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1. Pensions and Retirement--State disability benefits--calculation--mortality factor
The trial court erred as a matter of law in ordering that the additional disability benefits
due plaintiffs under Faulkenbury v. Teachers' and State Employees' Ret. Sys. of North Carolina,
345 N.C. 683, be calculated according to plaintiffs' expert where the trial court construed the
Supreme Court's decision as mandating the use of a mortality factor in computing the actuarial
equivalent of additional disability benefits. While plaintiffs argue that they faced the risk of
dying while awaiting the underpayments, there is no forfeiture of payments by deceased
members and the retirement statutes and the Faulkenbury decision do not mandate use of a
mortality factor in computing the actuarial equivalent.
2. Pensions and Retirement--State disability benefits--retroactive payments--interest
The trial court erred by allowing plaintiffs (State and local employees) to collect post-
judgment interest on retroactive disability benefits. The State of North Carolina is not required
to pay interest on its obligations unless it is required to do so by contract or by statute; here, the
General Assembly has not authorized the allowance of post-judgment interest but has provided
that all retirement benefits shall include regular interest at 4%. Appeal by defendants from judgments entered 25 August 1997
and 24 October 1997 by Judge Narley L. Cashwell in Wake County
Superior Court. Heard in the Court of Appeals 19 August 1998.
G. Eugene Boyce and Marvin Schiller for plaintiffs-
appellees.
Attorney General Michael F. Easley, by Senior Deputy
Attorney General Edwin M. Speas, Jr., Special Deputy
Attorney General Norma S. Harrell, and Special Deputy
Attorney General Alexander McC. Peters, for defendants-
appellants.
WALKER, Judge.
This case involves four consolidated cases appealed from two
decisions of the trial court on remedial questions following a
judgment for the plaintiffs on liability. (Plaintiff Hailey's
case was consolidated with the three original actions and
certified as a class action on 28 July 1997). On 21 July 1995,
the trial court entered judgment for the plaintiffs and concluded
they were entitled to receive additional disability benefits. This judgment was affirmed by our Supreme Court in Faulkenbury v.
Teachers' and State Employees' Ret. Sys. of North Carolina, 345
N.C. 683, 483 S.E.2d 422 (1997). These cases, certified as class
actions, challenged the way disability benefits were calculated
under the Teachers' and State Employees' Retirement System of
North Carolina and the North Carolina Local Governmental
Employees' Retirement System. The Supreme Court noted that
members of the class were:
[A]ll persons who were receiving disability
benefits in a lesser amount than they would
have received had the law not been changed;
persons who retired on service retirement who
could have retired on disability retirement
at higher rates if the law had not been
changed; all living heirs, beneficiaries, or
personal representatives of any estate of one
who was receiving less as a disability
retiree than he would have received if the
law had not been changed; and who had not
selected a designated survivor beneficiary;
and all living heirs, beneficiaries, or
personal representatives of the estate of a
deceased survivor beneficiary who was
receiving benefits pursuant to the election
of an option by a deceased disability
retiree.
Id. at 698, 483 S.E.2d at 431.
Thus, the plaintiffs include all class members who had been
employed for more than five years as of 1 July 1982 and whose
retirement and disability benefits were vested under either the
Teachers' and State Employees' Retirement System of NorthCarolina or the North Carolina Local Governmental Employees'
Retirement System.
On 1 July 1982, the method of calculating disability benefit
payments was changed so that the plaintiffs received less in
disability payments than they would have received had they
retired for disability prior to that date. All of the plaintiffs
became disabled after 1 July 1982 and received benefits which
were reduced from what they would have received if there had been
no change in the law on 1 July 1982. Plaintiff Woodard died after the commencement of this action and his widow was
substituted as a plaintiff.
In its decision, the Supreme Court held that the change in
calculation of the plaintiffs' disability benefits by the
retirement systems impaired their contractual rights. Id. at
694, 483 S.E.2d at 429. According to the decision in
Faulkenbury, the additional disability payments owed to the
plaintiffs were to be determined by applying N.C. Gen. Stat. §
128-32 and N.C. Gen. Stat. § 135-10 which have virtually
identical provisions as follows:
Should any change or error in the records
result in any member or beneficiary receiving
from the Retirement System more or less than
he would have been entitled to receive had
the records been correct, the Board of
Trustees shall correct such error, and as far
as practicable, shall adjust the payment in
such a manner that the actuarial equivalent
of the benefit to which such member or
beneficiary was correctly entitled shall be
paid.
N.C. Gen. Stat. § 128-32 (1995)(local government employees); N.C.
Gen. Stat. § 135-10 (1997)(state government employees).
The trial court held in its 21 July 1995 judgment that it
“retain[ed] jurisdiction . . . to decide at a second trial, if
necessary, the issues of specific amounts of underpayments,
interest and actuarial interest due to each class member. . . .”
In addressing this matter, the Supreme Court stated that the
relevant statute sections showed it was the intent of the General
Assembly that “if there was an underpayment of a pension
compensation, it would be paid at the actuarial value.”
Faulkenbury, 345 N.C. at 695, 483 S.E.2d at 430. Regarding the payment of interest on underpayments, the Supreme Court stated
that if the state or local governments possessed sovereign
immunity, it was waived by N.C. Gen. Stat. § 135-1(2), which
defines actuarial equivalent as a “benefit of equal value when
computed upon the basis of such mortality tables as shall be
adopted by the Board of Trustees, and regular interest.” Id. at
696, 482 S.E.2d at 430 (quoting N.C. Gen. Stat. § 135-
1(2)(1995)). Further, the Court noted that N.C. Gen. Stat. §
128-21(2) defines actuarial equivalent as a “benefit of equal
value when computed at regular interest upon the basis of such
mortality tables as shall be adopted by the Board of Trustees.”
Id. (quoting N.C. Gen. Stat. § 128-21(2)(1995)). Also, the
Supreme Court held that these sections require regular interest
at four percent (4%) to be included in the actuarial value so the
plaintiffs are entitled to the actuarial value of underpayments
including interest. Id.
Thus, pursuant to Faulkenbury, the plaintiffs who were
presently receiving disability benefits were entitled to pursue
claims for underpayments for the three years before these actions
were commenced. Faulkenbury, 345 N.C. at 695-96, 483 S.E.2d at
429-30. Further, in determining that plaintiffs were entitled to
regular interest on the underpayments, the Court stated the
following in addressing the defendants' argument:
The defendants say that allowing
recompense under all these sections gives the
plaintiffs double recovery. They say that
the payment of underpayments at their
actuarial equivalent will fully compensate
the plaintiffs and that the plaintiffs should
not be paid interest. We disagree.
In allowing interest, the court was following the definition of actuarial
equivalent prescribed by N.C.G.S. § 128-21(2)
and N.C.G.S. § 135-1(2). There is no double
recovery.
Id.
In its decision, the Supreme Court remanded the case to the
trial court for a determination of the additional disability
benefits due the plaintiffs.
At the hearing in the trial court, the evidence consisted of
the deposition testimony of the parties' respective actuarial
experts. The plaintiffs offered the deposition testimony of
their expert, Robert G. Sanford Jr. (Sanford), along with various
exhibits in support of his calculations. The defendants offered
the deposition testimony of their expert, Donald M. Overholser
(Overholser). In arriving at his conclusion of the additional
disability benefits due the plaintiffs, Sanford utilized a
calculation of actuarial equivalent which required the inclusion
of a mortality factor. The defendants' expert, Overholser,
calculated the additional disability benefits without the
application of a mortality factor.
On 25 August 1997, the trial court found that Sanford's
“calculations and methodology are in accord with the statutory
definition of actuarial equivalent and contain the correct
calculation and methodology for calculating pension
underpayments” due the plaintiffs. The trial court then ordered
that the additional disability benefits due the plaintiffs be
“calculated by application of the statutory definition of
actuarial equivalent” based on a mortality factor as testified to
by Sanford. On 24 October 1997, another hearing was held after which the trial court entered an order upholding the plaintiffs'
claim for judgment interest and denied the defendants' motion for
a stay of the order of 25 August 1997.
On appeal, where the facts are not at issue, a de novo
standard of review is applied in determining whether an error of
law exists. Ayers v. Bd. of Adjust. for Town of Robersonville,
113 N.C. App. 528, 530, 439 S.E.2d 199, 201, disc. review denied,
336 N.C. 71, 445 S.E.2d 28 (1994); Capricorn Equity Corp. v. Town
of Chapel Hill, 334 N.C. 132, 431 S.E.2d 183 (1993). “Any error
made in interpreting a statute is an error of law.” Savings &
Loan League v. Credit Union Comm., 302 N.C. 458, 464, 276 S.E.2d
404, 409 (1981).
[1]On appeal, the defendants contend that the trial court
erred as a matter of law in requiring the payment of additional
disability benefits based on a mortality factor because it
mistakenly interpreted the statutes governing the retirement
system and the Supreme Court's decision in Faulkenbury. The
defendants further contend that the use of a mortality factor is
not relevant in the calculation of additional disability benefits
owed to the plaintiffs or their survivors as there is no risk of
such benefits being forfeited. On the other hand, the plaintiffs
contend that both N.C. Gen. Stat. § 128-32 and § 135-10 require
that the actuarial equivalent based on a mortality factor be used
to calculate the amount of additional disability benefits to be
paid as determined by the decision in Faulkenbury. Furthermore,
the plaintiffs argue that since they faced the risk of dying
before having received the additional disability benefits, the use of a mortality factor is relevant in making the
calculations.
The plaintiffs' expert, Sanford, testified that he is
employed as a consulting actuary with ADP Benefit Services in
Richmond, Virginia, where he has 20 years of experience in the
design, financing, management, and administration of employee
benefit programs. Sanford noted that he had been contacted by
the plaintiffs' counsel and informed “that there had been a
decision that a group of retirees were entitled to be caught up”
and paid “past underpaid retirement benefits.” He stated that he
was “hired to perform the calculation of the amount needed to
make up for those past benefits.” In his approach to this case,
Sanford stated that he reviewed the statutes applicable to the
retirement systems in Chapters 135 and 128 and the Supreme
Court's decision in Faulkenbury, all of which were furnished to
him by the plaintiffs' counsel. He explained why his approach
included a mortality factor in his calculations in addition to
the regular interest.
On direct examination, he testified:
Q. In your opinion what is missing from a
calculation made . . . using only the four
percent interest component?
A. This plan's definition defines two
components in computing the actuarial
equivalent. One is the regular interest and
the other is the prescribed mortality tables.
. . .
Sanford then gave an explanation of “actuarial equivalent”
as follows:
The Actuarial Equivalent of a benefit is the
amount of money that a benefit is 'worth' at
a given date based on a stated mortality
table and interest rate. If the Actuarial
Equivalent of a benefit is determined at the
beginning of the benefit payout period, it is
determined by discounting the future benefit
payments for both interest and mortality,
i.e. the probability that the person will
survive to receive each future benefit
[payment]. If the Actuarial Equivalent of a
benefit is determined at the end of a payment
period, the reverse is true. The
'accumulated' Actuarial Equivalent must
accumulate prior benefits with interest over
the past time period and also for the inverse
of mortality, or the 'benefit of
survivorship.'
Further, on direct examination, Sanford was asked to
illustrate the actuarial equivalent with a hypothetical where a
person's benefit is incorrect at age 50 and corrected at age 55:
Q. If you will, illustrate for us . . . what
it is you are talking about when you say
actuarial equivalent with reference, say to a
person 50 years old and, say, for over a
period of five years. Illustrate . . . with
reference to that person where the benefit is
incorrect at age 50 and is corrected--when
that person reaches the age of 55.
A. We are dealing with a single benefit of
$1,000 that was payable at age 50. And we
are going to accumulate that for mortality
and 4 percent interest. The interest
accumulation would--just using simple
interest on the original amount, would
accumulate $40 every year. . . .
&nb
sp;
&nb
sp;
The reflection of the mortality component
requires that you select--you construct what
we call a life table based on these mortality
rates. You start with one person in your
life table at age 50 . . . let's assume that
every year the chance of dying is 1 percent.
At age 51, we are down to .99 of a person,
.98,.97,. . . .
The actuarial
equivalent of the $1,000 is your original
$1,000 plus your $200 interest divided by the
.95. There is a 5 percent chance of dying over the five year period.
Q. And so the bottom line answer to the
equation you have on the bottom there, then,
would give you the actuarial equivalent of
what that person should have gotten over that
five year period.
A. Yes.
On cross-examination, Sanford was questioned further about
how he defined the “benefit of survivorship.”
Q. And what do you mean by the benefit of
survivorship?
A. The benefit of survivorship is this
mortality factor we went through here where
you--it is basically the probability of
having died from the time those payments were
made until the present time.
Q. What is the benefit of survivorship in
this instance?
A. . . . [I]t is a calculation that, I
believe is called for under the plan, that in
addition to the interest component of
actuarial equivalent it prescribes that
mortality be reflected in the calculation.
Q. Well, why would you reflect the benefit
of survivorship if whether the person lives
doesn't make any difference?
A. Because the plan definition calls for it.
In referring to his hypothetical of an incorrect benefit
being paid to a person at age 50, but corrected at age 55,
Sanford testified as follows:
Q. And why is that--can you tell us simply
why that is the value of it?
A. The interest component is just a simple
accumulation on the $1,000 for five years. The mortality component--it shows here that
the probability of dying in that five year
period is 5 percent. And that is the
survivorship piece that gets added on.
Q. And the significance there is that some
people die and do not receive their money?
A. Right. The concept is, you know, a
little bit like you are accumulating a
retirement fund and everybody is setting
aside money, but some people will not live to
ever receive anything. And part of the
funding for the people who do survive will
come from the money that is forfeited by the
people that die in the meantime. That is,
you know, somewhat of an idea of this benefit
of survivorship.
In summary, Sanford testified that his approach of using a
mortality factor was based on the usual assumption of a risk that
benefits would not be paid to a survivor of a member and thus
would be forfeited. While the plaintiffs argue that they faced
the risk of dying before having received the additional
disability benefits, Sanford stated that he included the benefit
of survivorship in his calculations because he understood the
plan called for it. He admitted his calculations were based on
benefits not being paid to a survivor of a member.
The defendants' expert, Overholser, testified that he is
employed at Buck Consultants where he is the principal consulting
actuary and works primarily with governmental retirement systems.
He serves as director of the public employees' retirement system
consulting practice for the firm and is a member of both task
forces that worked with the governmental accounting standards
board in setting their standards for public pension plans. He is
also the chairman of the subcommittee on public retirement
systems of the Academy of Actuaries. In addition, he currently serves as the actuary for the statewide retirement systems in
South Carolina, Georgia, and Alabama, as well as for the
teachers' retirement system in Kentucky, and has served as
actuary for the retirement systems in North Carolina since 1985.
Overholser explained that he examined the same information
as Sanford, including the Faulkenbury decision, relevant
statutes, and mortality tables. On direct examination he was
asked:
Q. [W]hat is an actuarial equivalent or what
is it supposed to be?
A. It is a payment of equivalent value. Mr.
Sanford in his testimony gave a definition of
actuarial equivalent, which I would say is
pretty accurate. It is just converting one
stream of payments into another stream of
payments so that they are equivalent when
taking into account the time value of money
and the chance or probability that a person
will receive payment or a series of payments.
In all actuarial calculations that deal
with equivalency, three factors are
considered: the benefits to be paid, the
time value of money factor, and the
survivorship factor are always combined and
you get a value on that basis. Doing this
you can always equate streams of payments.
This is kind of what the concept of actuarial
equivalent is.
In his capacity as a consulting actuary for this State's
retirement systems, he stated that actuarial equivalent factors
were regularly used.
Q. And when would they use them?
A. When members retire, if they elect an
optional form of benefit which is the
actuarial equivalent of their basic benefit,
the factors are used to convert the regular
allowance into the optional allowance, into the actuarial equivalent of the optional
allowance.
Q. [W]ould that be, for example, if someone
retired at age 65 and then instead of taking
the maximum benefit he chose to take a
smaller benefit so that his wife could have a
benefit after his death? Is that when you
use this calculation?
A. The kind you just described is a joint survivor
benefit or a survivorship benefit where you leave a
benefit to a survivor after your death.
Overholser then testified that he disagreed with the
calculations by Sanford. He explained his disagreement in the
following manner:
I disagree with the calculations in the
context of the . . . decision of the court in
this case.
These factors and this calculation would
be appropriate if we were only going to make
payments to the members who have survived
until the present time. These calculations
build in a survivorship factor when there is
really no contingency risk or forfeiture of
the benefits.
According to the court ruling, not only
the people who survive would be entitled to
payment, but also the people who have died
since they received the payments and before
the present time. So there is really no risk
of forfeiture; hence there is no survivorship
value involved. Hence the mortality or
survivor factor would not be involved in
these calculations.
Overholser was further asked to explain how he interpreted
the language of the retirement statutes to his determination that
a mortality factor is not relevant in the calculation of
additional disability benefits here.
Q. And how would you relate the language in the statutory provision about the mortality
tables to your opinion that no calculation
for mortality should be included?
A. Well, in calculating actuarial
equivalency, you apply a mortality table if
it is relevant to the calculation, in
particular if there is a benefit of
survivorship involved. If there is no
benefit of survivorship, you do not introduce
the mortality element. . . . Where
there is an element of risk of forfeiture
involved, . . . you do reflect the mortality.
. . .
There is nothing at all contradictory in not
using mortality here because it doesn't enter
into an actuarial equivalent calculation when
there is no element of forfeiture or risk.
Q. Are you aware of any experience or any
instance in which mortality tables are used
to calculate an actuarial equivalent when the
risk of mortality does not prevent payment.
A. I am not.
In summary, Overholser explained that to include a mortality
factor in the calculation when there was no risk of losing
benefits would be to create “value out of nothing.” He stated
Sanford's calculations would be correct if you have to survive to
get the benefit, and those who do survive would get a “windfall,
a benefit of survivorship, because [they] profit from the
forfeiture of benefits by the people who have died in the
interim.” However, Overholser concluded that since the Court had
ordered that the additional disability benefits be paid “to
people who have died . . . there is no benefit of survivor[ship]
from forfeiture.”
Therefore, it is apparent from the testimony of Sanford and Overholser that the foundation of the mortality factor used in
the calculation of a retroactive benefit is premised on whether
that benefit is forfeited by a member who does not survive to the
time of payment and whether that payment which is forfeited is
paid to those members who have survived from the original group.
Black's Law Dictionary defines mortality tables as, “A means
of ascertaining the probable number of years any man or woman of
a given age and of ordinary health will live.” Black's Law
Dictionary, 1009 (6th ed. 1991). “A mortality table should only
be used for the purpose it is meant to fulfill.” Vinson & Elkins
v. Commissioner, 99 T.C. 9, 53 (1992), affirmed, 7 F. 3d 1235
(1993)(explaining the determination of which mortality table was
to be used in determining pre-retirement death benefits versus
post-retirement annuities). The key factor in determining when
to apply a mortality factor is whether or not survivorship is a
risk factor in the calculation of benefits to be paid. As
Sanford explained in his testimony, the benefit of survivorship
is “the probability of having died from the time those payments
were made until the present time” with those payments being
forfeited.
Within the retirement statutes a mortality factor is
relevant, as Overholser pointed out, when, for example, an
employee retires, instead of taking the maximum benefit, he
chooses to take a smaller benefit so that his beneficiary can
have a larger benefit after the employee's death. In this
example, the life expectancy of the employee determines the
amount of the benefit because it affects the likelihood that the benefit will continue to a certain point. The use of mortality
tables may be ignored if a forfeiture of compensation does not
occur at death. William H. Schmidt, Limitations on Contributions
and Benefits, C529 A.L.I.- A.B.A. 137 (1990)(explaining the use
of mortality tables in determining the actuarial equivalence of a
defined benefit plan). “[I]t is a well settled rule of statutory
construction that, where a literal interpretation of the language
of a statute would contravene the manifest purpose of the
statute, the reason and purpose of the law will be given effect
and the strict letter thereof disregarded.” Matter of Banks, 295
N.C. 236, 240, 244 S.E.2d 386, 389 (1978).
The plaintiffs argue they faced the risk of dying while
awaiting the underpayments while Sanford's calculations were
based on the risk of forfeiting these payments by members who had
died. Our retirement statutes do not recognize the risk asserted
by the plaintiffs and included in Sanford's calculations. Since
there is no forfeiture of payments by deceased members, there are
no other risks associated with these underpayments.
We have carefully reviewed all relevant statutes and the
decision in Faulkenbury including the option elections for
retirees and we find no authority which mandates the calculation
of additional disability benefits as contended by the
plaintiffs.
The trial court construed the Supreme Court's decision in
Faulkenbury to mandate the use of a mortality factor in computing
the actuarial equivalent of the additional disability benefits.
We do not construe our retirement statutes and the decision in Faulkenbury to mandate such a construction. The trial court
erred as a matter of law in ordering that the additional
disability benefits due plaintiffs be calculated according to the
plaintiffs' expert.
[2]Next, the defendants contend that the trial court erred
in allowing the plaintiffs to collect post-judgment interest on
their retroactive benefits. The trial court awarded post-
judgment interest at the legal rate of eight percent (8%), as set
by N.C. Gen. Stat. § 24-1 (1991), in addition to the regular
interest of four percent (4%) required under the retirement
statutes.
The plaintiffs contend that they should be granted post-
judgment interest pursuant to our Supreme Court's decision in
Smith v. State, 289 N.C. 303, 222 S.E.2d 412 (1976). In that
decision, the Supreme Court held that when the State enters into
a contract, it implicitly agrees to be sued for damages. The
Court further held that when the State is sued for damages, it
will “occupy the same position as any other litigant.” Id. at
320, 222 S.E.2d at 424. Therefore, the plaintiffs argue that if
the State is to be treated like “any other litigant,” that means
it should be required to pay post-judgment interest. However,
the defendants contend that despite the holding in Smith, the
State is not required to pay post-judgment interest unless there
is statutory authority requiring it to do so.
Our Courts have held that the State is not required to pay
interest on its obligations unless it is required to do so by
contract or by statute. Stanley v. Retirement and Health Benefits Division, 66 N.C. App. 122, 123, 310 S.E.2d 637, 638,
disc. review denied, 310 N.C. 626, 315 S.E.2d 692 (1984);
Davidson & Jones, Inc. v. N.C. Dept. of Administration, 69 N.C.
App. 563, 570, 317 S.E.2d 718, 723, affirmed in part and reversed
in part, 315 N.C. 144, 337 S.E.2d 463 (1985); Yancey v. Highway
Commission, 222 N.C. 106, 109, 22 S.E.2d 256, 259 (1942). This
has been the long established rule in this State. The decision
in Smith did not change this rule. In Smith, the issue of
whether to allow post-judgment interest was not before the Court.
Instead, that case dealt with the issue of whether a plaintiff
could sue the State in a breach of contract action. Smith, 289
N.C. at 320, 222 S.E.2d at 424. The decisions by our appellate
courts since Smith confirm this point. See Stanley, 66 N.C. App.
at 123, 310 S.E.2d at 638; See Davidson & Jones, Inc., 69 N.C.
App. at 570, 317 S.E.2d at 723.
Under our retirement statutes, N.C. Gen. Stat. § 135-1(2)
and § 128-21(2), regular interest is to be included in the
payment of retroactive retirement benefits. Statutes that allow
recovery against the State are to be strictly construed. Myers
v. Dept. of Crime Control, 67 N.C. App. 553, 555, 313 S.E.2d 276,
277 (1984). In Myers, this Court held that the plaintiff was not
entitled to post-judgment interest on an award of damages under
the State Tort Claims Act. Id. This Court, following the
reasoning in Yancey, stated that post-judgment interest is not
collectible against the State without authorization by the
General Assembly or unless the State has agreed to do so. Id.
The Court further noted that interest can be assessed at the legal rate on recovery of workers' compensation benefits because
N.C. Gen. Stat. § 97-86.2 provided that such interest was to be
awarded. Id. at 555-56, 313 S.E.2d at 277. However, N.C. Gen.
Stat. § 24-1 et seq., which allows for post-judgment interest,
contains no provision for the allowance of such interest to be
awarded against the State. The General Assembly has not
authorized the allowance of post-judgment interest against the
State but has provided that all retirement benefits shall include
regular interest of four percent (4%). Therefore, post-judgment
interest should not have been awarded against the defendants.
In conclusion, the order of the trial court is reversed and
the case is remanded for a determination of additional disability
benefits owed to the plaintiffs consistent with this opinion.
Reversed and remanded.
Judges LEWIS and MARTIN, John C. concur.
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