FINACT19F-006-ARB.pdf

19F-006-ARB · Arizona State Retirement System · 2019-07-03

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

Stormy Rose, No. 19F-006-ARB

Appellant, ADMINISTRATIVE LAW JUDGE DECISION v.

Arizona State Retirement System,

Respondent.

HEARING: June 10, 2019, at 8:00 a.m. APPEARANCES: Stormy Rose (“Appellant”) appeared on her own behalf; the Arizona State Retirement System (“ASRS”) was represented by Mark A. Fuller, Esq., Gallagher & Kennedy, P.A. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________ FINDINGS OF FACT 1. Appellant appealed to the ASRS Board ASRS’ determination that it had overpaid her $11,500.00 in Long Term Disability (“LTD”) benefits. ASRS referred the matter to the Office of Administrative Hearings, an independent state agency, for an evidentiary hearing. 2. A hearing was held on June 10, 2019. ASRS submitted fifteen exhibits and presented the testimony of Jenna Golab, a Member Advocate. Appellant submitted four exhibits and testified on her own behalf. HEARING EVIDENCE 3. On or about August 9, 1993, Appellant became a member of ASRS when she was employed by Safford United Schools as a teacher and began contributing to ASRS.1 Appellant subsequently was employed by Kyrene School District in Phoenix and continued to contribute to ASRS.

See ASRS Exhibit A. Office of Administrative Hearings 1740 West Adams Street, Lower Level Phoenix, Arizona 85007 (602) 542-9826 4. In 2002, Appellant suffered a serious traumatic brain injury (“TBI”) in an automobile accident. She went on short-term disability and then tried to return to teaching, but her TBI prevented her from returning to her prior work. She was

determined to be eligible for LTD benefits on or about March 4, 2004.

5. ASRS began paying Appellant a gross LTD benefit in the amount of

$2,170.72/month on October 5, 2004.

6. Appellant engaged in occupational therapy and remained under the regular

treatment of her neurologist for her TBI and, through hard effort, made some

improvement.

7. In 2014, Appellant started her own business, which she called New Heights,

offering business strengths coaching to business. Appellant explained that she worked

with businesses to identify talents among their employees to ensure the best fit for the

employees to different aspects of the employer’s business plan. Appellant testified that

she got a business logo and went to Washington D.C. for training and certification.

Appellant testified that she kept costs as low as she could and that, when she went to

Washington D.C., she stayed in a hostel.

8. Appellant scrupulously kept New Heights’ finances and financial records separate from her own personal finances and financial records. Appellant testified that she got a separate line of credit and credit card for the business from Wells Fargo Bank. 9. ASRS’ contractors who manage its LTD benefits, formerly Sedgwick and, currently, Broadspire, published information about the rights and obligations of a member who receives LTD benefits, including that ASRS is entitled to “[h]alf of any salary, wages or commissions or other employment related pay that a participant receives or is entitled to receive from any gainful employment.” The materials also informed members that “[a]ny money paid from employment during the LTD benefit period will be an offset for that period and will not be allocated over multiple benefit periods.”2

2 ASRS’ Exhibit C at 10 and Exhibit D at 5. 10. Appellant informed ASRS through Sedgwick or Broadspire that she had started a business. On Appellant’s 2014 federal tax return, she showed negative $8,684 as a business loss.3

11. On Appellant’s 2015 federal tax return, she showed negative $1,819 as a

business loss.4

12. At some point, Appellant acquired Best Western as a client for New Heights

and her business became more profitable.

13. On Appellant’s 2016 federal tax return, she showed positive $22,585 as

business income and $145 as wages for being a poll worker and for jury duty.5

14. Appellant testified that she was happy that New Heights showed a profit in

2016 and 2017, because it enabled her to pay off the line of credit and credit card that

she had taken out to start the business.

15. Appellant testified that she subsequently lost Best Western as a client and

that, because her TBI had not fully resolved, the stress of running New Heights became

overwhelming. Sometime in early 2017, she closed her business.

16. On Appellant’s 2017 federal tax return, she showed positive $415 as

business income.6 17. Broadspire sent Appellant letters, stating that she had been overpaid $11,292.50 in LTD benefits for the period of January 1, 2016, through December 31, 2016 due to the business income and requesting full reimbursement in this amount.7 This amount was later revised to $11,500, representing half of Appellant’s claimed business profits for fiscal years 2016 and 2017. 18. Appellant sent letters in response, agreeing that half of her business profits should be offset against the LTD benefits that she had received, but arguing that ASRS should consider her business losses in 2014 and 2015 when it calculated her business

See Appellant’s Exhibit 2. See id. See id. See id. 7 See ASRS’ Exhibits E and K. income.8 Appellant included in her calculation the business losses, as well as the $145 for being a poll worker and for jury duty, to calculate her net income from her business as $12,642, and the payment due to ASRS as $6,321.9

19. Ms. Golab testified that ASRS must follow the statutes that govern payment

of benefits because it is a public program. Ms. Golab testified that a person who is

eligible to receive ASRS LTD benefits is entitled to work at whatever occupation she is

able to, but that she must return half of her income to ASRS as an offset to the LTD

benefits that she has received.

20. ASRS’ assistant director and director denied Appellant’s appeals, finding

that she was not entitled to offset from the amount of her business profits in 2016 and

2017 the business losses for the prior two years.10 Neither letter cited any authority for

declining to offset Appellant’s losses against her later profits in calculating the amount

of previously paid LTD benefits that ASRS was entitled to recover from her.

CONCLUSIONS OF LAW

1. The Arizona legislature has required ASRS to recover overpayments to members and that it “as far as practicable shall adjust the payments in a manner so that the actuarial equivalent of the benefit to which the member . . . was correctly entitled is paid.”11 This matter lies with the ASRS Board’s jurisdiction. 2. ASRS bears the burden of proof to establish that Appellant’s LTD benefits were overpaid and the amount that Appellant is required to pay to reimburse these overpayments by a preponderance of the evidence.12 “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”13 A preponderance of the evidence is “evidence which is of greater weigh+9t or more convincing than evidence which is offered in opposition to it;

8 See ASRS’ Exhibits F and G; Appellant’s exhibit 4. See Appellant’s Exhibit 3. Appellant calculates her net profit as $12,915 and the amount due to ASRS as $6,457. The Administrative Law Judge has checked Appellant’s calculation against the amounts on her tax returns and concluded that her running total contains a miscalculation. See ASRS’ Exhibits J and L. A.R.S. § 38-765. See A.A.C. R2-19-119; see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). 13 MORRIS K. UDALL, ARIZONA LAW OF EVIDENCE § 5 (1960). that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.”14 3. A.R.S. § 38-797.07 provides in relevant part as follows:

A. The LTD program is subject to the following limitations:

1. [M]onthly LTD program benefits shall not exceed two- thirds of a member's monthly compensation, reduced by: ....

(h) Fifty percent of any salary, wages, commissions or other employment related pay that the member receives or is entitled to receive from any gainful employment in which the member actually engages.

A.R.S. § 38-797.08 provides as follows: If any change or error in the records results in any member receiving from the LTD program more or less than the member would have been entitled to receive if the records had been correct, the board shall correct the error and shall adjust the payments in a manner so that the equivalent of the benefit to which the member was correctly entitled is paid. The board shall correct any change or error and shall pay the appropriate monies to a member or shall recover monies from the member if the member is overpaid. The board shall recover monies by reducing any benefit that is otherwise payable by ASRS or the LTD program to an active, inactive, member with a disability or retired member, survivor, contingent annuitant, beneficiary or alternate payee.

4. Appellant does not dispute that ASRS is entitled to be repaid 50% of the profits from her business. ASRS does not dispute that, in 2014 and 2015, when she was starting up her business, she incurred net losses. “In applying a statute . . . its words are to be given their ordinary meaning unless the legislature has offered its own definition of the words or it appears from the context that a special meaning was intended.”15 The legislature has not defined “salary, wages, commissions or other

BLACK’S LAW DICTIONARY at page 1182 (6th ed. 1990). Mid Kansas Federal Savings and Loan Ass’n of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 128, 804 P.2d 1310, 1316 (1991). employment related pay” under A.R.S. § 38-797.07(A)(1)(h).16 The legislature did not expressly state and ASRS did not refer the Administrative Law Judge to any authority about whether income from a business should be offset against previous years’

business losses for purposes of calculating a reduction in a person’s LTD payments.

5. A California court has held that an employer must calculate credit due for

worker’s compensation benefits previously paid to an injured employee based on the

net profits of the employee’s business, taking into account losses, not merely gross

profits, reasoning as follows:

[T]here is a difference between working for another person and being self-employed. An employee ordinarily agrees to work for, and receives, a set wage or salary. His wages are not directly affected by the net income of the employer. In contract, the self-employed person operating a “business” such as Hupp’s has no more income available than the net income of the “business” after paying necessary expenses of the “business.”17

The court also noted, if the injured employee is allowed to keep more of his profits,

after losses are deducted, it may hasten a time when the employer is no longer

obligated to pay any worker’s compensation benefits to the injured employee:

The injured worker should be encouraged to be productive and self-sufficient by earning outside income when a disability prevents the worker from engaging in his or her usual employment. The worker who does so will usually reap the psychological benefits of having greater self-esteem and a greater sense of independence than the worker who remains idle. Under certain circumstances, these psychological benefits of self-employment could prove beneficial in speeding recovery from the industrial injury. However, there will be no incentive for a worker to purchase the necessary equipment and supplies for a business, to

16 A.R.S. § 38-711(7) defines “compensation” as “the gross amount paid to a member by an employer as salary or wages,” but excludes “[a]mounts that are paid as salary or wages to a member for which employer contributions have not been paid.” See A.R.S. § 38-711(7)(e) (emphasis added). A.R.S. § 38- 711(7) makes clear that its definition of compensation concerns the amount that should be used to calculate the monthly amount of a member’s LTD or retirement benefits, not deductions from that amount for profits from a business under A.R.S. § 38-797.07(A)(1)(h). Hupp v. Workers’ Compensation Appeals Board, 45 Cal Rptr.2d 859, 862, 39 Cal. App. 4th 84, 88-89 (1995). advertise the business to obtain customers or clients, or to hire others to assist in the income-producing enterprise if these business expenses cannot be deducted from gross earnings.18

If Appellant had not taken the entrepreneurial risk by incurring personal debt in 2014 and 2015 to invest in New Heights, ASRS would not have had any claim on New Heights’ profits in 2016 and 2017. It would be unjust to require Appellant to bear all of the risk for starting her business and to allow ASRS, after Appellant’s business has generated a profit, to reduce Appellant’s LTD benefits by the profits that her business generated in later years, without deducting the earlier losses that Appellant incurred to generate the later profits. 6. ASRS does not dispute that any of the business losses that Appellant claimed on her 2014 and 2015 tax returns were valid and does not claim that these losses were claimed only to reduce her future profits.19 Because the expenditures that Appellant made in 2014 and 2015 enabled her business to generate the profits that her business generated in 2016 and 2017, the earlier losses should be deducted from the later profits in calculating the amounts that ASRS is entitled to withhold from her future LTD payments. In addition, the $145 that Appellant earned for jury duty and working at the polls in 2016 should be included in ASRS’ calculation of the amount that it is entitled to recover from Appellant under A.R.S. § 38-797.07(A)(1)(h). RECOMMENDED ORDER Based on the foregoing, it is ordered upholding Appellant’s appeal. It is further ordered that the ASRS Board shall actuarially reduce the benefits paid to Appellant to recover a total of $6,321.00. In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be five (5) days from the date of that certification.

Id. at 862, 39 Cal. App. 4th at 89-90. Cf. Insurance Company of North America v. Industrial Commission, 116 Ariz. 21, 26-27, 567 P.2d 337, 342-43 (App. 1977) (declining to consider the injured employee’s claimed compensation from his own closely held corporation, which was based solely on his “ad hoc determination” of the value of assets that he accepted in lieu of a salary, to maximize his worker’s compensation award). Done this day, June 21, 2019.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to: Paul Matson, Director Arizona State Retirement System