As Long As Benefit Levels Protected, City Allowed To Merge Police And General Employee Pension Plans

Since approximately 1942, the City of Minot, North Dakota has maintained separate police and City employee pension plans and funds. City ordinances set out the terms of each pension plan. In 1972, the City adopted a home rule charter and began operating as a “home rule” city.

In 2004, the Minot City Council decided to contribute at equal rates to the police and City employee pension funds. Three years later, the City Employee Pension and Police Pension Board began discussing merging the two plans and their funds. In July 2008, the City Council approved an ordinance which repealed the ordinances for the separate plans and re-enacted and merged the two plans in a new ordinance, entitled Employees’ Pension Plan. Under the new combined pension plan the benefits, pension amounts, rules for vesting and payment remain the same for members of the police pension fund as they were under the separate plan. Before the plans were merged, the police pension fund had a net surplus and the City employee pension fund had a net liability.

Two police officers sued the City, alleging the City violated state statutes by merging the two pension plans. The case eventually wound up in the North Dakota Supreme Court.

The Court upheld the City’s actions. The Court based its decisions on the broad powers granted “home rule” cities under North Dakota law. Critical to the Court’s decision was the fact that “the police pension plan was not discontinued. The police pension funds were not liquidated. The two pension plans were combined and the members’ rights and benefits remained the same as they were under the separate plans.

“The officers argue the merger affected their rights because the police pension fund had a net surplus and the City employee pension fund had a net liability. However, a member of a defined benefit plan does not have a claim to particular assets that are part of the general asset pool and is not entitled to a share of the surplus assets; rather, a member only has a right to a certain level of defined or accrued benefits. A defined benefit plan consists of a general pool of assets and a plan member is entitled to a fixed periodic payment upon retirement. An employer generally bears the investment risk and must cover any underfunding or may reduce or suspend funding if the plan is overfunded. The pensions in this case are defined benefit plans and its members are only entitled to the promised defined benefits.

“The officers were not entitled to any of the surplus assets and the City was not required to continue funding the plan at the same rate to preserve the surplus. The parties agree the merger did not affect the officers’ vested rights and they will receive the benefits they were promised.”

Klug v. City of Minot, 2011 WL 1106216 (N.D. 2011).

This article appears in the May 2011 issue.