Retirement system asks state Supreme Court to reject Harnett pension-spiking case

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  • The state Retirement Systems Division has asked the state Supreme Court not to take a case involving a pension-spiking dispute with the Harnett County school board.
  • Harnett school officials dispute a $198,000 bill assessed by the retirement system to account for costs linked to a school employee's retirement.
  • A unanimous state Court of Appeals panel ruled in October in favor of the retirement system.

The state Retirement Systems Division urges North Carolina’s top court 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 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 Monday 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 retirement system defends the Court of Appeals decision, which “applies and expressly relies on the existing rulemaking procedures,” according to the court filing. “It abides by the precedent of this Court regarding retroactive application of state laws. And the legal issues that the Board asks this Court to address do not rise to a level that warrants an additional layer of appellate review.”

“[T]he issues the Board raises in its petition stem from its disagreement with the outcome of the Court of Appeals’ analysis of the rulemaking process, the type of fact-specific analysis that it and lower courts perform routinely,” Vysotskaya de Brito wrote. “The Court of Appeals scrutinized the Retirement System’s rulemaking procedure in connection with its Cap Factor Rule and concluded correctly that the Rule was properly promulgated and applied to the retirement at issue.”

The retirement system’s court filing also argued that the Court of Appeals decision “is in accord with this Court’s decisions, so discretionary review is unwarranted.”

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.”

“This retroactive application of the cap factor conflicts with North Carolina case law and interferes with the vested rights and liabilities of employers,” the petition argued. “This appeal involves legal principles of major significance to the jurisprudence of this State for two reasons: First, it implicates the minimum requirements for rulemaking under the APA, which applies to all administrative agencies adopting regulations throughout our State.”

“Second, it undermines the long-standing presumption against retroactive application of statutes and regulations,” Harnett school lawyers wrote. “Finally, this appeal has significant public interest because of the disproportionate burden imposed on public school systems by the contribution-based benefit cap legislation at issue.”

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.