Aaron J. Cryer v. City of Dyersburg

03/02/2021
IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
January 19, 2021 Session
AARON J. CRYER, ET AL. v. CITY OF DYERSBURG, ET AL.
Appeal from the Circuit Court for Dyer County
No. 16-CV-38 R. Lee Moore, Jr., Judge
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No. W2020-00045-COA-R3-CV
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City employees brought action against the city upon its amendment of the pension plan.
The trial court ruled in favor of the city. The employees appeal. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
Affirmed; Case Remanded
JOHN W. MCCLARTY, J., delivered the opinion of the court, in which Arnold B. Goldin and
Kenny W. Armstrong, JJ., joined.
Deborah Godwin, John F. Canale, Memphis, Tennessee, and Megan K. Mechak,
Washington, D.C. for the appellants, Jason M. Alexander, and Aaron J. Cryer.
Scott K. Haight, Christine A. Coronado, and Becky Dykes Bartell, Dyersburg, Tennessee,
for the appellees, City of Dyersburg, Tennessee, John Holden, Bob Jones, and Steve
Anderson.
OPINION
I. BACKGROUND
The City of Dyersburg (“City”), a municipal corporation in the State of Tennessee,
is governed by an elected mayor and an eight-member Board of Aldermen (collectively,
the “Board”). At the time of the action, John Holden was the mayor and had served in that
position since 2007.
In 1979, the City established a “defined benefit pension plan.” It was amended
effective July 1, 2001 (“2001 Pension Plan”) and then again on December 7, 2015 (“2015
Pension Plan”). Employees contributed 5% of their salary to the plan. Pursuant to the 2001
Pension Plan, employees who provided 30 years of service to the City received a benefit
equal to 2% multiplied by their years of service multiplied by the monthly average of their
highest 36 months of salary, regardless of age. Retirees also received an annual Cost-of-
Living Adjustment (“COLA”) of 2% or the amount of the Consumer Price Index,
whichever is less. Prior to the 2015 amendment, there were 283 participants in the plan. As
of July 1, 2013, the present value of the benefits in the plan was $23,580,225; the unfunded
accrued actuarial liability was $14,215,667. In 2006, the City’s prior administration did not
make an annual contribution to the plan. When Mayor Holden came into office in 2007, he
made the contribution due for 2007, as well as the 2006 contribution. From 2008 to 2010,
however, the City lost over 1,000 jobs. No salary increases occurred during the five years
following 2008. A significantly unfunded pension liability arose.
In approximately 2012, the plan was evaluated for potential cost-saving revisions.
Mayor Holden formed a retirement committee, joining with himself as members Bob
Jones, City Recorder; Sue Teague, Human Resources Director; and Steve Anderson, City
Treasurer. Around February 2014, the City became aware of potential changes in
Tennessee law that would, at a minimum, mandate municipalities to make 100% of the
annual required contribution toward pension plans within five years. Mayor Holden and
other City officials met with the State Treasurer and State Senate Majority Leader to seek
guidance regarding what would become the “Public Employee Defined Benefit Financial
Security Act (“Act”) of 2014.”1
The Act
The Act established a required set of procedures to help state political subdivisions,
like the City, which had existing but underfunded pension funds, achieve sustainability. It
required any political subdivision with a defined benefit plan not administered by the
Tennessee Consolidated Retirement System (“TCRS”) to develop a funding policy for
financing the obligations under its pension plan. Tenn. Code Ann. § 9-3-504(b). The
funding policy must be “legally adopted and approved through a resolution by the political
subdivision’s chief legislative body or governing body.” Tenn. Code Ann. § 9-3-504(b). It
also must, in pertinent part, include a statement that the political subdivision’s budget will
include funding of at least 100% of its actuarially determined contribution (“ADC”). Tenn.
Code Ann. § 9-3-504(c)(3).2 If a political subdivision is not paying at least 100% of its
ADC, the Act requires a “Plan of Correction,” in which the entity must explain how it will
do so, subject to a five-year phase-in period. Tenn. Code Ann. § 9-3-505(b). The Plan of
Correction must be submitted to the State Treasurer and approved by the State Funding
1
Public Chapter 990, codified at Tennessee Code Annotated §§ 9-3-501 – 9-3-507. Signed into law
on May 22, 2014.
2
The ADC means “the actuarially determined annual required contribution that incorporates both
the normal cost of benefits and the amortization of the pension plan’s unfunded accrued liability.” Tenn.
Code Ann. § 9-3-503(a)(1).
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Board. If a political subdivision fails to fund its ADC at 100%, the Commission of Finance
and Administration is authorized to withhold such amount or part of such amount from any
state-shared taxes that are otherwise apportioned to the political subdivision, and such
money shall be paid to the political subdivision’s pension plan. Tenn. Code Ann. § 9-3-
507(a). Significantly, the deduction is made as a first charge against any moneys payable
to the political subdivision, regardless of the source of such payments and the purpose or
contemplated use of such funds. Tenn. Code Ann. § 9-3-507.
At the time the Act was enacted, the City was using the 2001 Pension Plan, under
which it was not required to make any contribution to its plan. However, the City was
contributing 6.5% of its payroll amount to its plan, generating a yearly contribution of
approximately $800,000. The City has always paid every benefit due pursuant to the plan,
but the parties agree that the plan was substantially underfunded before the 2015 Pension
Plan amendment. As of 2014-2015, the City’s plan had an unfunded accrued liability of
about $22.4 million.
Faced with the new law and a funding crisis, the City’s Retirement Committee
issued a request for proposals for a new actuary. The request was comprised of two parts:
(1) an “analysis of the plan to assess the annual funding requirements that will be required
with this new legislation and analysis of the means by which such funding requirements
can be achieved,” and (2) “provision of ongoing actuarial services.” Alan Pennington was
selected to serve as the City’s new actuary.
The City desired to continue its plan and to provide meaningful benefits that were
properly funded and sustainable. It did not want to freeze the plan, which would have
prevented participants from earning any additional benefits. Further, notwithstanding that
the 2001 Pension Plan allows for its termination, the City did not want to end it.
According to the City Defendants, as part of the review process, Mr. Pennington
conducted an “Experience Study” of the plan (reviewed the last five years of the plan to
see if the experience was consistent with the assumptions being made in the valuation to
determine the City’s ADC). Mr. Pennington also completed a “Valuation Report,” which
he used to determine the ADC for the plan’s funding purposes in order to ensure that the
future investment return plus contributions will be sufficient to pay the future expected
benefits. Under the Act’s more conservative actuarial assumptions, Mr. Pennington
concluded that the City’s ADC increased to $2.15 million, almost triple the budgeted
amount of approximately $800,000, which constituted a substantial increase from the
historic 6.5% of payroll to 26.8% of payroll. According to Mr. Pennington, unless the City
made changes to its plan, it likely would become insolvent by July 2019. Mr. Pennington
testified that even if the City doubled its existing contribution level to 13% of payroll, the
plan would become insolvent by 2021.
Accordingly, the 2001 Pension Plan was reviewed to determine what changes the
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City could make to it. Mr. Pennington testified that he looked at what were the most
actuarially unsound provisions of the plan and tried to find a way to modify it to achieve
an ADC the City could maintain without reducing the vested or accrued benefits.
According to Mr. Pennington, he considered modifications to the ancillary benefits, many
of which were the least used benefits by the plan participants. He was not asked by the City
to make certain specific changes to the plan; instead, the City relied upon his advice to
ascertain the required adjustments:
[He] put forward a number of potential changes. Sat down with retirement
committee, discussed those changes. Got their feedback. Made some
modifications to some of those changes based on their feedback. And then,
came up with an ultimate set of recommendations after a back and forth
process to determine . . . what would make the objectives that they had put
forward and that they were comfortable with.
The City considered Mr. Pennington’s suggestions and further discussed other
possible changes. One option the City reviewed was increasing employee contributions.
However, in order to meet the necessary contribution for 2014, the City would have been
required to increase plan participant contributions from 5% to 32% of payroll, which was
not financially feasible. The City also reviewed whether there were additional funding
sources other than property taxes, which the City had already increased five times in a
thirteen-year period, beginning in 2007. None were readily found.
After due consideration, the City, through the actions of the Retirement Committee,
concluded that it was reasonable and necessary to revise the 2001 Pension Plan to reduce
the total liability of the plan. The City determined that it had to reduce the ADC to an
amount that could be reasonably reached within the five-year period mandated by the Act
while, at the same time, avoiding major cuts to essential City services or impossible tax
increases.3 The changes proposed by Mr. Pennington and the Retirement Committee were
as follows:
1. To close the plan to non-vested plan participants and new entrants; Non-
vested plan participants will no longer be eligible to participate in the plan.
2. To sponsor a new TCRS 401(k) plan to non-vested participants, non-
participants and new hires. In the TCRS 401(k) plan, the employer matches
employee contributions up to 3% of pay. The matching portion will be 100%
vested after five years – 20% per year for five years. Employee contributions
are always 100% vested.
3
All the members of the Retirement Committee were participants in the plan when they considered
the changes to it. Thus, any changes the Committee elected to make to the plan affected them individually.
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3. To no longer allow a participant who voluntarily leaves the plan to restart
contributions in the future. (However, non-contributing participants in the
plan will, at any time, be permitted to elect to participate in the new City
TCRS 401(k) plan).
4. To eliminate the annual COLA for retirees under age 70 and reduce to 1%
for retirees between ages of 70 and 74. Retirees age 75 or older should
continue to receive a 2% annual increase.
5. To modify the present value percentage used to calculate lump sum
distributions. The new present value percentage for lump sums will reduce
lump sum payments by approximately 15% for plan participants receiving
unreduced retirement benefits.
6. To pay out lump sum distributions in excess of $100,000 over five years.
7. To phase out the ability to retire early after 30 years of service with
unreduced benefits based on plan participants’ service as of December 7,
2015. Specifically, if an employee has served at least 25 years the unreduced
benefits will still be available after 30 years. If an employee served at least
15 years but less than 25, unreduced benefits are available after 35 years. For
employees who have served less than 15 years, unreduced benefits are no
longer available.
8. To eliminate the opportunity to purchase prior service.
9. To eliminate hardship withdrawals.
10. To change the vesting schedule for partially vested plan participants so
that the vesting percent will not change until the member completes 10 years
of service, at which time the vesting percent will go to 100%.
11. To implement a one-time service sell back plan whereby plan participants
will be permitted to sell back all or a portion of their accumulated service
years for an immediate lump sum payment.
On December 7, 2015, the City’s Finance Committee considered the proposed
changes to the plan. It adopted the “Pension Funding Policy of the City of Dyersburg” as
required by Tennessee Code Annotated section 9-3-504(b), the “Plan of Correction” as
required by Tennessee Code Annotated section 9-3-504(c)(3) and Tennessee Code
Annotated section 9-3-504(b), the Amended and Restated City of Dyersburg Pension Plan,
and a new 401(k) plan to be administered by TCRS. The changes approved by the Finance
Committee reduced the City’s projected ADC from $2.15 million to $1.7 million.
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Following the Finance Committee meeting, the Board met and unanimously approved and
adopted the same changes.
The Plan of Correction was subsequently tendered to the State Treasurer, who
forwarded it to the Tennessee State Funding Board and recommended approval. The State
Treasurer’s Recommendation Memo provides:
Treasury staff has reviewed the plan of correction and has determined that it
meets the requirements of applicable law. I recommend that the State
Funding Board approve the plan of correction submitted by the City of
Dyersburg. The actions by the city to close the [Defined Benefit] plan, start
a 401(k) plan, make structural changes to the now closed [Defined Benefit
Plan], and establish a service sell back program are steps that support
allowing the city greater flexibility to reach 100% funding of the ADC.
The State Funding Board approved the City’s Plan of Correction on December 21, 2015.
On January 6, 2016, the Comptroller of the Treasury advised Mayor Holden by letter of
the approval.
Aaron “Jay” Cryer and Jason M. Alexander (“Plaintiffs”) are City employees. Both
are 100% vested in the 2001 Pension Plan. They believe that this status means that their
benefits are guaranteed and not subject to change. They argue that because they have given
at least ten years of service to the City and contributed five percent of their annual salary
to the plan, their vested interests cannot change. They filed this action on June 2, 2016,
challenging the amendments to the City’s plan. The Plaintiffs seek a declaratory judgment
that the 2015 amendments were void because they violated the principles set forth by the
Tennessee Supreme Court in Blackwell v. Quarterly County Court of Shelby County, 622
S.W. 2d 535 (1981), and its progeny. They request injunctive relief preventing the City
from implementing the 2015 amendments, asserting that they relied upon the promises
found in the City’s plan and that the 2015 amendments interfere with those promises and
their vested pension rights.
In a memorandum opinion and order filed on November 1, 2017, the trial court held
as follows:
The court is convinced that necessary changes in public employee pension
plans may be made by the governing body. It appears from the case of
Blackwell v. The Quarterly Court of Shelby County, Tennessee, 622 S.W.2d
535 (1981) that the rights of employees are subject to the terms and
conditions of the pension plan rather than a contractual right. The employees
under the Blackwell case seem to have no contractual rights other than those
conferred by the plan. Blackwell also indicates that public opinion demands
that there be a right of the public employer to make reasonable modifications
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in an existing plan if necessary to create or safeguard actuarial stability,
provided that no then accrued or vested rights of members or beneficiaries
are thereby impaired. Our Supreme Court in Blackwell, stated, “we are not
convinced that a plan is frozen against detrimental changes or modifications
the moment an employee begins to participate in it, where such changes are
necessary to preserve the fiscal and actuarial integrity of the plan as a whole.”
It is also clear that our Supreme Court adopted the so-called Pennsylvania
Rule which permits reasonable modifications when necessary to protect or
enhance its actuarial soundness of the plan provided that no such
modification can adversely affect an employee who has complied with all
conditions necessary to be eligible for a retirement allowance. Blackwell also
states that modifications cannot be applied detrimentally under the
Pennsylvania Rule to any employee[s] who at the time of the amendment
were eligible to receive an allowance from the plan.
The court refrained from granting judgment on the issue of whether “the amended plan
detrimentally affected vested and accrued rights.” The court also concluded:
There is no evidence before the Court as to the reason for the amendment or
whether or not the changes made in December of 2015 were necessary to
preserve the fiscal and actuarial integrity of the plan as a whole. It is the
position of the defendants that this situation is not applicable to the plaintiffs
because they do not meet the definitions of having accrued and vested
benefits. The Court finds that there could be a question of fact in this area,
and the motion of the defendants for summary judgment of the entire case is,
therefore, denied.
A bench trial was held on July 29 and 30, 2019, and the final memorandum and
order was issued on December 12, 2019. The trial court determined that the modifications
made by the City in 2015 were permitted by the 2001 Pension Plan and state law, and that
the modifications were not arbitrarily done, but done with consideration from the City to
keep a pension plan for its employees that was actuarially and fiscally sound. The court
specifically concluded:
The Court finds that the 2001 Pension Plan provided for amendments to be
made. The Court also finds that under the case of Blackwell v. Quarterly
Court of Shelby County, 622 S.W.2d 53, that public policy demands that
necessary changes in public employee pension plans may be made by the
governing body to the extent and under the conditions discussed in the
Blackwell case. Public policy demands that there be a right on the part of the
public employer to make reasonable modifications in an existing plan if
necessary to create or safeguard actuarial stability, provided that no then
accrued or vested rights of members or beneficiaries are thereby impaired.
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The Court finds that the City modified the plan. The modification was not
arbitrarily done or done without consideration from the City to keep a
pension plan for the city employees that was fair and reasonable. The issue,
however, for this Court to determine is whether or not in modifying the 2001
Pension Plan there were accrued and vested rights of the plaintiffs impaired
by the modifications. Blackwell finds “vested interest” [means] that the
employee had interest in the assets of the retirement system, so as to render
the same immutable and beyond necessary amendment by the governing
body. Blackwell permits reasonable modification when necessary to protect
or enhance the actuarial soundness of the plan provided that no such
modifications can adversely affect an employee who has complied with all
conditions necessary to be eligible for a retirement allowance.
It is the position of the plaintiffs that modifications did, in fact, impair their
rights under the 2001 Pension Plan. It is the position of the City that the
modifications were allowable and that the modifications did not affect rights
that were both vested and accrued. The City argues that vested and accrued
benefits are defined specifically in the 2001 City of Dyersburg Pension Plan.
The defendants argue that Section 1.1 finds accrued benefit as meaning the
benefit amount earned by a participant as of a specified date as determined
by Section 4.1. Section 4.1 provides that each participant will be entitled to
retire at normal retirement date and to receive accrued benefit payable as a
formal form of retirement benefit equal to the amount determined in
accordance with the provisions of that section. The City argues that the
benefits are not vested and accrued until the retirement age. Section 1.32
finds normal retirement age being age 60 for participants hired prior to
February 1, 1989, and age 65 for participants hired on or after February 1,
1989. Although both plaintiffs certainly felt that they had vested benefits
prior to the amendment, under the terms and conditions of the 2001 Pension
Plan, benefits are not both fully accrued and vested until normal retirement
age. Both plaintiffs were employed by the City of Dyersburg after 1989. The
normal retirement age for both plaintiffs would be age 65. Section 4.1 of the
2001 Pension Plan provides that each participant will be entitled to retire at
normal retirement age and receive an accrued benefit payable as a normal
form of retirement benefit equal to the amount determined in accordance with
the provisions of this section. It appears to the Court, that the benefits became
accrued and vested as of age 65.
Section 4.7 of the 2001 Pension Plan provides that a participant shall have a
100% vested interest in his or her accrued benefit upon reaching normal (if
applicable early) retirement age prior to termination of employment, death
or disability.
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It appears also to the Court that the cost of living adjustment; the phase out
30-and-out provision; the disability benefit provisions; the rate of interest and
the rate of employee contribution are all ancillary benefits subject to
modification. The actuaries for both plaintiffs and defendant seem to indicate
that some of these type benefits are ancillary benefits. The actuary hired by
the City to help prepare the 2015 amendment testified specifically that they
were all ancillary benefits. His testimony was more persuasive than the
testimony of the plaintiffs’ actuary. The Court also finds that the City Pension
Plan was not prohibited by ERISA4 from making the amendments. The
Court, therefore, finds that the modifications made by the City in 2015 were
permitted under the 2001 Pension Plan and that they did not affect the
plaintiffs’ accrued and vested benefits. The Court finds that the modifications
were reasonable and necessary to preserve the actuarial integrity of the
pension plan and to comply with State law. The complaint is, therefore,
dismissed. Costs are assessed against the plaintiffs.
II. ISSUES
We restate the following issues raised by the Plaintiffs in their appeal as follows:
1. Whether the trial court erred by applying the wrong legal standard and
concluding that the City could amend the pension plan because doing so did
not affect the Plaintiffs’ “vested and accrued” benefits.
2. Whether the trial court erred by concluding that the 2015 amendments to
the City’s plan did not violate the principles found in Blackwell.
3. Whether the trial court erred by concluding that the COLA, early
retirement, disability retirement, and rate of interest earned on employee
contributions in the City’s plan were ancillary benefits, as that term is defined
by ERISA, and could be altered even if it harmed plan participants like the
Plaintiffs.
III. STANDARD OF REVIEW
The standard of review in this action for declaratory judgment and injunctive relief
is limited to determining whether the City acted illegally, arbitrarily, or capriciously in
enacting the 2015 Pension Plan. McCallen v. City of Memphis, 786 S.W.2d 633, 639 (Tenn.
1990). In reviewing legislative acts of local governments, we must review the local
government’s actions deferentially and should refrain from substituting our judgment for
4
Employee Retirement Income Security Act of 1974 (“ERISA”).
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the broad discretionary authority of the local governmental body. Id. at 641-42.
IV. DISCUSSION
The City has consistently explained that it revised the 2001 Pension Plan in 2015
for three reasons: (1) to comply with the Act, Tennessee Code Annotated section 9-3-501,
et. seq.; (2) to help preserve the actuarial and fiscal integrity of the plan; and (3) to create
a sustainable plan and to avoid its complete termination. The City asserts that because the
Plaintiffs were not eligible for retirement, their rights in the plan were not vested and
accrued.
The Plaintiffs argue that the City Defendants did not discuss or consult with the
employees that there were plans to amend the pension plan before the amendments were
enacted. They contend that if they had been consulted, they would have urged consideration
of other alternatives to reducing the plan benefits, such as increasing employee
contributions.
According to the Plaintiffs, the early retirement benefit which was eliminated was
an important inducement for continued employment. Mr. Alexander claims that he had
planned to retire at the age of 57, relying on the 30-year service requirement. He asserts
that he will now be required to work five additional years to receive unreduced retirement
benefits. He contends that the present value of his retirement benefit was reduced by
approximately $141,000 (from $411,000 to $270,000). Mr. Cryer argues that he will have
to work until he is 65 and provide approximately 40 years of service before he is eligible
to retire with an unreduced pension. According to Cryer, if he were to work 40 years, his
retirement benefit will only be based on 35 years of service—he will have to render five
years of service without accruing any additional benefit. He claims his retirement benefit
was reduced by approximately $97,000 (from $197,000 to $100,00).
The Plaintiffs additionally argue that the elimination of the COLA will negatively
impact those employees who retire at a younger age because those retirees will not
experience its compounding effect. They further contend that they relied upon the promise
of a COLA because an annual increase would ensure that their pension grew as the COLA
did, without the need to supplement their retirement benefits. The Plaintiffs also argue that
the lump sum payments negatively impact the present value calculation.
A.
In Blackwell, the Tennessee Supreme Court adopted the “Pennsylvania rule, which
permits reasonable modifications when necessary to protect or enhance actuarial soundness
of the plan, provided that no such modification can adversely affect an employee who has
complied with all conditions necessary to be eligible for a retirement allowance.” Id. at
543. The Blackwell Court explained, “We are of the opinion that the Pennsylvania rule is
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preferable. It is more in accord with the public interest requiring a reasonable amount of
flexibility on the part of the public employer. . . .” Id. As the Court determined in Blackwell:
[W]e are not convinced that a plan is “frozen” against detrimental changes
or modifications the moment an employee begins to participate in it, where
such changes are necessary to preserve the fiscal and actuarial integrity of
the plan as a whole. It seems to us that public policy demands that there be a
right on the part of the public employer to make reasonable modifications in
an existing plan if necessary to create or safeguard actuarial stability,
provided that no then accrued or vested rights of members or beneficiaries
are there by impaired.
Id. at 540-41. The Blackwell Court found that “the modification cannot be applied
detrimentally under the Pennsylvania rule to any employees who . . . were eligible to
receive an allowance from the plan” as of a date certain. Id. at 543.
Thus, the Blackwell holding provides that a public employer must be allowed to
make changes to improve the health of a pension plan. In the instant case, had the City not
made the necessary changes to the plan, it would have become insolvent and/or been
terminated, to the detriment of all the plan participants.
The 2001 Pension Plan provides on its first page: “in accordance with the terms of
the Plan, the Sponsor has the ability at any time, and from time to time, to amend the
plan[.]” Section 9.1 of the plan allows that the City has the right and authority to amend it
at any time, subject to certain conditions:
The Sponsor, or if there is no Sponsor, the Trustee, will have the right to
amend the Plan at any time subject to the following provisions:
(a) General Requirements: Amendments (including a change
in the actuarial basis for determining optional or early
retirement benefits) must be in writing and cannot
(1) increase the responsibilities of the Trustee or
Administrator without written consent; (2) deprive any
Participant or Beneficiary of Plan benefits to which he
or she is entitled; (3) decrease the amount of any
Participant’s Accrued Benefit except as permitted under
Code § 412(c)(8); (4) permit any part of the Trust Fund
to be used for or diverted to purposes other than the
exclusive benefit of the Participants or their
Beneficiaries except as required to pay taxes and
administration expenses, or cause or permit any portion
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of the Trust Fund to revert to or become the property of
the Employer; or (5) eliminate or reduce a retirement-
type subsidy, or an early retirement benefit, or an
optional form of benefit with respect to benefits
attributable to service before the amendment. In the case
of a retirement-type subsidy, this provision will apply
only to a Participant who satisfies the pre-amendment
conditions for the subsidy either before or after the
amendment. In general, a retirement-type subsidy is a
subsidy that continues after retirement, but does not
include a qualified disability benefit, a medical benefit,
a social security supplement, or a death benefit
(including life insurance).
The trial court determined that none of the conditions in Section 9.1(a) apply to the
2015 amendments. The Plaintiffs had not met the requirements to be eligible for any of the
claimed benefits. Further, the amendments did not decrease the amount of their accrued
benefits under the 2001 Pension Plan. A plan is “not set in stone the moment [one’s] right
to some future benefits vested upon reaching [a certain number of] years of service.” Dodd
v. City of Chattanooga, Tenn., 846 F.3d 180, 186 (6th Cir. 2017). Therefore, the 2015
amendments were permissible under the 2001 Pension Plan document and Blackwell.
B.
Vested and Accrued
A public employee’s rights in a pension plan are a matter of contract. They “are
subject to the terms and conditions of the pension plan,” and any contractual rights of the
employee are “those conferred by the plan.” Blackwell, 622 S.W.2d at 540. The 2001
Pension Plan contains several provisions relevant to determining what benefits are “vested”
or “accrued.” Section 1.1 of the plan defines an accrued benefit as follows:
The term Accrued Benefit means the benefit amount earned by a Participant
as of a specified date as determined under Section 4.1. A Participant’s
Accrued Benefit in a given year will never be less than the Actuarial
Equivalent of his or her Accrued Benefit as of the end of the prior Plan Year
except as otherwise permitted by law or applicable regulation or ruling. . . .
Therefore, a benefit does not become “accrued” until and unless the Participant reaches the
relevant “specified date” as determined under Section 4.1. The specified date is defined as
“Normal Retirement Age” in Section 1.32, which “means Age 60 for Participants hired
prior to February 1, 1989 and Age 65 for Participants hired on or after February 1, 1989.”
Section 4.1 provides guidance regarding the calculation of benefits at retirement:
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[E]ach Participant will be entitled to retire at Normal Retirement Date and to
receive an Accrued Benefit payable as a Normal Form of Retirement Benefit
equal to the amount determined in accordance with the provisions of this
Section.
Each Participant’s monthly Accrued Benefit will be an amount equal to
1/12th of the following:
(a) Benefit Formula: 2% of the Participant’s Average
Compensation multiplied by his or her completed years and
months of Benefit Service as Participant at Normal Retirement
Date or earlier Termination of Employment to a maximum of
35 years. . . .
Thus, Sections 1.1 and 4.1 of the 2001 Pension Plan reveal that a benefit does not become
“accrued” until a participant reaches the “specified date” of “Normal Retirement Age,”
which would be 65 for both of the plaintiff participants.
In Frazier v. City of Chattanooga, 841 F.3d 433 (6th Cir. 2016), the court defined
“accrued” to mean “‘[t]o come into existence as a claim that is legally enforceable.’” Id. at
437. The benefit did not become legally enforceable until the employee reached the
retirement age. In the instant matter, because neither of the plaintiffs had reached the
Normal Retirement Age when the 2015 Pension Plan was enacted, they had no “accrued”
interest in any of the Claimed Benefits.
Additionally, the Plaintiffs had no “vested” interest in any of the claimed benefits.
Section 1.54 of the 2001 Pension Plan states:
The term Vested Interest means a Participant’s non-forfeitable percentage in
the Participant’s Accrued Benefit which is derived from Employer
contributions, and the Participant’s non-forfeitable percentage in any account
or Accrued Benefit attributable to the Participant’s own Plan contributions.
A Participant’s Vested Interest in the Accrued Benefit derived from
Employer contributions will be determined in accordance with Section 4.7.
Section 4.7 provides that “A Participant shall have a 100% Vested Interest in his or her
Accrued Benefit upon reaching Normal (or if applicable Early) Retirement Age prior to
Termination of Employment, death or disability. . . .”
The Plaintiffs assert that because they had more than ten years of service, they were
vested in the plan and that their rights could not be reduced.
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Under Tennessee law, “[a]n employee has a ‘vested’ retirement right when the
employee has completed the requisite term of employment necessary to be entitled to
receive retirement benefits at some future time.” Cohen v. Cohen, 937 S.W.2d 823, 826
(Tenn. 1996). See also Miles v. Tennessee Consol. Ret. Sys., 548 S.W.2d 299, 305 (Tenn.
1976) (“[A]n offer of a pension, the acceptance of same, and the completion of the service
of the employee, creates a vested interest in said pension”) (emphasis added). Thus, in order
to be vested in the right to receive a benefit, the Plaintiffs “must have completed the
requisite amount of years of service to be entitled to receive such benefit.” Dodd v. City of
Chattanooga, 215 F. Supp. 3d 608, 622 (E.D. Tenn. 2016).
It is uncontested that neither of the Plaintiffs had reached the Normal or Early
Retirement Age when the 2015 Pension Plan was adopted. Accordingly, despite
completing the ten years of service to become vested in plan benefits, they had not yet
“completed the requisite term of employment necessary to be entitled to receive” the
benefits prior to the 2015 amendments. Thus, the Plaintiffs had not vested in those rights.
See Cohen, 937 S.W.2d at 826.
C.
Prior to making the amendments to the 2001 Pension Plan, the City considered
whether there were additional sources of funding available to it. Unfortunately, the City
determined that the only available options other than amending or terminating the plan5
were to substantially increase property taxes or to cut essential municipal services. The
record reveals that the City gave due consideration to determine the changes that could
legally be made to the plan. Based upon the analysis from the actuary, the requirements of
the Act, and its own deliberations, the City concluded that it was necessary to revise the
2001 Pension Plan in order to: (i) reduce the total liability of the plan; and (ii) reduce the
ADC to a number that could be reasonably reached within the five years mandated by the
Act. By adopting all the recommended actions, the City’s projected ADC was reduced to
approximately $1.7 million in the first year following the adoption of the 2015
amendments. To further reduce its outstanding liability and the ADC, the City also
implemented a service sell-back, which allowed participants in the plan to voluntarily sell
back service years to the City that would further reduce the total unfunded liability.
The Plaintiffs have failed to present sufficient probative evidence that the 2015
amendments were not “reasonable [and] necessary to create or safeguard actuarial
stability.” Blackwell, 622 S.W.2d at 541. The trial court correctly concluded that the
modifications made by the City were “not arbitrarily done or done without consideration
from the City to keep a pension plan for the city employees that was fair and reasonable.”
The court properly found “that the modifications were reasonable and necessary to preserve
5
The City considered terminating the plan, which was an available option under the terms of the
2001 Pension Plan.
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the actuarial integrity of the pension plan and to comply with State law.”
D.
Despite the Plaintiffs’ assertions that the City’s plan is subject to ERISA’s
requirements, ERISA does not apply to government plans. 29 U.S.C. § 1003(b)(1). ERISA
explicitly exempts “governmental plans” from its coverage:
(b) The provisions of this subchapter shall not apply to any employee benefit
plan if –
(1) such plan is a governmental plan (as defined in section 1002(32) of this
title); 29 U.S.C. § 1003(b)(1).
Section 1002(32) defines “governmental plan” as follows:
The term “governmental plan” means a plan established or 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 any of the foregoing. . . .
The clear and unambiguous definition of a governmental plan contained in ERISA
establishes that the City’s Pension Plan is a “governmental plan” exempt from ERISA.
Further, courts have not permitted a governmental entity to “opt-in” to ERISA.
Despite reference to ERISA in a plan’s terms, a governmental employer cannot “opt in” to
ERISA coverage for its pension plan. See Krystyniak v. Lake Zurich Cmty. Unit Dist, No.
95, 783 F. Supp. 354, 356 (N.D. Ill. 1991). 29 U.S.C. § 1002(32) makes no provision for
such option; it merely describes which plans are governmental plans and (by implication)
which are not. See Hall v. Maine Mun. Employees Health Trust, 93 F. Supp. 2d 73, 75 (D.
Maine 2000) (stating “[D]esire and compliance do not an ERISA plan make. A benefit plan
does not choose whether to opt in or opt out of ERISA.”). See also Michel v. United
Healthcare of Louisiana, No. Civ. A. 03-0649, 2003 WL 1790846 (E.D. La. 2003)
(concluding “Congress deliberately excluded governmental plans from the broad sweep of
ERISA preemption of state laws” and finding that ERISA did not apply to the plan at issue,
despite numerous references to ERISA in the plan document).
E.
The Plaintiffs have challenged the finding of the trial court that “the cost of living
adjustment; the phase out 30-and-out provision; the disability provisions; the rate of
interest and the rate of employee contribution are all ancillary benefits subject to
modification.” They claim that Mr. Pennington “testified only that the disability benefit
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was an ancillary benefit” and therefore, the finding by the trial court was not supported by
Mr. Pennington’s testimony.
The plaintiffs misstate Mr. Pennington’s testimony:
Q: Did you say that the disability benefit in this 2001 plan document was an
ancillary?
A: Yes, that’s an ancillary benefit.
Q: Why did you conclude it was an ancillary benefit as opposed to a vested
and accrued benefit?
A: Although the word ancillary is not defined in the plan document, in
general, the accrued benefit, the monthly benefit at age 65 based on salary
and service, you know, that’s the accrued benefit. Other benefits that are not
the accrued benefits, like the disability, life and death and so forth would be
considered ancillary, not the primary benefit.
In contrast, the expert for the Plaintiffs testified that the 30-and-out provision, the COLA,
and the lump sum option were vested, accrued benefits such that they could not be reduced
by amendment.
The record clearly reveals that Mr. Pennington’s position at trial, relied upon by the
trial court, was that all benefits that were not the primary accrued benefit were ancillary
benefits. Thus, the COLA, the 30-and-out provision, the disability provision, the rate of
interest and the rate of employee contributions were not vested and accrued, and therefore
were modifiable.
The Plaintiffs challenge the trial court’s reliance on the testimony of the City’s
expert, Mr. Pennington. The court ultimately agreed with the position of Mr. Pennington
and found in favor of the City. Findings that are related to the issue of credibility will not
be disturbed by this court, absent other concrete evidence to the contrary showing that the
trial court erred in its judgment of the veracity of the witnesses. Farmers & Merchants
Bank v. Dyersburg Prod. Credit Ass’n, 728 S.W.2d 10, 18 (Tenn. Ct. App. 1986). Where
the trial court’s factual determinations are based upon its assessment of witness credibility,
we will only overturn the rulings if clear and convincing evidence to the contrary is shown.
Franklin Cnty. Bd. of Educ. v. Crabtree, 337 S.W.3d 808, 811 (Tenn. Ct. App. 2010). In
the record before us, the Plaintiffs failed to identify any facts found by the trial court that
show the court erred in finding that the City’s expert was more credible than the Plaintiffs’
expert. Accordingly, the Plaintiffs’ argument is without merit.
Pursuant to Blackwell and the plan document, the court properly found that there
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was no legal prohibition to amending the 2001 Pension Plan. Thus, the trial court’s
determination regarding the 2015 Pension Plan amendments was not illegal, arbitrary or
capricious.
V. CONCLUSION
The judgment of the trial court is affirmed, and this cause is remanded for the
collection of the costs below. Costs on appeal are taxed to the appellants, Aaron Jay Cryer
and Jason M. Alexander.
_________________________________
JOHN W. MCCLARTY, JUDGE
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