Elkin school board resolves state pension spiking dispute

The Elkin City Schools Board of Education has resolved its pension spiking dispute with the state treasurer’s Retirement Systems Division. The resolution effectively ended a lawsuit that once involved six local school boards and a community college.

Paperwork filed Monday with the North Carolina Court of Appeals shows that the Elkin school board and retirement division had agreed to dismiss an appeal of a $52,692 pension-spiking bill the school system paid in July 2016. Had the school system won the dispute, the retirement division would have had to refund the money with interest.

Elkin’s decision came less than a month after the Appeals Court endorsed a settlement involving the Davidson, Granville, Henderson, Mitchell, and Moore county school boards and Blue Ridge Community College trustees. Those plaintiffs had challenged $434,000 in pension spiking assessments. Once that settlement was announced, the Elkin school board was the only remaining plaintiff.

After filing paperwork with North Carolina’s second-highest court in July 2023, the education agencies and retirement division entered mediation in September. All parties except the Elkin schools reached a “compromise settlement agreement” in January that ended their legal fight. All parties agreed to cover their own costs and legal bills.

In each settled case, the state assessed the local education agency a bill for state pension obligations created by a large pay increase near the end of a retiring employee’s career. The bills ranged from less than $23,000 in the Mitchell County Schools to more than $177,000 in Granville County.

“I inherited this litigation from the previous treasurer,” said State Treasurer Dale Folwell in a Jan. 30 interview with Carolina Journal. “But I committed to protect and defend this plan and enforce the laws passed by the General Assembly.”

“I appreciate these districts making the decision to end this litigation,” Folwell added. “We will continue to defend the pension system against occasional examples of people in power — or people who know people in power — using the system to spike their pay to lead to gigantic increases in the pension obligation.”

The disputed bills represented just a portion of the roughly $70 million the state has raised from laws fighting pension spiking. “This is money the rest of the people on the plan would have had to cover,” Folwell said.

Other pension-spiking battles continue to play out in North Carolina’s courts.

The Retirement Systems Division urged North Carolina’s top court in December to steer clear of a pension-spiking dispute involving the Harnett County school board. At stake is a $198,000 bill assessed to the local school system.

The division also asked the state Supreme Court in October to reject an appeal from the Wilson County school board. That case involves a disputed $400,000 bill.

The Harnett school board hopes the state Supreme Court will reverse an Oct. 17 decision from the state Court of Appeals.

“The Board has asked this Court to review a unanimous Court of Appeals decision that affirmed the Board’s obligation to pay an additional lump-sum contribution to the state pension plan,” wrote state Special Deputy Attorney General Olga Vysotskaya de Brito, in a court filing on behalf of the retirement system. “The Board’s obligation arose due to a funding gap in the state pension plan caused by the sharp increase in the salary paid to one of the Board’s retirees in the final few years of his employment.”

“This practice of dramatically increasing an employee’s salary near their career’s end to increase their retirement allowance, resulting in a funding gap in the state pension plan, is known as pension-spiking,” the retirement system’s court filing continued. “Pursuant to the Cap Factor Act enacted by the General Assembly in 2014, the Board’s retiree here receives the full retirement allowance established under the applicable statutory retirement structure, but the Board is required to make a one-time payment into the pension plan to address this gap.”

The Harnett school board’s lawyers offered a different take on the Appeals Court ruling in a Nov. 21 petition to the state Supreme Court.

“In April of 2020, this Court held that the Retirement System was required to engage in the rulemaking provisions of the Administrative Procedure Act (“APA”) in order to adopt a ‘cap factor,’ a critical component of the statutory formula used by the Retirement System in determining whether an employer must pay an ‘additional contribution’ to fund a state employee’s retirement” as part of the state’s anti-pension spiking law, Harnett school lawyers wrote.

That April 2020 case is titled Cabarrus County Board of Education v. Department of State Treasurer.

“[T]his Court recognized that the adoption of the cap factor is not simply a ‘ministerial act’ but, rather, a ‘substantive decision’ of great ‘magnitude,’” the petition continued. “Accordingly, this Court held that the cap factors previously set by the Retirement System without engaging in the rulemaking process were invalid.”

“If left standing, the Court of Appeals’ decision below will render this Court’s Decision in Cabarrus County essentially meaningless,” Harnett school lawyers argued. “The Court of Appeals’ opinion rubber stamps a perfunctory approach to rulemaking that fails to substantially comply with the APA. Even more troubling, the opinion below permits the Retirement System to correct its error of assessing employers with an invalid cap factor by simply retroactively applying a later-adopted cap factor to the same assessment.”

The Oct. 17 Appeals Court decision affirmed lower court rulings favoring the retirement system. The Harnett schools had challenged the way retirement officials had calculated the schools’ bill for a school administrator who retired in 2017.

Appellate judges agreed that the retirement system complied with state rule-making requirements when it developed a “cap-factor rule” linked to the state law against government pension spiking. Judges also agreed the retirement system applied its formula correctly in the Harnett Board of Education case.

“Harnett BOE … specifically argues the Retirement System failed to substantially comply with Section 150B-21.4(b1)(3) by failing to identify ‘the persons who would be subject to the proposed rule and the type of expenditures these persons were required to make.’ Harnett BOE asserts the Retirement System failed to consider the impact of the proposed Cap-Factor Rule on individual school systems or, indeed, any individual employer. Harnett BOE, however, cites no authority in specific support of its argument,” wrote Judge Toby Hampson for the unanimous panel.

“Indeed, to the contrary, the Fiscal Note prepared by the Retirement System — and approved by the Office of State Budget and Management — acknowledges the contribution-based benefit cap requirement of the anti-pension spiking statute impacts — and protects — all employing public agencies participating in TSERS,” Hampson wrote, referencing the Teachers and State Employees Retirement System. “The Note ‘estimates spiking employers will pay $73.6 [million] to the Retirement Systems over 15 years in additional employer contributions … while all employers that do not incur additional contributions … will avoid bearing a pro-rata share in present value terms of the unforeseen liabilities that these additional contributions serve to offset.’”

The retirement system noted that school systems “had incurred $2.8 million by the end of 2016,” accounting for 41% of liabilities linked to the pension-spiking law. That was “the largest share among agencies affected by the legislation.”

Appellate judges rejected Harnett schools’ argument that state law required the retirement system to “seek to reduce the burden” on agencies like local school systems that would have to comply with the pension-spiking law.

“Harnett BOE asserts the Retirement System failed to consider the burden imposed on individual school systems. Harnett BOE cites no specific authority to support its contention that the Retirement System was required to consider the particular impact to every individual school system or entity impacted by the proposed Cap-Factor Rule,” Hampson wrote.

The Appeals Court opinion pointed again toward the retirement system’s calculations.

“[T]he Fiscal Note itself illustrates the Retirement System was grappling with its duty to carry out a statutory mandate, reduce system-wide costs caused by alleged pension-spiking, thus, reducing costs across all impacted agencies and retirees (particularly those not engaged in alleged pension-spiking), and striking a balance by adopting a cap-factor that resulted in a Contribution-Based-Benefit Cap was neither underinclusive nor overinclusive,” Hampson wrote. “Again, the Retirement System did acknowledge the anti-pension-spiking legislation had had a greater impact on school systems compared to other agencies.”

“[T]here is simply a tension in adopting a cap-factor between maximizing the effectiveness of the Contribution-Based Benefit Cap Act — with the goal of decreasing the likelihood of higher system-wide employer contributions — and minimizing the burden on specific employers subject to the Act,” he added.

The retirement system “attempts to balance its obligation to reduce the burdens on all agencies and members system-wide with its obligation to fulfill the statutory mandates of the Act,” according to the opinion.

The Appeals Court rejected the Harnett school board’s argument that the cap factor should not have been applied retroactively to the 2017 retirement. “Harnett County BOE was on notice of the Act and on notice that it would apply to determine whether the retirement of its employee in 2017 would be subject to a cap,” Hampson wrote.

Judges Hunter Murphy and Michael Stading joined Hampson’s opinion.