State Supreme Court urged to reject Wilson schools’ pension-spiking appeal

Listen to this story (10 minutes)

  • The state retirement system and top legislative leaders are asking the North Carolina Supreme Court to dismiss the Wilson County school board's appeal in a pension-spiking dispute.
  • A unanimous state Court of Appeals panel ruled that Wilson schools owe more than $400,000 to help cover retirement costs for a former assistant superintendent.
  • The state lawyer representing the retirement system and top lawmakers argues that the case does not raise any constitutional concerns that require the Supreme Court's review.

The state employees’ retirement system and top legislative leaders urge the state Supreme Court to reject Wilson County schools’ recent appeal in a pension-spiking dispute. At stake is a $400,000 bill assessed to the county school board.

“In its filing, the Board asks this Court to review a unanimous decision of the Court of Appeals and excuse the Board from paying a statutorily mandated contribution to cover a monetary gap in the state pension fund created by the sudden increase in the salary paid to one of the Board’s retirees in the final few years of her work for the Board. This practice is known as pension-spiking,” wrote NC Special Deputy Attorney General Olga Vysotskaya de Brito in a court filing Monday.

Based on a 2014 state law called the Cap Factor Act, “the Board’s retiree here receives the full retirement allowance established under the applicable statutory retirement scheme, but the Board is required to make a one-time payment into the pension fund to address the gap created by the spike in that retiree’s salary,” Vysotskaya de Brito wrote.

The state Court of Appeals ruled against Wilson schools in August. “The Court of Appeals has performed the proper as-applied analysis already, and concluded unanimously that the assessed contribution was lawful,” according to Monday’s court filing. “The Board’s disagreement with that conclusion does not cross the threshold required for this Court’s discretionary review.”

“Nor does the Court of Appeals’ analysis conflict with any previous decisions of this Court,” Vysotskaya de Brito added. “The Board simply states that a conflict exists but fails to identify a single decision by this Court that clashes with the Court of Appeals’ fact-specific holding. Not a single case cited by the Board even addresses the issue of pension-spiking or the Cap Factor Act.”

“The Board also argues that this case has special constitutional significance, but the Board itself has strenuously argued all along that any impact of this case is limited, and the case’s holding only has significance as applied to this Board under the specific facts alleged in this case,” the state lawyer argued. “And the legal issues at hand center not on development of any substantial or new constitutional theories but on a simple task of applying the Cap Factor Act to the record facts of a single retiree’s retirement as established during the administrative proceedings in this case.”

“The Court of Appeals determined, after thoughtful analysis, that the record evidence failed to demonstrate that the statute was misapplied here,” Vysotskaya de Brito wrote. “It concluded that the application of the Cap Factor Act to this retirement triggered no constitutional concerns. The issue of a fact-specific application of a statute in a particular case does not pose any novel or substantial constitutional questions that warrant this Court’s review.”

The Wilson school board filed formal paperwork on Sept. 19 seeking a review from the state Supreme Court. Wilson school leaders seek reversal of the Appeals Court’s unanimous decision.

The General Assembly approved a law in 2014 attempting to address pension spiking for retiring government employees. The law allowed the state retirement system to charge an employer if a retiree’s benefits exceeded a newly established cap.

“Prior to the passage of this new law, and well prior to its effective date, Petitioner Wilson County Board of Education … had entered into an employment contract with its long-time employee, Dr. Susan Bullock, to promote her to an administrative position in the school system,” wrote the Wilson school board’s lawyers. “That contract was effective on 1 July 2013, and it was therefore on that date that the expectations and intentions of the Parties were fixed.”

“As a result of the new legislation, enacted and effective over a year following the employment contract, the Petitioner Board was invoiced a penalty in the amount of $401,763.96, allegedly owed to [the retirement system] under the new law,” the petition continued. “The penalty was imposed due to the employment contract’s allegedly resulting in prohibited ‘pension-spiking’ under the new law.”

Wilson schools challenged the invoice. Superior Court Judge William Wolfe issued a June 2022 favoring the school system. “The Superior Court found that, as applied, the Act here did constitute an unconstitutional impairment of contract; did violate Article IX, Section 7(a) of the North Carolina Constitution; and was impermissibly retroactive,” school lawyers wrote.

The Court of Appeals reversed that decision. “The Court below found first that there was ‘no employment contract,’ ignoring the ample record evidence that there was, in fact, a valid contract, and ignoring the numerous North Carolina appellate cases holding that the existence of statutes can add implied terms to contracts,” according to the Wilson school board.

Wilson’s school board also contested the Appeals Court’s finding that there was no “substantial” impairment of the contract.

“In any event, $401,763.96, almost half a million dollars, is no doubt significant and is over three times this employee’s final yearly compensation as an employee,” school board lawyers wrote. “It is also substantial compared to the amount contemplated by the Board when it entered into the contract, a contract that was agreed upon well before the Pension-Spiking Statute existed.”

“Furthermore, the amount was totally unexpected, was imposed as a penalty well after the making of the contract, and could not have been foreseen when the Board developed its budget for that year,” the petition added. “No employer, private or public, should be faced with such an unforeseen penalty occurring well after an employment contract has been signed.”

Wilson would have to pay the penalty from its local funds, “funds specifically set aside by Article IX, Section 7 to be used ‘exclusively for maintaining free public schools,’” school board lawyers wrote. “The Court of Appeals totally neglects to point out that typically all public school personnel are paid from State funds, and this includes required monthly Retirement contributions.”

“There is no doubt that $401,763.96, owed from the local funds of Wilson County, not otherwise budgeted for, and constituting an unforeseen after-the-fact penalty, is ‘substantial,’” the petition argued. “There was a contract here, and the impairment is ‘substantial.’ The Court of Appeals failed to properly analyze the constitutional issues presented, and this Court should hear this appeal.”

Judge Allegra Collins wrote the Appeals Court’s unanimous decision in August. Collins and two colleagues defended the application of the pension-spiking law. “[T]he Act does not violate Article I, Section 10, of the United States Constitution; does not violate Article IX, Section 7(a), of the North Carolina Constitution; and is not retroactively applied to Petitioner,” Collins wrote.

Appellate judges rejected the school system’s argument that the pension-spiking law violated the US Constitution’s prohibition on state laws “impairing the Obligation of Contracts.”

“If the employee’s salary increase took effect after the Act was enacted on 30 July 2014 and resulted in the contribution-based benefit cap factor analysis concluding that an additional contribution was required, then the Act did not impair the employment contract,” Collins wrote. “Accordingly, Petitioner has failed to establish that the Act substantially impaired its employment contract with the employee. As such, we need not analyze whether the impairment was reasonable and necessary to serve an important public purpose.”

Appellate judges also rejected the notion that the Wilson County school board had an implied contract with the retirement system. “Petitioner cites no authority to support its proposition that such an implied contract existed, or that it has a vested right in keeping constant its amount of contribution to the TSERS pension fund,” Collins wrote.

TSERS is the Teachers’ and State Employees’ Retirement System.

“There is no set rate that an employer must contribute, but rather it fluctuates to remedy gaps in the pension fund,” Collins wrote. “Petitioner has therefore failed to show that the General Assembly manifested a clear intention to be contractually bound to keep constant the amount an employer is required to contribute to the pension fund. Accordingly, Petitioner has failed to show that a contractual obligation was present. As such, we need not analyze whether the Act impaired a contract or whether the impairment was reasonable and necessary to serve an important public purpose.”

Nor did the retirement system apply the law retroactively, according to the Appeals Court. “The plain language of the Act indicates that it applies to any retirement allowance for a member who retires on or after 1 January 2015. Because the employee in this case retired on 1 January 2018, three years after Act took effect, the statute was not retroactively applied to Petitioner,” Collins wrote.

There is no deadline for the state Supreme Court to decide how to address the Wilson school board’s appeal.