Top NC court rejects pension spiking cases from Harnett, Wilson counties

The North Carolina Supreme Court will not take up pension spiking cases involving the Harnett and Wilson county school boards. In both cases, the state’s second-highest court ruled against the school systems in their disputes with the state employees’ retirement system.

In separate orders announced Friday, the state’s high court denied school board requests to review 2023 decisions from the state Court of Appeals. At stake in the Wilson County case is a $400,000 bill charged to the school system. The tab for Harnett County is $198,000.

Wilson County schools

The state retirement system and top legislative leaders urged the state Supreme Court in October 2023 to reject Wilson County schools’ appeal.

“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.

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 in September 2023 seeking a review from the state Supreme Court. Wilson school leaders sought 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.

Harnett County schools

The state filed paperwork in December 2023 asking the state Supreme Court to reject a similar request from the Harnett County school board.

“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 Vysotskaya de Brito in a court filing. “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 defended 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 November 2023 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.