Piccioli v. City of Phx.

249 Ariz. 113

466 P.3d 1166

Frank PICCIOLI, et al., Plaintiffs/Intervenors/Appellees/Cross-Appellants,

v.CITY OF PHOENIX, et al., Defendants/Appellants/Cross-Appellees.

No. CV-19-0116-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 Frank Piccioli, 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, MONTGOMERY, and JUDGE ESPINOSA¹ joined

VICE CHIEF JUSTICE TIMMER, Opinion of the Court:

¶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 sick leave upon retirement. Here, we decide whether a one-time payout for accrued sick 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," years of credited service, and a Plan-specified benefit rate. See Phx., Ariz., Charter ch. 24, art. 2, § 19.1. "Final average compensation" is the 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 sick leave to full-time employees "too ill or injured to be able to work safely." See Phx., Ariz., Personnel Rule 15(c). Employees earn sick leave hours regularly: hourly employees currently earn ten hours of sick leave per month, and salaried employees earn a day and one-quarter per month. Id. Sick leave accrues without limitation, meaning unused time can be accumulated and saved in a "leave bank." See Phx., Ariz., Admin. Reg. 2.441 (2012). The Plan provides that, for most members, any unused sick leave remaining at termination of employment, retirement, or death, shall be converted to credited service time, which is part of the pension benefit formula. See Phx., Ariz., Charter ch. 24, art. 2, §§ 14.4, 19.1(a).

¶4 In 1996, consistent with memoranda of understanding between the City and various unions, the City adopted Administrative Regulation ("A.R.") 2.441 to permit some employees to exchange a percentage of unused sick leave for a cash payout upon retirement. The trial court found that the primary purpose for adopting the regulation was to "encourage City employees not to abuse their sick leave during their employment by taking sick leave when they were not actually sick." Under A.R. 2.441, a retiring employee may "cash out" sick leave at the pay rate existing immediately before retirement, even if the employee accrued that leave at a lower pay rate. These payouts can be significant. For example, the average payout from 2009 to 2010 was $9,923. Any sick leave hours remaining after the one-time payout is converted to credited service time in accordance with the Plan. See Phx., Ariz., Admin. Reg. 2.441(3)(B); Phx., Ariz., Charter ch. 24, art. 2, §§ 14.4, 19.1(a).

¶5 Although not required to do so by the Plan or any regulation, from 1996 to mid-2012, the City included one-time accrued sick leave payouts in the calculation of final average compensation, thereby treating the payouts as pensionable and permitting members to increase or "spike" their pension benefits. The City consistently told members during this period that such payouts would be included in calculating pension benefits.

¶6 In 2012, after considering ways to reduce rising pension costs, the City eliminated the practice of including one-time payouts for accrued sick leave in the calculation of final average compensation. It amended A.R. 2.441 to exclude payouts made upon retirement for unused sick leave accrued after July 1, 2012 as pensionable compensation. 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 payouts for sick leave accrued before July 1, 2012 in calculating a member's final average compensation.

¶7 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"). Several days before the effective date of the amendment to A.R. 2.441, they sued the City, the Plan, and the City of Phoenix Employees’ Retirement Plan Board (collectively, the "City") seeking declaratory, injunctive, and mandamus relief based on allegations the amendment unlawfully "redefine[d] and limit[ed] the Charter's definition of compensation and final average compensation" by not considering accrued sick leave payouts upon retirement as pensionable compensation. Consequently, they alleged, 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.

¶8 After a bench trial, the trial court entered judgment in favor of Petitioners. It characterized sick leave as "non-monetary compensation" under the Plan with a value fixed by the payout amounts established by the City. The court ruled that Petitioners therefore had common law and constitutional rights to have one-time payouts for accrued sick leave included in the calculation of final average compensation, and the City could not unilaterally amend A.R. 2.441 to discontinue the practice for Petitioners. The court awarded Petitioners monetary damages and equitable relief.

¶9 The court of appeals reversed. Piccioli v. City of Phx. , 246 Ariz. 371, 439 P.3d 830 (App. 2019). It disagreed that the one-time payouts upon retirement set the value for non-monetary compensation under the Plan. Id. at 375 ¶ 14, 439 P.3d at 834 ("The accrued sick leave benefits are paid in money, and the City Council need not determine their value ...."). The court also rejected Petitioners’ alternate argument that the payouts are "salary or wages" and therefore pensionable under the Plan. Id. at 375–77 ¶¶ 15–21, 439 P.3d at 834-36. Finally, the court concluded that the City's administrative practice of treating sick leave payouts as pensionable from 1996 to mid–2012 did not confer common law or constitutional rights on Petitioners to continuation of that practice. Id. at 380 ¶ 37, 439 P.3d at 839.

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

DISCUSSION

I.

¶11 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).

¶12 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, 547 (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 before 2012 to include one-time payouts for accrued sick leave in their "final average compensation," 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 employees’ employment contracts); Fields , 234 Ariz. at 216 ¶ 1, 320 P.3d at 1162 (concluding...