WASHINGTON -- The District of Columbia Retirement Board and the city government have settled a board lawsuit and agreed to a payment schedule for the district's contributions to the pension fund for fiscal 1994 and 1995.

Tuesday's agreement is expected to help pave the way for congressional action on pending bills to eliminate the $5 billion unfunded pension liability and to increase the federal payment to the district by changing the formula on which the payment is based.

Legislators said during hearings last month before the House Appropriations subcommittee on the District of Columbia that the district's postponement of $190 million in fiscal 1994 pension payments would make it difficult for Congress to help ease the city's financial woes.

The settlement arose out of lawsuit filed last February in the District of Columbia Superior Court by the retirement board against Mayor Sharon Pratt Kelly, when she announced the deferral of payments. The agreement provides for the district to pay the $190 million in pension payments within three days of receiving the federal payment for fiscal 1995 this October, when the fiscal year begins.

The accord also calls for the district to pay earnings foregone by the pension fund. The earnings are to be calculated as the amount the plan would have earned: 1) if each quarterly payment had been made on time in fiscal 1994; and 2) on investments that have been or will be liquidated to make monthly benefit payments to retired police officers, firefighters, teachers, and judges from January through October 1994.

The board will let the district know by Dec. 15, 1994, the amount of foregone earnings plus interest.

The settlement also provides for making the fiscal 1995 payments on time. The mayor had recently proposed deferral of one payment next year.

"I am optimistic about this agreement," Ellen O'Connor, the district's chief financial officer, said in a joint statement with the board.

Jeanna Cullins, the board's executive director, said, "The retirement board is satisfied that the agreement fully protects the interests of the retirement funds and their participants and beneficiaries."

The House Committee on the District of Columbia, which is chaired by Rep. Pete Stark, D-Calif., has scheduled a June 14 hearing before its subcommittee on fiscal affairs on a bill sponsored by Delegate Eleanor Holmes Norton, D-D.C., to eliminate the unfunded liability.

The committee also plans a hearing, possibly last month, on Stark's bill to increase the federal payment. If the bill had been law in fiscal 1994, the federal payment for fiscal 1995 would have been about $20 million more than the administration's proposed payment of $670 million, a committee aide said. The bill would change the formula for making the payment, trying it to city revenue in the previous fiscal year.

The aide said it is unlikely that Stark will defer action on legislation until after the mayoral election this fall. "Whatever we need to get through, we need to get through as soon as possible," the aide said.

A spokesman for Stark suggested last week that the chairman might defer action.

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