DAB Decision 29
December 6, 1976 State of Rhode Island; Audit Control No. 40022-01;
Docket No. 75-19; Decision No. 29 DeGeorge, Francis D.; Malone, Thomas
Hiller, Manuel B.
DECISION
Statement of the Case
This is an appeal from a decision of the Regional Director, Region I,
refusing to approve the treatment of certain retirement costs in Rhode
Island's State-Wide Cost Allocation Plan for fiscal years 1971, 1972 and
1973. The facts are not in dispute; they are reflected in the records
and documentation of the State's plan. There appears to be only a
single issue in this appeal: Whether contributions to the State's
retirement fund for state employees engaged in Federal grant activities
are justified.
The facts giving rise to this dispute are as follows:
The State employees' pension fund is financed by contributions from both
employees and the State. Employees pay a fixed percentage of wages,
excluding overtime, to the pension fund while the State's share is
determined actuarially. In computing the State contribution to the
retirement system the actuary develops two rates, a fully funded rate
and a partially funded rate. The fully funded rate represents the rate
of annual contribution to be paid to the retirement system, from the
dates of entry of employees into the system to the dates of retirement,
to fully fund the prescribed benefits. Under a partially funded
concept, however, the State only contributes to the system the amount
necessary to meet the current annual payouts of the system plus a small
reserve. The rates computed by the actuary for fiscal years 1970
through 1973 and the actual partially funded rate applied by the State
are shown below:
Per Actuary Actual Fiscal
Fully-Funded Partially-Funded Partially-Funded Year
Rate Rate Rate Applied 1970 8.5%
5.55% 5.18% 1971 9.2% 5.55%
4.42% 1972 9.9% 5.55% 4.71% 1973
9.9% 6.5 --
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Our review disclosed that the State, in its billings to the Federal
government and in the pension costs claimed on the SWCAP used the fully
funded rate. These contributions are deposited, in full, into the
retirement system. Pension fund contributions are also made at the full
funded rate for State employees of self supporting activities, such as
the data processing section, whose costs are recovered through billing
to user agencies. In addition, the State makes a fully funded
contribution to a separate retirement system for teachers in the State
colleges and university. For the remaining State employees
(approximately 70 percent of the total State employees covered by a
retirement system) state contributions to the retirement system are, by
state law, limited to the partially funded rate.
Attachment A, Section C(l) of ONB Circular A-87 states that to be
allowable costs must "be consistent with policies, regulations, and
procedures that apply uniformly to both Federally assisted and other
activities of the unit of government of which the grantee is a part..."
The amounts at issue are $2,020,623 for each of fiscal years 1970, 1971,
and 1972, and $2,656,033 for fiscal year 1973.
In its appeal dated October 28, 1975, appellant lists its several
retirement programs available to state employees and the contributions
by which the respective funds are financed. It states that "The State of
Rhode Island does pay fully-funded rates to the Retirement System for
all special funds of the state and all Restricted Revenue Accounts
within the General Fund which is the same rate charged to Federal
Accounts." /1/ (Emphasis original). The list of retirement programs and
contributions scheme follows:
1. State Police Employee Rate -- Non-Contributory until July
1, 1974. 5% contribution of new members from July 1, 1974.
Employer Rate -- Appropriations for current pension costs.
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2. Judicial Employee Rate -- Non-Contributory -- Justices only.
Employer Rate -- Appropriation for current pension costs.
3. U.S. Civil Service Commission Employee Rate 7% --
Cooperative Extension Service, Univ. of R.I. Employer Rate
7%
4. Teachers' Insurance and Annuity Association Employee Rate 5%
(Employees of Higher Education Institutions) Employer Rate 9%
(Fully Funded)
5. Employees' Retirement System (all other employees) Employee
Rate 5%.
Employer rate until 7/1/72 financed on a partial funded basis.
The contribution by the state for any fiscal year consisted of an
amount equal to the computed average annual expenditures for the
several benefits provided by the Retirement System, for a period
of five years next succeeding the fiscal year in question. A
uniform rate of contribution is maintained for such five (5) year
period, after which a computation is to be made to establish the
contribution rate for the ensuing five-year period.
From July 1, 1967, the computed rate was 5.55% for the five-year
ensuing period.
From July 1, 1972, the uniform rate was dropped and a rate which
increased each year by a .33 of 1% was adopted:
1973 5.88% 1974 6.21% 1975 6.54% 1976 6.87% 1977
7.2%
These computations and rates were applied only to the General Fund
-- General Revenue Appropriation Accounts.
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The rates for:
1. Restricted Revenue Accounts (Dedicated Revenues) 2.
Special Funds (Dedicated Revenues) 3. Federal Grant Accounts
are on a fully-funded basis:
1970 8.5% 1971 8.5% 1972 9.2% 1973 9.9%
Thus, it is observed that Rhode Island has computed a fully-funded
contribution rate that is equally applicable to Restricted Revenue
Accounts, Special Funds and Federal Grant Accounts. However, the State's
contribution to the general retirement system is based upon a
partially-funded rate, "an actuarially computed sum determined by
application of the General Law that provides for appropriations for the
Retirement System and should provide an equitable charge." /2/
Discussion
Upon a full consideration of the appeal file, the Board has concluded
that the appeal should be and is hereby denied.
We address first the requirement contained in OMB Circular A-87 /3/
which states, in pertinent part:
"The cost must be consistent with policies, regulations and
procedures that apply both to Federally assisted and other
activities. The cost must be accorded consistent treatment. The
cost must be distributed equitably to grant programs and to other
activities."
As noted above, appellant has made contributions to certain of the
Restricted Revenue and Special Fund Accounts, including the Teachers'
Insurance and Annuity Association, on a fully-funded basis. It claims
that such contributions reflect its compliance with the OMB Circular
requirement for consistent
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cost treatment applicable to both Federally assisted and other
activities. However, this is only part of the picture; the major share
of the State's obligation toward the 70% of its employees is purportedly
met by partially funding. In justification of this variation, appellant
relies upon two arguments: (1) The provisions of state law prescribing
a contribution system /4/ and the "guaranty" by the state set out
in
Sec. 7 of that Chapter. /5/
We do not read the former section as prescribing a partial funding of
the system; if anything, it implies full funding of the projected
average annual expenditures for a period of five (5) years. Appellant
has undertaken to discharge this obligation by partial funding.
Whatever may be the merits or advantages of partial over full funding,
it is clear that the state contributes to the retirement fund on a
partially funded basis, while fully-funding other activities, and
charging the Federal Government with full funding costs is not in
compliance with A-87 requirements for consistent cost treatment. /6/ As
was said by Assistant Secretary/Comptroller, John D. Young in reviewing
the decision of this Board in the Appeal of the State of Connecticut,
Docket No. 9, involving the same issue presented here for decision,
"This Department only insists that the Federal Government' s
contributions to the Retirement Fund not be in excess of the State's
contributions to that Fund...This Department is not objecting to a
contribution by it to the Retirement Fund of the full 22.3%, but is only
objecting to paying such a rate at the same time that the State is
contributing to the Retirement Fund at a lesser rate." To the extent
that Rhode Island contributed to the Retirement Fund a lesser rate than
charged the Federal Government, such contribution by the Federal
Government represents discriminatory treatment at odds with the
requirement of OMB Circular A-87.
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The unfairness of the situation is compounded by the circumstance that
the retirement fund does not receive the benefit of interest income on
the larger amount of what would otherwise be the State's contributions
to the Fund if fully funded. This serves to create an imbalance in the
charge to the United States. /7/
As to the contention of appellant that its laws set forth a guaranty by
the state to make the required payments to the employees, we refer again
to the Board's decision in the Appeal of the State of Connecticut,
supra. We there said:
"The State has not incurred a legal obligation for the excess
rates. The State contends that the retirement costs which it
fails to fund, and elects to accrue, represent a 'legal liability
of the State' (appeal document, page 27). An entitlement to
retirement benefits which an employee may accrue over the years
does not represent a legal liability of the State. The State is
free to reduce or terminate such benefits as it sees fit. To the
extent that the State could be liable for such future benefits,
its liability is, at best, a contingent one."
That such liability is only a contingent one finds support in recent
action of the Connecticut State Legislature increasing the minimum
retirement age for State employees beginning in 1980. Similar or other
restrictive action could be taken by Rhode Island limiting the State's
"Liability" for retirement benefits.
The reasonableness of the computed rates does not, ipso facto, justify
their acceptance. Reasonableness is required of the contribution rates
in addition to meeting the standards of consistency and equity. Here,
the plain and simple fact
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is that the Federal Government is asked to contribute for the retirement
benefits of State employees at a rate in excess of that which the State
contributes.
By letter dated October 29, 1976, the State submitted a copy of the
Legislative Act passed by the Rhode Island General Assembly establishing
a new procedure, effective July 1, 1976, for estimating and computing
retirement costs. This legislation, being effective subsequent to the
period in question, does not alter the conclusion above expressed.
For the foregoing reasons it is the decision of this Board that the
appeal of the State of Rhode Island be denied.
/1/ See appeal letter dated October 28, 1975, p.1.
/2/ Appeal letter, p. 6.
/3/ Now identified as FMC 74-4.
/4/ Sec. 2, Title 36, Chapter 10, General Laws of Rhode Island,
amended.
/5/ Sec. 7, Title 36, Chapter 10, General Laws of Rhode Island,
amended.
/6/ Letter dated July 15, 1975 from Assistant Secretary John D.
Young to Mr. Wendell S. Gates, Assistant Attorney General, State of
Connecticut.
/7/ See letter of A.A. Weinberg, Actuary, submitted by appellant in
support of its appeal, and his discussion, on p.2, of the consequences
of interest income loss under partial funding. We also note, but only
as a matter of interest, his recommendation for full funding as the most
economical form of funding pensions cost.
May 7, 1992