disqualified, with the accompanying loss of tax benefits for employees. This loss of tax benefits not only impairs the ability of employees to accumulate future retirement savings, but also can require the employees to pay taxes immediately on contributions made to the disqualified plan in prior years." John D. Colombo, "Paying for the Sins of the Master: An Analysis of the Tax Effects of Pension Plan Disqualification and a Proposal for Reform," 34 Ariz. L.Rev. 53, 54 (1992). If a plan is retroactively disqualified, plan participants may incur current tax liability, including penalties and interest, for prior years in which the plan did not meet qualification requirements, even though the plan participants did not receive distributions and may not have cash available to pay the taxes. See id.
One commentator identified three principal tax consequences to plan participants if a plan is disqualified. First, "[f]rom the standpoint of the employee/participant, plan disqualification produces major adverse tax consequences. The most immediate consequence is that an employee who is vested in the plan will be taxed on any contribution made by an employer during the time the trust is disqualified, even though the employee may have no right to receive the value of the contribution in cash. As a result, it is possible for an employee to owe a substantial tax liability on money which the employee has no right to receive." (Footnotes omitted.) John D. Colombo, "Paying for Sins of the Master: An Analysis of the Tax Effects of Pension Plan Disqualification and A Proposal for Reform," 34 Ariz. L. Rev . 53, 68 (1992). Second, "[a] disqualified plan also results in a loss of the tax exemption for the plan trust under § 501. Investment income of the trust therefore becomes taxable, and the plan participants lose a major tax benefit of qualified plans: the ability to compound earnings on plan contributions tax-free." (Footnotes omitted.) Id., 70. Third, "employee/participants of a disqualified plan lose all or a part of the beneficial tax treatment available for distributions from qualified plans. Case law disagrees on the extent to which disqualification affects the ability of a plan participant to take advantage of tax-free rollovers and lump-sum distribution treatment." (Footnotes omitted.) Id.
Until the 1980s, governmental qualified defined benefit plans were exempt from many of the qualification requirements that applied to private sector plans. The 1986 TRA, however, removed some of the exemptions that had previously applied to governmental plans. After the TRA was enacted, the Code imposed eighteen qualification requirements on state and local public employee retirement systems. See Metz, supra, pp. 9-16. These included a maximum benefit limit, established by § § 401(a)(16) and 415, and a limit on the amount of compensation to be taken into account when calculating an employee’s benefits, established by § 401(a)(17). See Metz, supra, pp. 12-13. Under the version of § 415 in effect in 1989, the benefits of a participant in a qualified plan could not exceed the lesser of $90,000 or one hundred percent of the participant’s average compensation for his high three years. Under the provision of § 401(a)(17) in effect in 1989, the compensation that could be considered in calculating an employee’s benefits was limited to $200,000. Both the benefit limitation and the compensation limitation were subject to cost-of-living adjustments pursuant to § 415(d).
In 1989, § 401(a)(16) of the Code provided: "A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part provides for benefits or contributions which exceed the limitations of section 415." At the same time, § 415(b)(1) provided: "In general.- Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an annual benefit (within the meaning of paragraph (2)), such annual benefit is greater than the lesser of- (A) $90,000, or (B) 100 percent of the participant’s average compensation for his high 3 years." Section 415(d)(1) provided, in relevant part, that "[t]he Secretary shall adjust annually- (A) the $90,000 amount in subsection (b)(1)(A), ...- for increases in the cost of living in accordance with regulations prescribed by the Secretary."
In 1989, § 401(a)(17) of the Code provided in relevant part: "A trust shall not constitute a qualified trust under this section unless, under the plan of which such trust is a part, the annual compensation of each employee taken into account under the plan for any year does not exceed $200,000. The Secretary shall adjust the $200,000 amount at the same time and in the same manner as under section 415(d)."
B
SEBAC I AND CODE § 415
In SEBAC I, Issue No. 87 expressly concerned the application of § 415 of the Code. SEBAC’s last best offer as to Issue 87 was as follows: "Notwithstanding any other provision of law, the maximum benefit payable to any member or beneficiary shall be limited to the extent necessary to conform to the requirements of section 415 of the United States Internal Revenue Code as applicable to governmental plans." The state’s last best offer was considerably longer and more detailed, proposing amendments to General Statutes § § 5-162, 5-154, and 5-192f.
The state’s last best offer as to Issue 87 provided as follows:
Last Best Offer State- Issue No. 87 (IRC Sec. 415)The State’s Last Best Offer is to add the following language introducing IRC Section 415 maximum benefit limitations into tier I of the retirement system. Amend Section 5-162 by adding Section i to read as follows:
SECTION 5-162.i (1) THE MAXIMUM ANNUAL RETIREMENT INCOME ATTRIBUTABLE TO STATE CONTRIBUTIONS PAYABLE TO A MEMBER UNDER THE SYSTEM, WHEN ADDED TO ANY RETIREMENT BENEFIT ATTRIBUTABLE TO CONTRIBUTIONS OF THE STATE PROVIDED TO THE MEMBER UNDER ANY OTHER DEFINED BENEFIT PLAN, SHALL BE EQUAL TO THE LESSER OF (i) $90,000 OR (ii) THE MEMBER’S AVERAGE ANNUAL COMPENSATION DURING THE THREE CONSECUTIVE CALENDAR YEARS IN HIS STATE SERVICE AFFORDING THE HIGHEST SUCH AVERAGE, OR DURING ALL THE YEARS IN HIS STATE SERVICE IF LESS THAN THREE YEARS. HOWEVER, IF THE MEMBER HAS NOT COMPLETED 10 YEARS OF STATE SERVICE, THE MAXIMUM ANNUAL RETIREMENT INCOME SHALL BE REDUCED BY THE RATIO WHICH THE NUMBER OF YEARS OF HIS STATE SERVICE BEARS TO 10. IF THE RETIREMENT INCOME BEGINS BEFORE THE MEMBER’S 62ND BIRTHDAY, THE MAXIMUM RETIREMENT INCOME IN (i) ABOVE SHALL BE THE ACTUARIAL EQUIVALENT OF THE MAXIMUM BENEFIT PAYABLE AT AGE 62, BUT IN NO EVENT LESS THAN $75,000 PROVIDED RETIREMENT OCCURS AT OR AFTER AGE 55 AND SHALL BE THE ACTUARIAL EQUIVALENT OF $75,000 FOR RETIREMENT BEFORE AGE 55. IN NO EVENT SHALL THE MAXIMUM DOLLAR LIMITATION FOR A QUALIFIED POLICEMAN OR FIREMAN BE REDUCED BELOW $50,000 REGARDLESS OF THE AGE AT RETIREMENT. IF THE RETIREMENT INCOME BEGINS AFTER THE MEMBER’S 65TH BIRTHDAY, THE MAXIMUM RETIREMENT INCOME IN (i) ABOVE SHALL BE IN LIEU OF THE INTEREST RATE OTHERWISE USED IN THE DETERMINATION OF ACTUARIAL EQUIVALENT, OF THAT MAXIMUM INCOME PAYABLE AT AGE 65. IF THE MEMBER’S RETIREMENT INCOME IS PAYABLE IN A FORM OF PAYMENT OTHER THAN AS A LIFE ANNUITY, THE MAXIMUM RETIREMENT INCOME PAYABLE AS A LIFE ANNUITY INDICATED ABOVE SHALL BE ADJUSTED TO AN ACTUARIAL EQUIVALENT AMOUNT IN ACCORDANCE WITH THE REGULATIONS PRESCRIBED BY THE COMMISSIONER OF INTERNAL REVENUE. HOWEVER, IF THE MEMBER’S RETIREMENT INCOME IS PAYABLE AS A JOINT AND SURVIVOR RETIREMENT BENEFIT WITH HIS SPOUSE AS THE BENEFICIARY, THE MODIFICATION OF THE RETIREMENT INCOME FOR THAT FORM OF PAYMENT SHALL BE MADE BEFORE THE APPLICATION OF THE MAXIMUM LIMITATION, AND, AS SO MODIFIED, SHALL BE SUBJECT TO THE LIMITATION. (2) As OF JANUARY 1 OF EACH CALENDAR YEAR ON AND AFTER JANUARY 1, 1988, THE DOLLAR LIMITATION AS DETERMINED BY THE COMMISSIONER OF INTERNAL REVENUE FOR THAT CALENDAR YEAR SHALL BECOME EFFECTIVE AS THE MAXIMUM PERMISSIBLE DOLLAR AMOUNT OF ANY RETIREMENT BENEFIT PAYABLE UNDER THE SYSTEM DURING THAT CALENDAR YEAR. (3) IN THE CASE OF A MEMBER WHO IS ALSO A MEMBER OF A DEFINED CONTRIBUTION PLAN OF THE STATE OR WHO HAS ACCUMULATED CONTRIBUTIONS UNDER THE SYSTEM, HIS MAXIMUM BENEFIT LIMITATION SHALL NOT EXCEED AN ADJUSTED LIMITATION COMPUTED AS FOLLOWS, PURSUANT TO SECTION 415 OF THE INTERNAL REVENUE CODE: (i) DETERMINE THE DEFINED CONTRIBUTION FRACTION
(ii) SUBTRACT THE RESULT OF (i) FROM ONE (1.0)
(iii) MULTIPLY THE DOLLAR AMOUNT IN (i) OF PARAGRAPH (1) ABOVE BY 1.25
(iv) MULTIPLY THE DOLLAR AMOUNT DESCRIBED IN (ii) OF PARAGRAPH (1) BY 1.4
(v) MULTIPLY THE LESSER OF THE RESULT OF (iii) OR THE RESULT OF (iv) BY THE RESULT OF (ii) TO DETERMINE THE ADJUSTED MAXIMUM BENEFIT LIMITATION APPLICABLE TO THE MEMBER.
(4) FOR PURPOSES OF THIS SECTION:
(i) THE DEFINED CONTRIBUTION FRACTION FOR A MEMBER WHO IS A MEMBER OF ONE OR MORE DEFINED CONTRIBUTION PLANS OF THE STATE OR WHO HAS VOLUNTARY CONTRIBUTIONS UNDER THIS SYSTEM SHALL BE A FRACTION THE NUMERATOR OF WHICH IS THE SUM OF THE FOLLOWING:
(A) THE STATE’S CONTRIBUTIONS CREDITED TO THE MEMBER’S ACCOUNTS UNDER THE DEFINED CONTRIBUTION PLAN OR PLANS;
(B) THE MEMBER’S TOTAL CONTRIBUTIONS; AND
(C) ANY FORFEITURES ALLOCATED TO HIS ACCOUNTS UNDER SUCH PLAN OR PLANS; BUT REDUCED BY ANY AMOUNT PERMITTED BY REGULATIONS PROMULGATED BY THE COMMISSIONER OF INTERNAL REVENUE, AND THE DENOMINATOR OF WHICH IS THE LESSER OF THE FOLLOWING AMOUNTS DETERMINED FOR EACH YEAR OF THE MEMBER’S STATE SERVICE:
(D) 1.25 MULTIPLIED BY THE MAXIMUM DOLLAR AMOUNT ALLOWED BY LAW FOR THAT YEAR; OR
(E) 1.4 MULTIPLIED BY 25% OF THE MEMBER’S COMPENSATION FOR THAT YEAR.
(ii) A DEFINED CONTRIBUTION PLAN MEANS A PENSION PLAN WHICH PROVIDES FOR AN INDIVIDUAL ACCOUNT FOR EACH MEMBER AND FOR BENEFITS BASED SOLELY UPON THE AMOUNT CONTRIBUTED TO THE MEMBER’S ACCOUNT, AND ANY INCOME, EXPENSES, GAINS AND LOSSES, AND ANY FORFEITURES OF ACCOUNTS OF OTHER MEMBERS WHICH MAY BE ALLOCATED TO THAT MEMBER’S ACCOUNTS, SUBJECT TO (III) BELOW; AND
(iii) A DEFINED BENEFIT PLAN MEANS ANY PENSION SYSTEM OR PLAN WHICH IS NOT A DEFINED CONTRIBUTION PLAN; HOWEVER, IN THE CASE OF A DEFINED BENEFIT PLAN WHICH PROVIDES A BENEFIT WHICH IS BASED PARTLY ON THE BALANCE OF THE SEPARATE ACCOUNT OF A MEMBER, THAT PLAN SHALL BE TREATED AS A DEFINED CONTRIBUTION PLAN TO THE EXTENT BENEFITS ARE BASED ON THE SEPARATE ACCOUNT OF A MEMBER AND AS A DEFINED BENEFIT PLAN WITH RESPECT TO THE REMAINING PORTION OF THE BENEFITS UNDER THE PLAN.
(iv) FOR PURPOSES OF THIS SECTION, THE TERM "REMUNERATION" OR "COMPENSATION" WITH/ RESPECT TO ANY MEMBER SHALL MEAN THE WAGES, SALARIES AND OTHER AMOUNTS PAID IN RESPECT OF SUCH MEMBER BY THE STATE FOR PERSONAL SERVICES ACTUALLY RENDERED, AND SHALL INCLUDE, BUT NOT BY WAY OF LIMITATION, BONUSES, OVERTIME PAYMENTS AND COMMISSIONS; AND SHALL EXCLUDE DEFERRED COMPENSATION, STOCK OPTIONS AND OTHER DISTRIBUTIONS WHICH RECEIVE SPECIAL TAX BENEFITS UNDER THE INTERNAL REVENUE CODE. (5) NOTWITHSTANDING THE PRECEDING PARAGRAPHS OF THIS SECTION, IN NO EVENT SHALL A MEMBER’S ANNUAL RETIREMENT BENEFIT PAYABLE UNDER THIS SYSTEM BE LESS THAN THE BENEFIT WHICH THE MEMBER HAD ACCRUED UNDER THE SYSTEM AS OF DECEMBER 31, 1982; PROVIDED, HOWEVER, THAT IN DETERMINING SUCH BENEFIT NO CHANGES IN THE TERMS AND CONDITIONS OF THE SYSTEM ON OR AFTER JULY 1, 1982, SHALL BE TAKEN INTO ACCOUNT.The State’s Last Best Offer is to add the following language limiting compensation for benefit purposes to $200,000.
1. Amend definition (h) in Section 5-154 Definitions, by adding the following sentence:
SALARY FOR ALL PURPOSES OTHER THAN DETERMINING MAXIMUM BENEFITS MAY NOT EXCEED $200,000 PER YEAR OR SUCH HIGHER AMOUNT AS FROM TIME TO TIME MAY BE PERMITTED BY THE COMMISSIONER OF THE INTERNAL REVENUE SERVICE AND FURTHER PROVIDED THAT THIS LIMITATION SHALL NOT SERVE TO REDUCE ANY MEMBER’S ACCRUED BENEFIT AS OF JULY 1, 1989.
2. Amend definition (c) in Section 5-192f Definitions, by adding the following sentence:
SALARY FOR ALL PURPOSES OTHER THAN DETERMINING MAXIMUM BENEFITS MAY NOT EXCEED $200,000 PER YEAR OR SUCH HIGHER AMOUNT AS FROM TIME TO TIME MAY BE PERMITTED BY THE COMMISSIONER OF THE INTERNAL REVENUE SERVICE AND FURTHER PROVIDED THAT THIS LIMITATION SHALL NOT SERVE TO REDUCE ANY MEMBER’S ACCRUED BENEFIT AS OF JULY 1, 1989.
The last best offer of the State on this issue is without prejudice to the State’s position on other open matters involving the statutory provision(s) at issue here.
In his discussion of Issue 87, the arbitrator observed: "It is unnecessary to review in this Opinion the extensive literature on the impact of Code 415 which establishes maximum limits on contributions and benefits ... It is evident from the testimony of the actuaries that, at least insofar as public pension programs are concerned, Code 415 is not regarded favorably. One described it as a ‘headache, yet it’s a virtual non-event for public employees because it is unlikely a state such as Connecticut will reach the cutoff maximum ($90,000 in 1987) for a number of years.’ ... Nevertheless, this Code, unlike those involved in Issues 1 and 2, does apply to governmental plans. About this Sebac and the State are in full accord. The only basic issue is the extent to which the new Master Agreement- and the statutory revisions pursuant thereto- should provide detailed provisions to reflect compliance with the Code." SEBAC I, Part III, p. 87-1.
In Issue 1, SEBAC proposed amendments to General Statutes § 5-165 and § 5-192r to provide certain spousal benefits. In Issue 2, SEBAC proposed amendments to General Statutes § § 5-162(d), 5-166(a), 5-192l(a), 5-192m(a), 5-192o(a), and 5-192p(a) to provide for "five year cliff vesting." Both proposals were similar to requirements under the Employees Retirement Income Security Act (ERISA) that applied to private pension plans but not to governmental plans. As to both issues, the state opposed SEBAC’s proposals and offered instead to maintain the existing language. The arbitrator adopted the state’s last best offer as to both issues.
From the last best offers submitted and the arbitrator’s discussion, it can reasonably be inferred that all parties to the agreement recognized the necessity of compliance with federal tax law requirements to maintain the plan’s qualified status. There would be no reason to incorporate § 415 benefit limits other than to qualify for favorable tax treatment of the plan. It is also reasonable to infer, from the arbitrator’s discussion, that the parties did not expect that, as a practical matter, Connecticut retirees’ benefits would actually be limited, at least in the near future, because the limits were higher than the retirement benefits state retirees were expected to earn under existing wage structures. The actuary’s testimony that § 415 was "a virtual non-event for public employees" indicates that prevailing wages and salaries of state employees made it unlikely that employees would reach the maximum benefit level of § 415 for several years.
The plaintiffs argued that there was no evidence that SEBAC I was ever approved by the legislature. The only evidence of approval in the administrative record consists of copies of transmittal letters reflecting the submission of the arbitration award to the clerks of the House of Representatives and the Senate. The letters, dated and stamped as received on October 4, 1989, stated that the arbitration award, together with the issues to which the parties stipulated and a statement setting forth the amount of funds necessary to implement the award, was submitted in accordance with General Statutes § 5-278(b)(2). According to the record of the Joint Standing Committee on Appropriations, on October 12, 1989, the Appropriations Committee considered the SEBAC agreement and award and approved it by a 25 to 15 vote. There is no record of subsequent legislative activity to reject the award.
General Statutes § 5-278 sets forth the procedure for negotiation and legislative approval of collective bargaining agreements and arbitration awards concerning the state and state employees. As amended by Public Acts No. 89-349 (P.A. 89-349), effective from passage on June 29, 1989, § 5-278(b)(2) provided in relevant part: "Within ten days of the distribution of an arbitration award, issued in accordance with section 5-276a, the bargaining representative of the employer shall file such award with the clerks of the house of representatives and the senate with a statement setting forth the amount of funds necessary to implement such award ... (B) If the filing of the award is made when the legislature is not in regular session, the joint standing committee of the general assembly having cognizance of matters relating to appropriations shall meet within ten days of the filing to consider whether to accept or recommend rejection of the award. If the committee fails to vote to recommend rejection of the award, the award shall be binding on all parties unless the legislature within thirty days of the filing of the award determines by a two-thirds vote in each house that there are insufficient funds for full implementation of the award ..."
The court concludes that SEBAC I was properly approved by the legislature. Pursuant to General Statutes § 5-278(b)(1), as then in effect, legislative approval of SEBAC I effectively amended General Statutes § 5-162 to include the provisions set out in the state’s last best offer for Issue 87. By this amendment of § 5-162, the legislature approved the application of the benefit limits of Code § 415 as to Tier I participants.
General Statutes § 5-278(b)(1), as amended by P.A. 89-349, provided in relevant part: "Any agreement reached by the negotiators shall be reduced to writing. A request for funds necessary to fully implement such written agreement and for approval of any provisions of any new provisions of the agreement which are in conflict with any statute or any regulation of any state agency shall be submitted by the bargaining representative of the employer within fourteen days of the date on which such agreement is reached to the legislature which may approve or reject such request as a whole by a majority vote of those present and voting on the matter; but, if rejected, the matter shall be returned to the parties for further bargaining. Once approved by the legislature, any provision of an agreement need not be resubmitted by the parties to such agreement as part of a future contract approval process unless changes in the language of such provision are negotiated by such parties ..."
The plaintiffs argue that even if SEBAC I was properly approved, it cannot apply to them because General Statutes § 5-278(e) mandates that any change in the retirement system brought about by any negotiated agreement shall be effective only for employees that enter the system upon or after the "first day of the third month" after the commission receives a certified copy of the agreement. The plaintiffs’ interpretation of § 5-278(e) is unpersuasive. Section 5-278(e) provides: "Where there is conflict between any agreement or arbitration award approved in accordance with the provisions of sections 5-270 to 5-280, inclusive, on matters appropriate to collective bargaining, as defined in said sections, and any general statute or special act, or regulations adopted by any state agency, the terms of such agreement or arbitration award shall prevail; provided if participation of any employees in a retirement system is effected by such agreement or arbitration award, the effective date of participation in said system, notwithstanding any contrary provision in such agreement or arbitration award, shall be the first day of the third month following the month in which a certified copy of such agreement or arbitration award is received by the retirement commission or such later date as may be specified in the agreement or arbitration award." The plaintiffs rely on the proviso concerning "participation ... effected by such agreement." Their construction of this provision appears to confuse the verb "effect" with the verb "affect." To "effect" means to "cause to come into being," while to "affect" means to "produce a material influence upon or alteration in" something. See Merriam-Webster’s Collegiate Dictionary (Eleventh Edition 2012), p. 21 (defining "affect") and p. 397 (defining "effect"); see also J. Warriner & F. Griffith, English Grammar and Composition (1965), p. 173 ("Affect ... means ‘to impress’ or ‘to influence (frequently the mind or feelings). Effect as a verb means ‘to accomplish, to bring about"). The subject of the proviso clause in which the verb "effected" is used in § 5-278(e) is "participation," which is not expressly defined in the retirement act, but is used frequently throughout the retirement act to refer to membership in or elective choices regarding specific retirement plans. The proviso clause on which the plaintiffs rely ("provided if participation of any employees in a retirement system is effected by such agreement or award ...") is more reasonably construed to mean that if any agreement or award entitles any employees who were not previously participants in a particular retirement plan to become participants, such participation will be effective on the first day of the third month after the month in which the retirement commission receives a certified copy of the award. Such a construction makes sense, as the three-month time delay allows time for any administrative steps that are necessary to accommodate new participants in a retirement plan. The proviso has no bearing on agreements or awards affecting employees who are already participants in plans.
As the Merriam-Webster editors observe, "effect and affect are often confused because of their similar spelling and pronunciation ... The more common affect denotes having an effect or influence < the weather affected everyone’s mood> . The verb effect goes beyond mere influence: it refers to actual achievement of a final result < the new administration hopes to effect a peace settlement> ." Merriam-Webster’s Collegiate Dictionary (11th Ed. 2012), p. 397.
For instance, General Statutes § 5-154v defines "participant" as "eligible employees in higher education who elect to participate in an alternate retirement program." See also General Statutes § 5-158a ("[e]ach state employee who is a member of the state employees retirement system ... shall be eligible ... to contribute and be a member of part A and participate in Social Security without diminution of his state retirement salary ..."); General Statutes § 5-166(e) ("A member who is eligible for retirement when he leaves state service ... who is eligible to participate in or is a participating member of the Connecticut teachers’ retirement system may elect to have transferred to such system his contributions and earned interest in the state employees retirement system for credit pursuant to the requirements of the teachers’ retirement system").
The plaintiffs argue vigorously that SEBAC agreements cannot strip them of rights that had vested under the statutory plan provided in § 5-162. They each assert that their rights fully vested in 2002, when each had attained the age of fifty-five and had reached twenty-five years of service. SEBAC I, approved by the legislature on October 12, 1989, predated the date on which the plaintiffs claim their rights vested. Even if the plaintiffs’ rights had vested before SEBAC I, however, the Supreme Court has concluded that vested rights of active employees in future retirement benefits are not invariably unalterable. In Pineman v. Oechslin, 195 Conn. 405, 416, 488 A.2d 803 (1985), the court held that the statutes that govern pensions for state employees do not "create vested contractual rights and obligations in favor of state employees." Instead, "employees have statutory rights to retirement benefits once they satisfy the eligibility requirements of the act by becoming eligible to receive benefits." Id., 416. In Pineman, the court concluded that the statutory pension scheme establishes "a property interest on behalf of all state employees in the existing retirement fund, which interest is entitled to protection from arbitrary legislative action under the due process provisions of our state and federal constitutions ... [T]he due process approach protects public employees from legislative confiscation of the retirement fund and arbitrary forfeiture of pension benefits. At the same time, a due process approach provides the necessary flexibility that the contract approach lacks ..." Id., 416-17.
The court has distinguished the situation of retired employees, holding that the presumption against retroactive amendments in General Statutes § 55-3 will apply generally to preclude application of changes in the pension statutes to persons who have already retired and begun to receive benefits. See Gormley v. State Employees Retirement Commission, 216 Conn. 523, 529, 582 A.2d 764 (1990).
Pineman concerned a 1975 legislative amendment to SERS that equalized the age of eligibility for retirement for men and women. Before the 1975 amendment, male employees were eligible for retirement at age fifty-five with twenty-five years of service, but female employees were eligible for retirement at age fifty with twenty-five years of service. This disparity in retirement ages was held to violate the prohibition against sex-based employment discrimination contained in Title VII of the Civil Rights Act of 1964. See Fitzpatrick v. Bitzer, 390 F.Supp. 278 (D.Conn. 1974), aff’d in part and rev’d in part on other grounds, 519 F.2d 559 (2d Cir. 1975), aff’d in part and rev’d in part on other grounds, 427 U.S. 445, 96 S.Ct. 2666, 49 L.Ed.2d 614 (1976). In response to the Fitzpatrick litigation, in 1975 the General Assembly amended the retirement act to establish age fifty-five as the retirement age for all state employees with twenty-five years of service. The Pineman litigation thereafter challenged the legislature’s authority to amend the retirement act to alter what the plaintiffs claimed to be vested contractual rights. Our Supreme Court rejected the claim that the retirement act creates vested contractual rights for active employees, but concluded that the retirement act does create a property interest in the retirement fund for employees who satisfy the statutory eligibility requirements of age and years of service. Such a property right was entitled to protection from arbitrary alteration under principles of due process.
In Pineman, our Supreme Court declined to decide whether the 1975 amendment violated due process rights of active employees because the appeal had been briefed on a contract clause claim. Pineman v. Oechslin, supra, 195 Conn. 417. The Pineman plaintiffs thereafter litigated the due process issue in federal court. Both the district court and the court of appeals concluded that principles of due process were not violated by the 1975 amendment. See Pineman v. Fallon, 662 F.Supp. 1311 (D.Conn. 1987), affirmed, 842 F.2d 598 (2d Cir. 1988), cert. denied, 488 U.S. 824, 109 S.Ct. 72, 102 L.Ed.2d 48 (1988). Because the pension system is economic legislation, the principles of due process do not preclude the legislature from amending the pension statutes if such amendments "are rationally related to a legitimate state interest." Pineman v. Fallon, supra, 842 F.2d 601. This is true even when the amendment negatively affects active employees’ interests in the pension system. In Pineman v. Fallon, the Second Circuit affirmed the district court’s conclusion that the legislature’s amendment of the retirement age for female employees was rationally related to legitimate state interests. Such legitimate state interests included the need to equalize retirement age requirements for men and women to comply with federal antidiscrimination law, to take into account Social Security levels and taxes, and to address the economic pressure on the pension system resulting from high inflation, escalating wages, and previous underfunding. Id., 601-02.
In these appeals, as in Pineman, considerations of due process did not preclude legislative approval of the retirement act amendments contained in Issue 87 of SEBAC I. The state and the collective bargaining agents recognized the necessity of maintaining the qualified status of the state pension plan. Compliance with Code requirements was essential to avoid the risk of plan disqualification, with its substantial adverse tax consequences for all SERS members, including the plaintiffs in this case.
The plaintiffs argue that it would not be unlawful for the state to operate a pension plan that does not qualify for favorable tax treatment under § 401(a). While this may be true, it is disingenuous. The state’s pension system has been operated for decades on the assumption that it is a qualified plan, with the result that plan members have not been taxed on pension contributions during their working years, but only upon receipt of pension benefits after retirement. That assumption is implicit in the discussion of federal tax law changes in the introduction to the SEBAC I award as well as in the discussion of Issue 87 itself.
The plaintiffs argue that the commission consistently applied the retirement act as codified in § 5-162 until 2011, ignoring the provisions of SEBAC I, and that it cannot now enforce Code limitations against the plaintiffs. The commission concedes that it failed to apply the Code limitations adopted in SEBAC I before 2011. It argues, however, that once it recognized its error, it was obligated to take steps to correct it, and that it has consistently applied the Code limitations since 2011. The commission’s position is surely correct; an agency cannot be required to persist in a misapplication of governing law. See Starks v. University of Connecticut, 270 Conn. 1, 31, 850 A.2d 1013 (2004). As discussed above, SEBAC I was approved by the legislature and therefore effected the amendment of § 5-162 as prescribed in Issue 87. The amendment to § 5-162 in. Issue 87 expressly required compliance with § 415 of the Code. Possibly because no one expected the § 415 limits to affect any retiree’s actual benefits for a number of years, adoption of the § 415 limits may have been treated as a "non-event," but by 2011 retiree benefits had increased substantially and at least some retirees were receiving benefits in excess of the limits permitted by § 415. As the Supreme Court has held, the courts "cannot allow the past practice of an agency, no matter how well-meaning, to disregard the clear mandate" of a legislated provision. Starks v. University of Connecticut, supra, 270 Conn. 31.
The plaintiffs also argue that the adoption of § 415 limitations in a SEBAC agreement effective in July 2011, establishes that the § 415 limitations did not apply before 2011, by which time both plaintiffs were fully vested. In support of that argument, they cite a background report by the Office of Legislative Research that summarized the 2011 SEBAC agreement.
The 2011 SEBAC agreement states that, as to SERS, "The maximum salary that can be considered as part of an individual pension benefit is the amount outlined in Section 415 of the Internal Revenue Code." Similarly, the OLR report states that the 2011 SEBAC agreement uses § 415 "to cap the amount of salary that can be used to determine an employee’s pension benefit." Report 2012-R-0032, "OLR Backgrounder: The 2011 SEBAC Agreement." The OLR report adds: "In 2011, Section 415 prohibited any base salary exceeding $245,000 from being used to determine a pension plan member’s contributions or benefits. Previously, the state had not limited the amount of salary that could be used in an employee’s pension calculation." Id.
The intent of the cited provision in the 2011 SEBAC agreement is not entirely clear. Although it purports to limit the "maximum salary" to be considered for a pension benefit to "the amount outlined in Section 415," § 415 itself does not "outline" a maximum salary amount for qualified plans. Instead, the salary or compensation limit for qualified plans is set out in § 401(a)(17). The OLR report similarly appears to conflate § 401(a)(17) and § 415 when it states that "[i]n 2011, Section 415 prohibited any base salary exceeding $245,000 from being used to determine a pension plan member’s contributions or benefits." The sum it cites- $245,000- is the 2011 compensation limit ($245,000) applicable under § 401(a)(17). In 2011, the benefit limit under § 415 was $195,000, not $245,000. See Internal Revenue Service, Cost-of-Living Adjustments for Retirement Items, 1989-2020, available on the IRS website at https://www.irs.gov/pub/irs-tege/cola_table.pdf (last accessed on December 30, 2019).
While the language used in the 2011 SEBAC agreement is not a model of clarity, its apparent meaning is nevertheless consistent with a Treasury regulation, 26 C.F.R. § 1.415(c)- 2, which was effective as of April 5, 2007. Pursuant to 26 C.F.R. § 1.415(c)- 2(a), "Paragraph (f) [of this regulation] provides rules regarding the application of the rules of section 401(a)(17) to the definition of compensation for purposes of section 415." Paragraph (f) in turn provides in relevant part: "Interaction with section 401(a)(17). Because a plan may not base allocations (in the case of a defined contribution plan) or benefits (in the case of a defined benefit plan) on compensation in excess of the limitation under section 401(a)(17), a plan’s definition of compensation for a year that is used for purposes of applying the limitations of section 415 is not permitted to reflect compensation for a year that is in excess of the limitation under section 401(a)(17) that applies to that year." 26 C.F.R. § 1.415(c)- 2(f). As previously discussed, § 415(b)(1) limits benefits to the "lesser of- (A) $90,000 or (B) 100 percent of the participant’s compensation for his high 3 years." (Emphasis added.) Under the 2007 Treasury regulation, the average compensation that can be considered under § 415(b)(1)(B) is limited to the maximum compensation permitted by § 401(a)(17).
The plaintiffs argue that the inclusion of § 415 in the 2011 SEBAC agreement proves that it did not apply before 2011. The court disagrees. To be sure, the 2011 SEBAC agreement does not indicate why it was deemed necessary to add a provision regarding § 415, which had been incorporated by amendment to General Statutes § 5-162 in SEBAC I. The explanation may lie in the prefatory sentence of the state’s last best offer in Issue 87 of SEBAC I: "The State’s Last Best Offer is to add the following language introducing IRC Section 415 maximum benefit limitations into tier I of the retirement system." (Emphasis added.) In contrast, the 2011 SEBAC provision concerning salary limits under § 415 was not limited to Tier I, but applied generally to all SERS plans.
Neither the state’s last best offer nor the arbitrator’s discussion explains why Tier II was not similarly amended in SEBAC I. It may be noted, however, that Tier II was still new at the time of SEBAC I and generally encompassed members who joined SERS after July 1, 1984. See General Statutes § 5-192e(a) and § 5-192f(f) (Rev. to 1989). The creation of Tier II was still controversial in 1989, and SEBAC in fact proposed eliminating it altogether. See SEBAC I, Issue 8. In contrast, by 2011, Tier II was accepted as a fait accompli and a further tier, Tier IIA, had also been created.
C
CODE § 401(a)(17) and SEBAC I
In concluding that § 401(a)(17) limits the compensation that can be considered in calculating the plaintiffs’ pension benefits, the commission relied on the following reasoning: (1) SERS is intended to be a qualified defined benefit plan; (2) to be qualified for favorable tax treatment, a governmental plan must incorporate the applicable Code requirements, including § 401(a)(17); (3) OBRA, enacted in 1993, lowered the § 401(a)(17) compensation limit to $150,000 and made the new limit, with periodic cost-of-living adjustments, applicable to governmental plans beginning no later than the 1996 plan year; (4) on November 21, 1996, the commission passed a resolution to "amend the retirement plans within the Commission’s jurisdiction" to apply the reduced § 401(a)(17) limits as required by OBRA; and (5) in 2011, the commission began to apply the § 401(a)(17) limits.
The commission’s reliance on its November 21, 1996 resolution is problematic in several respects. The commission claims to have passed the resolution under the authority of General Statutes § 5-155a(e). It relies on that portion of § 5-155a(e) that provides: "The Retirement Commission may adopt such regulations, in accordance with the provisions of chapter 54, as are necessary to carry out the provisions of this chapter and may establish rules and regulations which it deems necessary or desirable to facility the proper administration of the retirement system." It is clear, however, that the November 21, 1996 resolution was not adopted as a regulation pursuant to chapter 54, which requires publication of the intent to adopt a regulation, public comment, approval by the Attorney General of the legal sufficiency of a proposed regulation, and legislative review, among other requirements. See General Statutes § 4-166 through § 4-172. To the extent that the commission claims that the resolution was passed under its authority under § 5-155a(e) to make "rules," as somehow distinguished from "regulations," it overlooks the second sentence of § 5-155a(e), which provides in relevant part that "no regulation, rule, action or determination made or adopted by the Retirement Commission shall in any manner conflict or be inconsistent with any provision of an applicable current collective bargaining agreement in effect between any state employer and the unions representing employees." In light of the commission’s view that the § 401(a)(17) limits are not reflected in SEBAC I, it would appear that its "rule" would conflict with those agreements. Nor has the commission explained how it could "amend" SERS, a statutory plan, in light of General Statutes § 5-155a(c)(3), which requires the commission to conduct its business "in accordance with the provisions of the general statutes and applicable collective bargaining agreements." Finally, the commission cannot reconcile the November 21, 1996 resolution with the application of the § 401(a)(17) limits to these plaintiffs. The November 21, 1996 resolution expressly provided that "employees who became participants in the plan before the first day of the plan year beginning on or after January 1, 1996, will not be subject to the OBRA 1993 annual compensation limit." Both plaintiffs were members of SERS long before the first day of the 1996 plan year.
Although the commission’s reasoning is unpersuasive, its conclusion- that § 401(a)(17) limits must be applied- may be supportable on a far simpler ground: the inclusion of those limits in the SEBAC I award. To be sure, the commission did not find that the § 401(a)(17) limits were included in SEBAC I, and Issue 87 in SEBAC I does not explicitly cite § 401(a)(17). The court recognizes that the division and the commission appear to have assumed, over the thirty years since SEBAC I, that SEBAC I addressed only § 415 limitations and did not limit the compensation base on which benefit calculations were made. The court is not persuaded, however, that SEBAC I did not include the § 401(a)(17) limits. In the court’s view, the commission’s construction of Issue 87 in SEBAC I does not comport with common principles of statutory construction, because it ignores two provisions that are integral to its meaning.
The final two provisions in the state’s last best offer in Issue 87, as ultimately adopted by the arbitrator and approved by the legislature, proposed amending General Statutes § 5-154(h) and § 5-192f(c) by adding the following language to each provision respectively: "SALARY FOR ALL PURPOSES OTHER THAN DETERMINING MAXIMUM BENEFITS MAY NOT EXCEED $200,000 PER YEAR OR SUCH HIGHER AMOUNT AS FROM TIME TO TIME MAY BE PERMITTED BY THE COMMISSIONER OF THE INTERNAL REVENUE SERVICE AND FURTHER PROVIDED THAT THIS LIMITATION SHALL NOT SERVE TO REDUCE ANY MEMBER’S ACCRUED BENEFIT AS OF JULY 1, 1989." (Capitalization in original.)
Before SEBAC I was approved, General Statutes § 5-154(h) (Rev. to 1989) provided as follows with respect to the Tier I plan:" ‘Salary’ means (1) any payment, including longevity payments and payments for accrued vacation time under section 5-252, for state service made from a payroll submitted to the comptroller; and (2) the cash value of maintenance furnished by the state; and (3) fees received from the state in whole or in part in lieu of or in addition to item (1) above, and established to the satisfaction of the retirement commission, to the extent that the employee has made retirement contributions on such fees; and (4) compensation paid by the United States to state employees who are employees of the United States Purchasing and Finance Office. Notwithstanding the provisions of section 5-208a, any state employee who is employed by more than one state agency during any week shall, for compensation earned on and after January 1, 1983, have all such compensation recognized for all purposes of the retirement program."
Before SEBAC I was approved, General Statutes § 5-192f(c) (Rev. to 1989) provided as follows with respect to the Tier II plan:" ‘Covered earnings’ means the annual salary, as defined in subsection (h) of section 5-154, received by a member in a year, limited by one hundred thirty percent of the average of the two previous years’ covered earnings. The limit does not apply to earnings for calendar years before 1984, nor for the first three full or partial calendar years of employment. The retirement commission may adopt regulations in accordance with chapter 24 determining the procedures to be followed when the member was not employed on a full-time basis for the entire two previous years used to develop such limit."
The statutory provisions that are amended by this language- § 5-154(h) and § 5-192f(c)- concern the salary base upon which pension benefits are calculated. The plaintiffs argue that the language "salary for all purposes other than determining maximum benefits" refers to § 415 limits and precludes using the § 415 limits as maximum benefit limits. That argument makes no sense, because Issue 87 expressly requires application of the § 415 benefit limits. The plaintiffs also argue that the commission now "asserts that it may use the lesser § 415 limits established under OBRA 1993." But the § 415benefit limits were not directly reduced by OBRA 1993; the principal change in OBRA 1993 that affected SERS was the reduction of the § 401(a)(17)compensation limit from $200,000 to $150,000. However, if the § 401(a)(17) compensation limit was necessarily incorporated into § 415(b)(1)(B), the § 415 benefit limit could be indirectly reduced by OBRA 1993.
A plausible reading of SEBAC I’s amendments to the definition of "salary" in § 5-154(h) and § 5-192f(c) is to read them as imposing the § 401(a)(17) limitation on compensation on the meaning of "compensation" used in § 415(b)(1)(B). That is to say, compensation for all purposes is limited to $200,000 except where use of $200,000 would exceed the maximum benefit limitation of § 415(b)(1)(A).
To reiterate, the limits imposed by § 401(a)(17) concern the compensation base upon which pension benefits may be calculated. The limits imposed by § 415 impose an upper limit on pension benefits. In 1989, § 415(b)(1) provided in relevant part: "Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an annual benefit ... such annual benefit is greater than the lesser of (A) $90,000, or (B) 100 percent of the participant’s average compensation for his high 3 years." (Emphasis added.) In 1989, § 401(a)(17) provided in relevant part: "A trust shall not constitute a qualified trust under this section unless, under the plan of which such trust is a part, the annual compensation of each employee taken into account under the plan for any year does not exceed $200,000. The Secretary shall adjust the $200,000 amount at the same time and in the same manner as under section 415(d)." Section 415(d) provided for annual cost-of-living adjustments of the $90,000 limit.
The interplay between § 401(a)(17) compensation limits and § 415 benefit limits can be seen by comparing two hypothetical situations applying the 1989 Code limits on compensation and benefits. These hypotheticals illustrate why, as a matter of logic, "compensation" as used in § 415(b)(1)(B) should be construed to incorporate the compensation limit of § 401(a)(17). In these hypotheticals, it is assumed that the statutory pension formula is two percent times years of service times average compensation for the highest three years.
(1) For the first hypothetical, assume that a plan participant’s average compensation for his highest three years was $300,000, and he had ten years of service at retirement. Under these assumptions, if the § 401(a)(17) limits are not incorporated into § 415(b)(1)(B), the participant’s annual retirement benefit would equal $60,000 (two percent for each year of service, times ten years of service, times $300,000). This $60,000 benefit would not exceed the § 415(b)(1)(A) maximum benefit of $90,000, but it would violate § 401(a)(17) because the § 415(b)(1)(B) calculation would be based on compensation greater than $200,000. If, however, the § 401(a)(17) compensation limit were understood to be incorporated into the meaning of compensation as used in § 415(b)(1)(B), then this participant’s benefit would be limited to $40,000 (two percent times ten years times $200,000).
(2) For the second hypothetical, assume that a plan participant’s average compensation for his high three years was $190,000 and he had twenty-five years of service at retirement. Under these assumptions, his retirement benefit would equal $95,000 (two percent per year times twenty-five years times $190,000). The compensation base used in the § 415(b)(1)(B) calculation would satisfy § 401(a)(17), because it was less than $200,000, but the total benefit would exceed the $90,000 maximum benefit limit of § 415(b)(1)(A). Consequently, this participant’s benefit could not be based on the maximum compensation permitted by § 401(a)(17), as allowed by § 415(b)(1)(B), but would have to be reduced to $90,000 to satisfy § 415(b)(1)(A).
Taking into account the tax law changes that were extensively discussed in the course of the SEBAC I arbitration, it is plausible to construe the phrase "Salary for all purposes other than determining maximum benefits may not exceed $200,000" as generally imposing the compensation limit of § 401(a)(17) while also addressing the second hypothetical situation described above. That is, the $200,000 compensation limit of § 401(a)(17) applies in calculating pension benefits except when the resulting benefit would exceed the maximum benefit permitted by § 415(b)(1)(A).
This construction of the SEBAC I amendments to the definition of salary in § 5-154(h) and § 5-192f(c) is supported by the fact that these amendments expressly allowed the $200,000 limit to be increased to "such higher amount as from time to time may be permitted by the Commissioner of the Internal Revenue Service ..." Section 401(a)(17) requires the Secretary to make cost-of-living adjustments to the § 401(a)(17) limits "at the same time and in the same manner as under section 415(d)."
The text of the provisions amending § § 5-154(h) and 5-192f(c) is not perfectly clear, but it cannot simply be ignored. It must be considered in interpreting and applying Issue 87 of SEBAC I. Its context (in an issue submitted to satisfy the requirements of § 415 of the Code) and its text (adding the compensation limit expressed in § 401(a)(17), including the requirement of cost-of-living adjustments) together support the meaning suggested by the court, but there is room for doubt. The commission, however, provided no analysis of the text or the purpose of these provisions in the decisions and declaratory rulings at issue in these appeals. The court has found nothing in the record of these appeals that reflects any attempt by the commission to determine the meaning of the salary limits imposed in Issue 87.
If these appeals concerned only the construction of a statute, which is subject to de novo judicial review, the court could simply apply the principles of statutory construction to resolve any uncertainty about the meaning of SEBAC I’s amendments to § 5-154(h) and § 5-192f(c). In this case, however, statutory and contractual interpretation are intertwined, since SEBAC I was first negotiated as a collective bargaining agreement and then given the force of statute by legislative approval. Just as uncertainty or ambiguity in the text of a statute may be illuminated by legislative history and by consideration of the circumstances the statute was intended to address, contractual ambiguities may be illuminated by "consideration of all available extrinsic evidence and the circumstances surrounding the entering of the agreement."Casablanca v. Casablanca, 190 Conn.App. 606, 621, 212 A.3d 1278, cert denied, 333 Conn. 913, 215 A.3d 1210 (2019). The commission is better positioned than the court to seek out and consider, in the first instance, evidence concerning the understanding and intentions of the parties who negotiated SEBAC I. For instance, it may be possible to obtain copies of the briefs or exhibits that were submitted in the arbitration, or to obtain testimony from participants in the negotiations. It certainly should be possible to obtain articles published between 1986 and 1989 that discussed the impact of the TRA on public pension plans; the arbitrator commented that there was "extensive literature on the impact of Code 415." SEBAC I, Issue 87, Discussion at 87-1.
The court agrees with the plaintiffs that the reasons given by the commission for applying the § 401(a)(17) limits to the plaintiffs’ pension calculations are insufficiently supported by law or logic. The court does not agree, however, that § 401(a)(17) limits cannot properly be applied to the plaintiffs. The commission’s analysis fails to take into account the amendments to the definition of salary included in Issue 87 of SEBAC I. The court therefore remands the Carter and the Kay matters to the commission with direction to reconsider its opinion that § 401(a)(17) is not addressed in SEBAC I, and more particularly, to undertake a thorough examination of all available evidence to determine the intended meaning and effect of the provisions in Issue 87 of SEBAC I that amended the definition of salary in § 5-154(h) and § 5-192f(c).
V
CONCLUSION
For the reasons stated herein, the court concludes that the limits of 26 U.S.C. § 415 were made applicable to Tier I plan participants through Issue 87 of SEBAC I, and the plaintiffs’ rights are not violated by application of those limits to their pension calculations. To the extent that the plaintiffs challenge the application of § 415 to their pension benefits, their appeals are dismissed. To the extent that the plaintiffs challenge the application of 26 U.S.C. § 401(a)(17) to limit their pension benefits, further proceedings are required to determine the meaning of the salary limitations imposed in Issue 87 of SEBAC I. The court accordingly remands both the Carter matter, in Docket No. HHB-CV-17-6036697-S, and the Kay matter, in Docket No. HHBCV-18-6043023-S, to the commission for further proceedings in accordance with this decision.