This post was also written by Scott E. Blissman.

The Supreme Court has recently declined to review the Commonwealth Court’s 2008 holding that a municipality properly included officers that had entered into a deferred retirement plan in the municipality’s calculation for state pension aid. In a time when municipal pension funds have been devastated by market conditions, this ruling will increase the amount of state aid many municipalities will receive to help satisfy increasing minimum municipal obligations.


City of Erie v. Department of the Auditor General involved the City’s establishment of a Partial Lump Sum Distribution Option (“PLSDO”). The PLSDO allowed City employees who had reached certain age and length-of-service requirements to select a “pension look-back date” that preceded their actual termination date by 12, 24 or 36 months. For purposes of pension calculations, the pension look-back date would be used as the effective date for the employee’s retirement benefits. The employee would continue to work for the City, but would no longer accrue seniority or service credit; however, the employee was required to continue contributing to his or her pension plans between the pension look-back date and the date of employment termination. Following the employee’s separation of employment, he or she would receive his or her normal retirement benefits determined as of the pension look-back date, as well as a lump sum cash distribution equal to the participant’s monthly retirement benefit, multiplied by the number of months elected in the PLSDO. In most respects, the PLSDO is analogous to Deferred Retirement Option Plans or In-Service Retirement Option Plans.

During an audit by the Department of the Auditor General (“AG”), the AG determined that the City included PLSDO participants in the City’s preparation of its PF-385 form used to receive state pension aid. The AG believed that PLSDO participants should not be included as employees eligible for Act 205 monies, because they were, in effect, retired. Conversely, the City believed that the PLSDO participants should be counted in the calculations, because they were still actively working between their elected pension look-back date and their actual termination date. The AG’s audit recommended that the City reimburse the commonwealth for the excess state aid received in error. The City challenged the recommendations in the audit report concerning the excess state aid through the AG’s administrative process, and the AG’s hearing officer sustained the audit report findings. The City appealed that decision to the Commonwealth Court.

The Commonwealth Court’s Decision

The Commonwealth Court appropriately focused its analysis on the applicable statutory language that authorizes state pension aid; i.e., Section 402 of the Municipal Pension Plan Funding Standard and Recovery Act (commonly referred to as “Act 205”). Act 205 established a General Municipal Pension System State Aid Program that provides funds that municipalities may use to supplement their pension plans. The court noted that the amount of money a municipality may receive is based on “each active employee who was employed on a full-time basis for a minimum of six consecutive months prior to December 31 preceding the date of certification and who was participating in a pension plan maintained by that municipality…” (emphasis added).

The court then concluded that the PLSDO’s pension look-back date is merely used for pension calculation purposes, and not as the date that the employee stopped working. Rather, an employee who participated in the PLSDO continued to work on a full-time basis and contribute to the pension plan beyond the look-back date. Finally, the court noted that the definition of “active employee” indicates that the PLSDO participants are engaged in an activity; i.e., their continued employment. There were no limitations or restrictions placed on their jobs once the employees elected the PLSDO. Therefore, the court held that the City was not required to refund the state aid received for participants of the PLSDO.

Practical Effects for Pennsylvania Public Employers

  • Employers should include active employees who are participating in deferred retirement option plans on their roster of employees for purposes of calculating state pension aid.
  • Employers should expect unions to emphasize this decision in pushing to obtain such deferred retirement option plans, or to obtain enhancements of the benefits available under these plans.
  • While there are many similarities between the PLSDO and a traditional DROP or IROP, the courts may rely upon a few differences in distinguishing this case from one involving a traditional DROP or IROP. Specifically, the court noted in City of Erie that the employees continued to contribute toward their pensions, which does not occur in traditional DROP or IROP settings.