Lack Of Cost Estimates Invalidates Arbitrator’s Award

Under Pennsylvania law, an arbitration panel modifying pension plans must comply with certain requirements. In particular, an arbitrator’s award can only be based on evidence that includes, in part, “cost estimates of the effect of the proposed benefit plan modifications.”

When Northampton Township and the Northampton Township Police Benevolent Association were unable to agree on the terms of a new collective bargaining agreement, they submitted the dispute to binding arbitration. One of the issues before the arbitration panel was the amount members contribute to the Township’s police pension plan. Under the previous contract, the member contribution rate was set at five percent.

The Arbitrators’ award called for a reduction of member contribution to three percent. The Township challenged the award on the ground that the record before the Arbitrators did not contain the requisite cost estimates for the proposed modification.

The Pennsylvania Commonwealth Court, Pennsylvania’s Court of Appeals, agreed with the Township. The Association argued that documents entitled “Minimum Municipal Obligation Reports” (MMOs) were part of the arbitration record, and that the documents showed that the cost of pension benefits, as a percent of payroll, had increased by 2.5 percent from 2003 to 2004, and that the Township’s minimum obligation in order to keep the plan actuarily sound had increased from $76,000 to $475,000. In the eyes of the Association, the MMOs were sufficient cost estimates upon which the arbitration panel could have based its decision.

The Court disagreed, finding that the MMOs were insufficient to meet the requirements of state law. The Court noted that under state law, “the cost estimates must be specifically set forth by an actuary and must address the effect of the proposed modification, here, a two percent reduction in employee contributions. The law does not envision that figure being arrived at by simple arithmetic, as the Association argues.

“Aside from not setting forth the specific cost estimate, all the 2004 MMO provides is an expected minimum municipal obligation for 2004. That hardly is sufficient information upon which the Arbitrators could determine if there was going to be modifications to the future financial requirements and, if so, what they were.

Consequently, the Arbitrators’ decision that the cost estimate met the requirements of state law exceeded their powers.”

Northampton Township v. Northampton Township Police Benevolent Association, 2005 WL 2495199 (Pa.Cmwlth. 2005).

This article appears in the December 2005 issue