Am. Fed'n of State Cnty. & Mun. Emps. Afl-Cio Local 2384 v. City of Phx., CV-19-0143-PR

• Court: Supreme Court of Arizona
• Citation: 249 Ariz. 105,466 P.3d 1158
• Docket Number: No. CV-19-0143-PR,CV-19-0143-PR
• Parties: AMERICAN FEDERATION OF STATE COUNTY AND MUNICIPAL EMPLOYEES AFL-CIO LOCAL 2384, et al., Plaintiffs/Appellants, v. CITY OF PHOENIX, et al., Defendants/Appellees.
• Decision Date: 10 July 2020

249 Ariz. 105
466 P.3d 1158

AMERICAN FEDERATION OF STATE COUNTY AND MUNICIPAL EMPLOYEES AFL-CIO LOCAL 2384, et al., Plaintiffs/Appellants,
v.
CITY OF PHOENIX, et al., Defendants/Appellees.

No. CV-19-0143-PR

Supreme Court of Arizona.

Filed July 10, 2020

Susan Martin (argued), Daniel L. Bonnett, Jennifer L. Kroll, Michael M. Licata, Martin & Bonnett, PLLC, Phoenix, Attorneys for American Federation, et al.

Eric M. Fraser (argued), Colin F. Campbell, Hayleigh S. Crawford, Osborn Maledon, P.A., Phoenix, Attorneys for City of Phoenix, et al.

VICE CHIEF JUSTICE TIMMER authored the Opinion of the Court, in which CHIEF JUSTICE BRUTINEL and JUSTICES BOLICK, GOULD, LOPEZ, BEENE, and MONTGOMERY joined.

VICE CHIEF JUSTICE TIMMER, Opinion of the Court:

466 P.3d 1159

¶1 The City of Phoenix pays pension benefits to eligible employees upon retirement. The amount of that benefit depends, in part, on a retiring employee's highest average annual compensation paid over a multi-year period. The City also pays employees for unused accrued vacation leave upon retirement or separation from employment. Here, we decide whether a one-time payout for unused vacation leave forms part of an employee's compensation for purposes of calculating that employee's pension benefit. We hold it does not.

BACKGROUND

¶2 Most City of Phoenix employees are members in the City of Phoenix Employees’ Retirement Plan ("Plan"), a defined benefit plan codified in the Phoenix City Charter ("Charter"). A member is entitled to receive a pension upon retirement, which is determined by multiplying a member's "final average compensation," total years of credited service, and a Plan-specified benefit rate. See Phx., Ariz., Charter ch. 24, art. 2, § 19.1. "Final average compensation" is an average of a member's highest annual compensation paid over a period of consecutive years, the length of which depends primarily on the member's hiring date. See id. §§ 2.14, 2.22–2.24. Compensation can be monetary ("salary or wages") or non-monetary. See id. § 2.13. For ease of reference, we refer to compensation used in calculating "final average compensation" as "pensionable" or "pensionable compensation."

¶3 The City provides paid vacation leave to employees and encourages its use. See Phx., Ariz., Admin. Reg. 2.18 (2014) ("Vacation Leave is an important benefit to an employee's health, productivity, personal development, and enjoyment of life. Vacation leave should be taken."). Regardless, for decades the City has permitted eligible employees to profit financially from foregoing vacations. Each year, members may "sell back" for a lump sum payment any unused vacation leave earned that year. See id. Also, upon retirement or separation from employment, members may "cash out" for a lump sum payment up to two and one-half years’ accrued vacation leave. See id. (permitting employees to "cash out" between 240 and 450 unused vacation leave hours, depending on position and years of service). And, although not required to do so by rule or regulation, for decades the City treated these payouts as pensionable, thereby permitting members to increase or "spike" their pension benefits. Indeed, the City repeatedly told members these payouts could be included in their final average compensation calculations to "maximize" pension benefits.

¶4 In 2013, the City acted to reduce rising pension costs by eliminating pension "spiking." It revised Administrative Regulation ("A.R.") 2.18 effective July 1, 2014 to explicitly exclude as pensionable compensation "cash out" payments made upon retirement or separation from employment for unused vacation leave accrued after that date. See id. As a result, such payouts are no longer included in calculating a retiring member's final average compensation, generally lowering pension benefits for members. The amended regulation is prospective, however, meaning the City will continue to include "cash out" payments for vacation leave accrued before July 1, 2014 in calculating a member's final average compensation.¹ See id.

466 P.3d 1160

¶5 Petitioners are individual Plan members and unions that represent Plan members under the City's meet-and-confer ordinance (collectively, "Petitioners"). See Phx., Ariz., Code § 2-214(B) (providing that public employees, with exception, have "the right to be represented by an employee organization of their own choosing, to meet and confer" with their employer "in the determination of wages, hours and working conditions, and to be represented in the determination of grievances arising thereunder"). They sued the City, the Plan, and the City of Phoenix Employees’ Retirement Plan Board (collectively, the "City"), alleging that the 2014 revision to A.R. 2.18 unlawfully "redefine[d] and limit[ed] the Charter's definition of compensation and final average compensation" by not considering vacation leave "cash outs" upon retirement or separation as pensionable compensation. Consequently, they asserted, the City diminished and impaired their vested rights to pension benefits in violation of the Pension and Contract Clauses of the Arizona Constitution, see Ariz. Const. art. 2, § 25 ; id. art. 29, and the Contract Clause of the Federal Constitution, see U.S. Const. art. 1, § 10.

¶6 The trial court granted summary judgment for the City and denied Petitioners’ cross-motion for summary judgment. It ruled that because one-time accrued vacation leave payouts are not regularly paid on an annual basis, they are not "salary or wages" used in calculating a member's final average compensation. It further found that members did not have vested rights in unearned vacation leave, meaning the City was free to discontinue permitting members to spike pensions with "cash out" payments for vacation leave accrued after July 1, 2014. Because members did not have a right to include such payouts as pensionable compensation, the court concluded the City did not violate members’ constitutional rights by prospectively discontinuing the practice. The court of appeals affirmed. Am. Fed'n of State Cty. & Mun. Emps. AFL-CIO Local 2384 v. City of Phx. (AFL-CIO Local 2384 ), No. 1 CA-CV 18-0027, 2019 WL 2191112 at *1 ¶ 1 (Ariz. App. May 21, 2019) (mem. decision).

¶7 We accepted review to provide guidance concerning the interpretation of public employee pension plans, a matter of statewide importance.

DISCUSSION

I.

¶8 Public employee pension rights are well protected in Arizona. Under our constitution, "[m]embership in a public retirement system is a contractual relationship." See Ariz. Const. art. 29, § 1 (C). As such, it is protected by our Contract Clause, id. art. 2, § 25, which prohibits laws "impairing the obligation of a contract." See id. art. 29, § 1 (C); see also U.S. Const. art. 1, § 10 ("No State shall ... pass any ... Law impairing the Obligation of Contracts."). Pension benefits are additionally protected by the Pension Clause, Ariz. Const. art. 29, § 1 (D), which, with exceptions inapplicable here, prohibits benefits from being "diminished or impaired." See Fields v. Elected Officials’ Ret. Plan , 234 Ariz. 214, 218 ¶ 17, 320 P.3d 1160, 1164 (2014) ("The Contract Clause applies to the general contract provisions of a public retirement plan, while the Pension Clause applies only to public retirement benefits."). Neither the Pension Clause nor the Contract Clause, however, provides an independent source of substantive rights; they "only protect whatever pension rights [members] ha[ve] under applicable law." See Cross v. Elected Officials Ret. Plan , 234 Ariz. 595, 599 ¶ 9, 325 P.3d 1001, 1005 (App. 2014).

¶9 A public employee's pension rights vest "upon acceptance of employment." Fields , 234 Ariz. at 221 ¶ 31, 320 P.3d at 1167 (quoting Yeazell v. Copins , 98 Ariz. 109, 115, 402 P.2d 541 (1965) ). These rights include using the benefit calculation formula in place at the start of employment, together with any beneficial changes made to that formula during employment. Id. at 220 ¶ 27, 320 P.3d at 1166. Thus, if Petitioners had rights to include one-time payouts for accrued vacation leave in their "final average compensation" before the City revised A.R. 2.18 in 2013, the City cannot eliminate that practice for Petitioners without their consent. See Hall v. Elected Officials’ Ret. Plan , 241 Ariz. 33, 41 ¶ 23, 383 P.3d 1107, 1115 (2016) (holding that the legislature's unilateral increase of statutory contribution rate and detrimental change to statutory formula granting permanent benefit increases breached public

466 P.3d 1161

employees’ employment contracts); Fields , 234 Ariz. at 216 ¶ 1, 320 P.3d at 1162 (concluding the legislature violated the Pension Clause by changing an existing statutory formula for calculating benefit increases for retired members); Yeazell , 98 Ariz. at 116, 402 P.2d 541 (holding that a municipality could not calculate a police officer's pension benefit using a statutory formula that was less beneficial than one existing at the start of employment as doing so without the officer's assent would alter the employment contract). Whether such rights exist depend on the Plan's terms and, alternately, whether Petitioners had an independent contractual right to include these payouts in the...