City of Villa Hills v. Ky. Ret. Sys.

• Decision Date: 26 August 2021
• Docket Number: 2019-SC-0434-DG
• Citation: 628 S.W.3d 94
• Court: United States State Supreme Court — District of Kentucky
• Parties: CITY OF VILLA HILLS, Kentucky, Appellant v. KENTUCKY RETIREMENT SYSTEMS, Appellee

628 S.W.3d 94

CITY OF VILLA HILLS, Kentucky, Appellant
v.
KENTUCKY RETIREMENT SYSTEMS, Appellee

2019-SC-0434-DG

Supreme Court of Kentucky.

AUGUST 26, 2021

COUNSEL FOR APPELLANT: Mary Ann Stewart, Bryce C. Rhoades, Covington, Adams Law, PLLC.

COUNSEL FOR APPELLEE: Anne Caroline Bass, Kentucky Public Pensions Authority.

OPINION OF THE COURT BY CHIEF JUSTICE MINTON

We accepted discretionary review to consider the application of Kentucky Revised Statute (KRS) 61.598, sometimes referred to as the pension-spiking statute. Kentucky Retirement Systems assessed over $200,000 in actuarial costs to against the City of Villa Hills following the retirement of one of its employees. The Retirement Systems found that increases in that employee's compensation over the five years preceding his retirement that was "not the direct result of a bona fide promotion or career advancement" and so shifted the added actuarial cost of the retiree's pension benefits to the City.

The City raises four primary objections to the assessment on appeal: (1) the Retirement Systems applied KRS 61.598 in an improperly retroactive manner to compensation paid to the employee before the effective date of the statute; (2) the burden

628 S.W.3d 99

of proof was improperly placed on the City to prove the existence of a bona fide promotion related to the pay raise; (3) the courts below erroneously concluded the assessment was supported by substantial evidence that the employee did not experience a bona fide promotion; and (4) that KRS 61.598 is unconstitutional for being arbitrary, overbroad, an ex post facto law, and a law violating the Contracts Clause.

The Court of Appeals resolved all the City's issues in favor of the Retirement Systems, and we affirm that decision.

I. FACTUAL BACKGROUND

Joseph Schutzman was a police officer for the Villa Hills Police Department when he retired on January 31, 2014. Years before, in addition to his police work, Schutzman was an experienced building and code inspector operating under the business name Schutzman Inspection Services. He originally ran this side-business in his free time off-duty. The City was a client of his on a contractual basis.

On November 29, 2010, the mayor of Villa Hills expanded the city's police department to bring in-house the formerly outsourced responsibility of building inspection, code enforcement, and zoning administration. Because of his experience, this inspector role was in some way or another assigned to and fulfilled solely by Schutzman, who would perform these additional functions while continuing under the same rank and title he already held within the police department.¹ On the same day in November 2010, the City of Villa Hill's city council reviewed and adopted Civil Service Rules for Villa Hills by ordinance and conducted the first reading of pay scales by ordinance. The very next day, the mayor sent an email to the city administrative clerk approving an increase in Schutzman's base pay of $28.35/hour to $38.35/hour. With his overtime-pay rate at the typical 1.5 times base-pay rate, he would earn approximately $57.25/hour while working overtime. Before December 2010, Schutzman had never reported overtime, but he began doing so when he undertook the police department's new inspection functions. He reported his police overtime and his inspection overtime separately.

His gross compensation in the last six fiscal years of employment was as follows:

Fiscal Year	Gross Compensation	Increase Over the Prior Fiscal Year
2008–2009	$61,277.04	n/a
2009–2010	$60, 026.40	0%
2010–2011	$115,252.23	92%
2011–2012	$164,681.55	48.89%
2012–2013	$111,119.20	0%
2013–2014 (until Jan. 31)	$27,918.80	0%

628 S.W.3d 100

In FY 2010–2011 Schutzman's compensation attributable to his inspection duties was $48,586.87, and in FY 2011–2012 that amount was $91,675.48. Separate from the added inspection duties, the pay directly attributable to his police work would have been $66,665.67 in FY 2010–2011 and $73,006.07 in FY 2011–2012. His compensation attributable to overtime in FY 2010-2011 was $39,728.59, and $78,809.25 in FY 2011-2012. The changes in gross compensation between these years constitute the "spikes" in question.

In the meantime, the General Assembly sought to address a practice called "pension spiking"—the practice of increasing the pay of an employee in the years immediately leading up to retirement with the effect of increasing the employee's pension benefits in retirement. To limit this practice, the General Assembly passed KRS 61.598, which went into effect on July 1, 2013.

On January 31, 2014, Schutzman retired from the police department. On June 23, 2014, the Retirement Systems assessed $210,893.82 against the City for the increased actuarial costs resulting from Schutzman's compensation increases in FYs 2010–2011 and 2011–2012.

Responding to the assessment, the City filed with the Retirement System a Form 6481 Request for Post-Determination of Bona Fide Promotion or Career Advancement. The Retirement Systems examined the circumstances described by the City, and in its post-determination concluded that the City was responsible for the assessed actuarial costs because the pay increase was not the result of a bona fide promotion or career advancement.

The City requested an administrative hearing to challenge the liability. The Hearing Officer issued an order on March 17, 2015, initially assigning the burden of proof to the Retirement Systems to prove the alleged spike was not a result of a bona fide promotion. Then, on the Retirement Systems's motion, the Hearing Officer placed the burden of proof on the City instead, requiring it to prove by a preponderance of evidence that the alleged spike was a result of a bona fide promotion. A hearing was held on December 7, 2015, and on March 14, 2017, the Hearing Officer issued a recommended order finding the Retirement Systems's assessment proper under KRS 61.598. The City filed exceptions. The Retirement Systems's Board of Trustees adopted the recommended order as its final order with minor modifications.

The City then petitioned for judicial review of the final order. The Franklin Circuit Court reviewed motions and heard oral argument. On May 15, 2018, the court issued an opinion and order in which it held Retirement Systems properly applied KRS 61.598 retroactively, that the burden of proof was properly assigned to the City, and that substantial evidence supported the Systems's spike determination. The City appealed. The Court of Appeals affirmed the circuit court on the same bases.

At every stage of litigation and appeal thus far, the Retirement Systems has prevailed. The City sought discretionary review from this Court, which we granted.

II. ANALYSIS

To begin with an overview of the applicable law, KRS 61.598 affects the amount of a retiree's monthly benefits and how the costs of such benefits are allocated between the Retirement Systems and a participant employer, like the City. KRS 61.598 involves a statutory concept called "creditable compensation." KRS 61.510(13)(a), in pertinent part, defines "creditable compensation" as:

628 S.W.3d 101

"[A]ll salary, wages, tips to the extent the tips are reported for income tax purposes, and fees, including payments for compensatory time, paid to the employee as a result of services performed for the employer or for time during which the member is on paid leave, which are includable on the member's federal form W-2 wage and tax statement under the heading "wages, tips, other compensation"....

Put simply, creditable compensation refers to an employee's gross income and compensation in a given fiscal year. To calculate an employee's monthly retirement benefit and allocate any related actuarial costs between the participant employers and the Retirement Systems, the Retirement Systems must look to the last five fiscal years of the retiree's employment and identify increases in creditable compensation exceeding 10% between any of the five fiscal years. Then, depending on the timing of earnings and the date of the employee's retirement, the actuarial costs of an identified increase over 10% in any one or more of the five fiscal years must be assessed against the employer if the increase is not justified by a "bona fide promotion or career advancement" or otherwise excepted by statute. Implicit is that, generally, the Retirement Systems will bear the actuarial costs of a compensation increase up to 10% in a given year.

KRS 61.598(2) defines the class of retiring employees for which the Retirement Systems must limit the retiree's pension benefits based on compensation increases in the last five years of his employment that are not a result of a bona fide promotion or career advancement. The legislature selected January 1, 2018, as the subsection's effective date, meaning that only those retiring after this date would be subject to caps on creditable compensation increases exceeding 10% between any of the last five years of employment. Thus, KRS 61.598(2) concerns the amount of the retiree's monthly benefits. It does not directly concern the payment of actuarial costs related to those benefit payments.

Accordingly, KRS 61.598(3) applies that very same 10% limit only to that creditable compensation earned by a retiree after July 1, 2017. Significantly, subsection (3) was added by amendment in 2017 to read:

In order to ensure the prospective application of the limitations on increases in creditable compensation contained in subsection (2) of this section, only the creditable compensation earned by the retiring employee on or after July 1, 2017, shall be subject to reduction under subsection (2) of this section. Creditable compensation earned by the retiring employee prior to July 1, 2017, shall not be subject to reduction under subsection (2) of this section.

The emphasized "creditable compensation ... reduction under subsection (2) " refers to that reduction "used to calculate the retiring employee's monthly retirement allowance" under subsection (2).² Thus, subsection (3)...