New York Codes, Rules and Regulations › Title 16 - DEPARTMENT OF PUBLIC SERVICE › Appendices › Appendix 6-C

Current through Register Vol. 46, No. 28, July 10, 2024
OPINION OF THE COMMISSION--DECLARATION OF POLICY
RE
EMPLOYEE PENSION COSTS
Eddy, Commissioner:
The problem of the accounting treatment of pensions is one of
				increasing importance. This Commission last passed directly on the problem in
				Case 11800 involving the Village of Lake Placid. The Utility Workers Union,
				CIO, requested this Commission to reconsider its previous attitude as expressed
				in that case, and for that reason this proceeding was brought dealing with all
				of the prescribed accounting systems for the various utilities under the
				jurisdiction of the Commission.
It was announced at the bearing that tentatively the
				Commission, after having taken the briefs of the parties, would prepare
				proposed changes in its accounting regulations. Such changes are in the course
				of preparation, and will be considered at a future hearing.
There are presently before the State Legislature certain
				proposed amendments to the Public Service Law dealing with the problem. Since
				it does not presently seem possible to afford an adequate hearing on the
				proposed changes before the Legislature adjourns, the Commission feels that a
				general statement of the principles by which this Commission will be guided
				should presently be made.
There has been throughout the last thirty years a very great
				change in the social thinking of this country in respect to pensions. At one
				time, as defined by the Court of Appeals (see 268 N.Y. 228), pensions were
				regarded as a "gratuity of the sovereign". Gradually that concept has changed
				until today pensions are regarded not as a favor or a gift but as part of the
				compensation of the employee. We think there can be no better statement than
				that quoted by the Circuit Court of Appeals for the Seventh Circuit in the
				Inland Steel case, 170 F.2d 247:
" . . . we are convinced and find that the term 'wages' as used
				in Section 9(a) must be construed to include emoluments of value, like pension
				and insurance benefits, which may accrue to employees out of their employment
				relationship . . Realistically viewed, this type of wage enhancement or
				increase, no less than any other, becomes an integral part of the entire wage
				structure, and the character of the employee representative's interest in it,
				and the terms of its grant, is no different than in any other case where a
				change in the wage structure is effected."
By the same token, with the change in concept of the nature of
				a pension there has likewise been a change in the accounting concept. In
				November of 1948 and subsequent to our decision in the Lake Placid case, the
				Committee on Accounting Procedure of the American Institute of Accountants,
				dealing with accounting for annuity costs based on past services, said:
"1. When costs incurred under pension plan
			 are based in part on services performed prior to the adoption of the plan, the
			 problem arises whether that portion of the costs which are attributable to such
			 services are applicable to the past or to the present and future periods and,
			 accordingly, whether they should be charged to income. This bulletin deals with
			 the accounting treatment of such costs arising out of past services when
			 incurred under pension plans involving payments to outside agencies such as
			 insurance companies and trustees.
"2. The committee has undertaken a statement
			 on this subject at this time because of the trend toward expansion of pension
			 plans to cover a wider and much larger group of employees, often at
			 substantially increased costs, and in order to narrow the area of difference in
			 the accounting treatment accorded in actual practice to annuity costs based on
			 past services. Self-administered and informal plans which do not require
			 payments to outside agencies are not specifically dealt with because of their
			 special features and lack of uniformity. The principles set forth herein,
			 however, are generally applicable to those plans as well.
"3. Charges with respect to pension costs
			 based on past services have often been made to surplus on the grounds that such
			 payments are indirectly compensation for services and, since the services upon
			 which the payments are computed were performed in the past, the compensation
			 should not be permitted to affect any period or periods other than those in
			 which the services involved were performed. In other cases all annuity costs
			 based on past services have been charged to income in the period of the plan's
			 inauguration as a current cost of originating the plan. In still other cases
			 the position has been taken that a pension plan cannot bring the anticipated
			 benefits in the future unless past as well as future services are given
			 recognition and, accordingly, annuity costs based on past services have been
			 spread over a period of present and future years. The last method is the one
			 permitted under provisions of the Internal Revenue Code. [FN*]
"4. The committee believes that, even though
			 the calculation is based on past services, costs of annuities based on such
			 services are generally incurred in contemplation of present and future
			 services, not necessarily of the individual affected but of the organization as
			 a whole and, therefore, should be charged to the present and future periods
			 benefited. This belief is based on the assumption that although the benefits
			 flowing from pension plans are intangible, they are nevertheless real. The
			 element of past services is one of the important considerations of most pension
			 plans and costs incurred on account of such services contribute to the benefits
			 gained by the adoption of a plan. It is usually expected that such benefits
			 will include better employee morale, the removal of super-annuated employees
			 from the payroll, and the attraction and retention of more desirable personnel,
			 all of which should result in improved operations.
"5. The committee, accordingly, is of the
			 opinion that:
(a) Costs of annuities based on
			 past services should be allocated to current and future period; provided,
			 however, that if they are not sufficiently material in amount to distort the
			 results of operations in a single period, they may be absorbed in the current
			 year.
(b) Costs of annuities based
			 on past services should not be charged to surplus."
"6. The committee does not intend that its
			 recommendations shall require (a) a change in policy calling for charges to
			 income rather than charges to reserves previously provided, or (b) that any
			 recognition be given in the accounts of current or future periods to pension
			 costs written off prior to the issuance of this bulletin."
We must, therefore, conclude not only as a matter of modern
				economic thinking, but as required by law and accepted practice that pensions
				are wages and constitute a present benefit. Hence, we must expressly overrule
				the decision in the Lake Placid case and hold that upon the establishment of a
				pension plan, whether based on past or future services, or both, the entire
				charge becomes an operating expense, not an income deduction or a charge to
				surplus.
We think certain fundamental principles should be
				stated:
First: If we are to treat pensions as a part of wages, it is
				essential that the company claiming the deduction as an operating expense will
				have irrevocably committed itself to the obligation. Title must have passed to
				the beneficiaries.
Second: The pension plan must be a reasonable one, carry with
				it the assurance that the obligations which it purports to create can and will
				be fulfilled and meet the standards of this Commission. If pensions are wages,
				the matter of pensions is a matter of collective bargaining between the company
				and its men over which we have no control. However, in a rate proceeding where
				payments are excessive, while we cannot fix the compensation, we can disallow
				excessive payments for the purpose of fixing rates. It follows then if pensions
				are part of compensation, unreasonable payments should likewise not be allowed
				as a part of operating expenses.
Third: The inclusion in operating expenses should, of course,
				be made in the year when provisions should be made for it. The definition of
				the proper year is one of the most vexing problems presented in this matter
				and, except to state the general principle, this question will be left for
				further consideration. As in the case of many other operating expenses, there
				well may be instances in which the Commission should give its approval to
				amortizing payments over a longer period than the current year in which payment
				is made.
Fourth: We feel that where companies have undertaken to pay
				pensions, even if the plan be styled a so-called voluntary plan under which the
				company may claim it has no legal liability, there exists a high moral
				responsibility and, as a practical matter, a voluntary plan of long standing
				cannot be terminated without destroying good labor relations or by compensating
				the employees in some other form. Where liabilities exist that should be made
				known by footnotes to the balance or other appropriate entries.
It has been argued that the present provisions in the Uniform
				System for electric and gas companies are adequate to take care of the problems
				before us provided we interpret them as they interpreted here in relation to
				past services. If there is any ambiguity in those provisions, they will in the
				future be interpreted in accordance with this memorandum until such time as the
				revision is complete.
With the exception of some portions of the bus industry the
				relations between labor and managment in the utilities in this state are
				uniformly excellent. In general the workers in the utilities have a high
				standard of morale. In the utility field above all others a breakdown in good
				labor relations most seriously affects the public. As previously stated, we
				have no control over the process of collective bargaining, nor should we
				attempt to exercise any such control. We must, however, make our determinations
				in the regulation of utilities so as to remove any obstructions from the path
				of collective bargaining and to adopt those policies which promote good labor
				relations, and therefore, better service to the public. For this reason alone,
				even if we were not compelled to make the determination by the modern legal
				concept of pensions, we should adopt the principles enunciated here.
I am in accord with Commissioner Arkwright to the extent that
				any increase in operating expenses tends toward an increase in rates. However,
				if we are correct in our view that pensions are a form of wages, and if in the
				course of collective bargaining, the employees of a utility desire a pension
				rather than benefits in pay, the granting of pensions in any form, will produce
				no different rates than those that would be produced by an equivalent change in
				wage scales.
March 9, 1950.
Approved by the Commission March 9, 1950, Commissioner
				Arkwright in the negative filing a memorandum dated March 9, 1950.
ARKWRIGHT, Commissioner:
I do not oppose retirement or pension plans.
The members of this Commission, and of the prior Commission,
				wore and are in complete accord as to their desirability and the good that
				necessarily flows from them.
The only point of difference, and the only problem presented,
				relates to the accumulation of funds to provide for services rendered in the
				past, by employees to a company and to whether present and future consumers
				should have to pay costs that previous consumers might have had to pay, if such
				plans were in effect.
The matter has been before this Commission on several other
				occasions, and has been most carefully considered. In newly established pension
				plans, or in these already established where proper actuarial provisions are
				provided for to take care of retroactive service, the cost thereof must be met.
				A determination has now been made that these costs should not be paid by the
				utility or by contributions of the employees, but should be passed on to the
				public, present and future. This means that, throughout the state, where such
				plans may be set up, or are in being, these costs must be passed on in the form
				of increased rates, to the users of gas, electricity, water, and
				transportation, whether railroad, bus, or freight.
The previous holding of the Commission in no way passed these
				costs on to the public. It in no way prevented the utility and its employees by
				agreement and by contributions among themselves from inaugurating and
				maintaining any kind of retirement or pension plan, whether with accumulated
				back costs or not. Thus an accumulation of what amounts to past debt, or
				expenses in connection therewith, was not passed on to current and prospective
				customers and riders, and their rates wore thereby not increased.
In my opinion, the public interest is best served by not
				passing these particular costs on to the public.
March 9, 1950.
[FN*] SeeIRC Sec. 23 (p)(1)(A).