Milliman Inc. v. Md. State Ret.

• Decision Date: 20 July 2011
• Docket Number: 2010.,Sept. Term,No. 102,102
• Citation: 421 Md. 130,25 A.3d 988
• Parties: MILLIMAN, INC.v.MARYLAND STATE RETIREMENT AND PENSION SYSTEM, et al.
• Court: Maryland Court of Appeals

421 Md. 130

25 A.3d 988

MILLIMAN, INC.

v.MARYLAND STATE RETIREMENT AND PENSION SYSTEM, et al.

No. 102

Sept. Term

2010.

Court of Appeals of Maryland.

July 20, 2011.

Robert J. Mathias (Kurt J. Fischer, Jennifer M. Skaggs, and William L. Reynolds of DLA Piper US LLP, Baltimore, MD; Stephen T. Jacobs and Sarah A. Huck of Reinhart Boerner Van Deuren S.C., Milwaukee, Wisconsin), on brief, for Appellant/Cross–Appellee.Dana A. Reed, Asst. Atty. Gen. (Douglas F. Gansler, Atty. Gen. of Maryland, and Kathleen E. Wherthey, Asst. Atty. Gen., Baltimore, MD; Rachel S. Cohen, Asst. Atty. Gen., Baltimore, MD), on brief, for Appellees/Cross–Appellants.Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, MURPHY, ADKINS, BARBERA, JJ.BATTAGLIA, J.

In this case, we are tasked with reviewing a decision of the State Board of Contract Appeals, which determined that Milliman, Inc., Appellant, (“Milliman”), had breached contracts to provide actuarial services ¹ to the Maryland State Retirement System, Appellee, (“the System”), allegedly resulting in approximately $73 million in losses to the System as a result of a claim that the System had filed against Milliman pursuant to Section 15–219.1 of the State Finance and Procurement Article, Maryland Code (2001, 2006 Repl.Vol.); ² the claim asserted that Milliman had understated the contributions required to fund three of the State's ten retirement and pension systems because of the actuary's misinterpretation of a particular data code.

In the initial round of the administrative action, the Retirement System Procurement Officer determined that Milliman had “failed to comply with its contractual duties and responsibilities,” and that the System was entitled to recover “$34.2 million in contributions that would have been received but for Milliman's errors, and $38.8 million in lost income that would have been earned on those contributions.” Thereafter, Milliman appealed to the State Board of Contract Appeals, which heard the claim de novo and determined that in failing to detect and correct the coding error for a period of twenty two years, the actuary had substantially breached its contracts with the System, causing the three affected retirement funds to be significantly underfunded, amounting to $34,208,960 in lost contributions and $38,756,188 in lost interest on those contributions.

Milliman filed a petition for judicial review in the Circuit Court for Baltimore City, which affirmed the Board's findings that Milliman had breached its contracts with the System and affirmed the award of lost investment earnings, but reversed the Board's award of amounts equaling lost contributions. We granted certiorari prior to any proceedings in the intermediate appellate court to consider the following questions:

1. Can an actuarial funding recommendation for a state pension system, even one that contains an error, cause damages when it is undisputed that the funding recommendation resulted in contributions being received by the pension system that always met or exceeded statutory funding goals?

2. In determining the measure of damages, what is the legal relationship between the State of Maryland (the “State”) and the Maryland State Retirement and Pension System (the “System”): are they separate, so that future contributions and earnings made by the State to the System must be considered in assessing damages to the System, or are they related so that any loss to the System must be offset by the gain retained by the State?

3. When applying the contributory negligence doctrine, must a trier of fact consider only expert testimony, or should factual evidence showing that the plaintiff contributed to the harm be considered and evaluated under a reasonable person standard?

The State Retirement and Pension System presented a conditional cross-petition, which we also granted, in which one question was posed:

Did the MSBCA [Maryland State Board of Contract Appeals] correctly assess damages, and did the circuit court erroneously reduce the MSBCA's damage award by $34,200,000 by employing an incorrect standard of review and adopting a theory that departs from well-established principles of Maryland law to find that the State of Maryland must pay the contribution portion of the damages caused by Milliman's breach, even if doing so would require the State to pay far more in contributions than it would have had to pay if Milliman had not breached its contracts?

Milliman, Inc. v. Maryland State Retirement and Pension System, 417 Md. 125, 9 A.3d 1 (2010). We shall hold that Milliman is liable to the System for repeatedly misinterpreting a data code associated with survivors' benefits, irrespective of whether the System met funding goals during the contracts. We shall further hold that because the State was not a party before the Board of Contract Appeals, whether the measure of damages should reflect the State's use and benefit of contributions not made to the System as a result of Milliman's errors is not properly before us. In addition, we shall hold that the System was not negligent in the development or transmission of data provided to Milliman and, therefore, contributory negligence does not bar the System's recovery. Finally, we shall hold that the Circuit Court erroneously reduced the Board's damage award by $34,200,000, representing lost contributions, and therefore, shall vacate the judgment of the Circuit Court and shall direct that the Board's decision be affirmed.Introduction

A state or local government retirement system is designed, fundamentally, to fund the long term cost of providing benefits to employees. Thomas P. Bleakney, Retirement Systems for Public Employees 33 (Univ. of Penn. Press 1972). The latter is so, because, “there is a time lag between the accruing of pension rights and the payment of benefits.” Id. at 14. Retirement benefits are funded by the interplay of three sources, namely, contributions from the employer, contributions from the employee, and investment income. Employer contributions are calculated, moreover, so that over the long run, annual contributions plus investment earnings are sufficient to pay out the promised benefits. The Top 10 Advantages of Maintaining Defined Benefit Pension Plans, http:// www. macrs. org/ news/ 96– the– top– 10– advantages– of– maintaining– defined– benefit– pension– plans. html (last visited July 16, 2011). In this way, the financial workings of a public employee retirement system have been compared to a water network, with the

Inputting to this reservoir are three flows: employee money, employer money, and earnings on the investments of the fund. The outflow is for benefit payments and administrative expenses. So long as the reservoir is not empty, the system will continue to operate. Because the input from employee contributions and investment earnings is not easily altered, proper design of the system requires anticipation of the expected outflow in advance, so that the demands on the employer can be scheduled. This is the essential scope of financing techniques-measuring the anticipated outflow and regulating the rate of input of employer contributions into the fund.

Bleakney, supra, at 106–07.

Actuaries come into a retirement process because they focus primarily on “analyzing the financial consequences of future uncertain events.” Michael A. Bean, Probability: The Science of Uncertainty 6 (American Mathematical Society 2001). In the pension context, actuaries perform complex calculations to ensure that employer contributions are sufficient to fully satisfy the liabilities of a fund over time, despite fluctuations in investments and the steadily growing number of retirees. The Top 10 Advantages of Maintaining Defined Benefit Pension Plans, http:// www. macrs. org/ news/ 96– the– top– 10– advantages– of– maintaining– defined– benefit– pension– plans. html (last visited July 16, 2011). In formulating estimates of employer contributions, “planning for error is part of the calculation,” and actuaries often employ “a degree of conservatism in [their] assumptions,” erring on the side of over-funding rather than under-funding. Rhoades, McKee & Boer v. United States, 43 F.3d 1071, 1075 (6th Cir.1995).

In Maryland, the State Retirement and Pension System is composed of ten independent retirement systems,³ although only three were the subject of the challenge initiated by the State against Milliman, those being the Judge's Retirement System, the State Police Retirement System, and the Law Enforcement Officers' Pension System, all of which are managed by a Board of Trustees, which includes the Secretary of Budget and Management, the State Comptroller, the State Treasurer, and elected or appointed representatives of each retirement system. Pursuant to Section 21–125(a) of the State Personnel and Pensions Article, Maryland Code (1993, 2004 Repl.Vol.),⁴ the Board of Trustees “shall designate an actuary” to:

(1) give technical advice to the Board of Trustees on the operation of the funds of the several systems; and

(2) perform other related duties that the Board of Trustees requires.

The designated actuary is required to make an annual “valuation of the assets ... of the funds of the several systems,” upon which the State's (the employer's) contributions to the System are based:

(b) Annual valuation.—(1) On the basis of actuarial assumptions that the Board of Trustees adopts, each year the actuary shall make a valuation of the assets and liabilities of the funds of the several systems.

(2) Each year the Board of Trustees shall certify to the Secretary of Budget and Management and to the Governor the rates of employer contributions.

Section 21–125(b) of the State Personnel and Pensions Article. Moreover, Section 21–304 of the State Personnel and Pensions Article establishes a statutory goal for the System to have its obligations to participants fully funded by the year 2020, as follows:

(d)(1) Beginning July 1, 2001, each year the ...