Ruling Expected in $17M Philadelphia Pension Abuse Suit

October 5, 2004 ( - A Pennsylvania state court judge is expected to rule Wednesday in a class action lawsuit in which 12,000 City of Philadelphia employees charged that the city mismanaged their pension plan over 11 years.

The employees 1994 suit was tried as a nonjury trial before Common Pleas Court Judge Stephen Levin in July. Levin is scheduled to hear closing arguments in the case Wednesday and rule soon after that, the Philadelphia Inquirer reported. The plaintiffs have asked for a damage award of $11.6 million plus up to $5 million in compensation to the fund.

At issue in the legal fight are two contracts the city awarded to private companies to manage the Philadelphia Employees’ Deferred Compensation Plan during the administrations of former Mayors W. Wilson Goode and Edward Rendell.

Plaintiff lawyer Steven Angstreich has asserted that city was “grossly negligent” in overseeing the management companies that received generous fees from the pension plan while allegedly losing millions of dollars on investments, the Inquirer report said. For the city’s part, chief deputy city solicitor Michael Eichert denies any negligence by the city.

The dispute focuses on a period when the city Finance Department had authority over the pension plan and was responsible for awarding the management contracts. Since 1995, the plan has been under the supervision of the city Board of Pensions.

The two management firms in question, not named as defendants, are Public Employees Benefit Services Corp. (Pebsco), of Columbus, Ohio, chosen by the Goode administration in 1984, and Copeland Associates Inc., of New Brunswick, New Jersey, chosen by the Rendell administration after the first firm’s contract was canceled in 1993.

Angstreich contends that during the Goode administration in the 1980s, Pebsco offered pension plan participants a “completely unsuitable and excessively overpriced” life insurance option through which 5,900 city employees lost $3.7 million, the Inquirer said.

In 1992, the Rendell administration canceled Pebsco’s contract and sued the company in US District Court, claiming Pebsco had received $1 million in commissions on the sale of life insurance policies. The firm countersued for the cancellation of its contract. The city settled the case in 1994, paying Pebsco $200,000.

The lawsuit also alleges that the Rendell administration made a bad investment in 1992, transferring $27.4 million from a long-term security that would have paid a fixed rate of 7.3% to shorter-term investments paying lower rates. The lawsuit says the transfer led to a $3.5 million loss – in reduced income – over a two-year period.

The city’s lawyers argue that the transfer was made to diversify investments, trading a high return rate from a single investment to a lower return rate for several investments intended to be safer.

Angstreich also contends the city allowed both Pebsco and Copeland to “gouge the plan with excessive administrative and investment service fees.” The city disputes that, arguing that both contracts were awarded properly to the lowest bidder.

The city Solicitor’s Office sought unsuccessfully to have the case dismissed on grounds that municipal governments were immune from negligence claims. Levin rejected that argument in 2002 and allowed the case to go to trial.