Appendix 6-C.  

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.^*

“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.