ALJDEC decisions subject to certification as final

20F-007-ARB · Arizona State Retirement System · 2020-09-03

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

Scott McCarty,

Appellant.

v.

Arizona State Retirement System,

Respondent.

No. 20F-007-ARB

ADMINISTRATIVE LAW JUDGE DECISION

HEARING: July 24, 2020; the record was held open until August 14, 2020, to allow sufficient time for preparation of transcript of the hearing.

APPEARANCES: Attorney Andrew M. Fowler and Attorney Maren Sorenson represented Scott McCarty (Appellant). Attorney Patrick Irvine and Assistant Attorney General Cassie Adams represented the Arizona State Retirement System (ASRS).

ADMINISTRATIVE LAW JUDGE: Kay A. Abramsohn

_____________________________________________________________________

Having heard the evidence and testimony and having considered the record in this matter, the undersigned Administrative Law Judge hereby makes the following Findings of Fact and Conclusions of Law and issues the following Recommended Order to the Board of ASRS.

FINDINGS OF FACT

Background and Procedure

ASRS is a public pension plan for workers employed by various government entities within and for the State of Arizona. The state agency administers retirement benefits, among other benefits, to qualified government employees. ASRS is governed by a Board that acts as fiduciary of the ASRS trust fund with powers and duties as outlined in Ariz. Rev. Stat. §§ 38-713 and 38-714.

ASRS offers several optional programs regarding retirement benefits, one of which is codified in Ariz. Rev. Stat. § 38-743 entitled “Public service credit.” Public service credit allows actively contributing ASRS members to purchase credited service to be placed in/added to their ASRS benefits Normal from their previous employment with other government agencies, including the federal government, other state governments, and other in-state government agencies.

In 1995, under an emergency Act entitled Social Security Public Officer and Employees, the Arizona Legislature amended Title 38, Chapter 5 of the Arizona Revised Statutes to add new Articles 1 and 2 (repealing former Articles and 2). Included in that amendment was a provision allowing the named active members of ASRS, at the time of their retirement, to purchase and receive up to 5 years of credited service from certain named employment in other states, if they were not receiving benefits from that other state employment. Ariz. Rev. Stat. § 38-743(A), Out of state service credit [Laws 1995, Chapter 32, Section 14, effective March 30, 1995]. The member’s cost-to-purchase the credited service was “the amount equal to the increase in the actuarial present value of benefits computed at the time of retirement that results from adding the number of years or partial year of credited service...” Ariz. Rev. Stat. § 38-743(B).

In 1995, under an emergency Act entitled Public Officers and Employees – State Retirement System, a further amendment removed the “time of retirement” condition and indicated that the cost to purchase would be “the amount equal to the increase in the actuarial present value of benefits computed at the time of retirement that results from adding the number of years or partial year of credited service...” Ariz. Rev. Stat. § 38-743(A) and (B) [Laws 1995, Chapter 134, Section 5, effective April 18, 1995]. The member’s cost-to-purchase the credited service was “the amount equal to the increase in the actuarial present value of projected benefits resulting from adding the number of years or partial year of credited service...”

In 1996, under an Act entitled Arizona State Retirement System, an amendment opened up the class eligible to purchase credited service to active ASRS members who had been a member of other public employee retirement systems, removed the 5-year credited service purchase limit, and changed the member’s cost-to-purchase to be “the amount equal to the product of the member’s current annual compensation times the normal cost rate for ASRS for the fiscal year during which the purchase of credited service is being made time the years or partial year of credited service being purchased.” Ariz. Rev. Stat. § 38-743(A) and (B) [Laws 1996, Chapter 185, Section 9, effective July 20, 1996].

The 1996 cost-to-purchase formula is commonly referred to as the “Normal Cost” method.

In 1996, under an Act entitled Arizona State Retirement System, an amendment opened up the class eligible to purchase credited service to active ASRS members who had been a member of other public employee retirement systems and removed the 5-year credited service purchase limit. The most notable amendment was the change to the member’s cost-to-purchase to now be “the amount equal to the product of the member’s current annual compensation times the normal cost rate for ASRS for the fiscal year during which the purchase of credited service is being made time the years or partial year of credited service being purchased.” Ariz. Rev. Stat. § 38-743(A) and (B) [Laws 1996, Chapter 185, Section 9, effective July 20, 1996].

In 2004, under an Act entitled Retirement System, an amendment excluded from possible credited service “any time worked for a prison while the member was incarcerated.” However, the most notable amendment, and the underlying basis of the appeal in this matter, was the reversion of the member’s cost-to-purchase to an actuarial formula: “an amount equal to the present value of the additional benefit that is derived from the purchased credited service using the actuarial assumptions that are approved by the board.” Ariz. Rev. Stat. § 38-743(A) and (B) [Laws 2004, Chapter 252, Section 1, effective August 25, 2004].

The 2004 cost-to-purchase formula is commonly referred to as the “Actuarial Present Value” (APV) method.

Appellant was employed with the Town of Gilbert from September 3, 1989 until 1998. As an employee of the Town of Gilbert, Appellant was a member of the ASRS.

Appellant relocated to Washington State for a period of nine years from 1998 until 2007. During this period, Appellant was employed with local governments in Des Moines, Washington, and in Puyallup, Washington. During this period, Appellant was not an active contributing member of ASRS.

Appellant returned to Arizona in 2007. At hearing, Appellant indicated that he returned to Arizona in 2007 to take a position with the City of Scottsdale as Deputy Chief Financial Officer. When he returned to Arizona, he once again became an active contributing member of ASRS.

In April 2009, Appellant visited the ASRS office to discuss the process of purchasing his eligible Other Public Service (OPS) for the first time. However, Appellant did not submit any requests to purchase his OPS at that time.

In July 2013, Appellant visited the ASRS office a second time to discuss retirement and OPS options. However, Appellant did not submit any requests to purchase his OPS at that time.

In May 2018, Appellant contacted ASRS by phone to discuss buying his OPS from the State of Washington. ASRS staff went through how the cost would be calculated and options for payment available. However, Appellant did not submit any requests to purchase his OPS at that time.

On February 15, 2019, Appellant submitted a request to purchase OPS from the City of Puyallup, Washington for 5.34 years.

On March 1, 2019, Mr. McCarty received an invoice from ASRS calculating the cost for 5.34 years at the APV cost methodology for a total of $341,421.98. Utilizing the Normal Cost method, the cost for 5.34 years would have been $148,270.80. The invoice had a due date of March 15, 2019 and detailed the invoice would no longer be valid after this date. Appellant did not submit payment to ASRS for this invoice.

On April 11, 2019, Appellant submitted a separate request to purchase OPS form the City of Des Moines, Washington for 3.59 years.

On April 15, 2019, Appellant received an invoice from ASRS calculating the cost for 3.59 years, utilizing that APV cost methodology, was $222,260.98. The invoice had a due date of April 29, 2019 and detailed the invoice would no longer be valid after this date. Appellant did not submit payment to ASRS for this invoice.

On May 10, 2019, Appellant resubmitted the request to purchase OPS from the City of Des Moines, Washington for 3.59 years.

On May 13, 2019, Appellant received an invoice from ASRS calculating the cost for 3.59 years, utilizing the APV cost methodology, was recalculated to be $223,368.39. Utilizing the Normal Cost method, the cost for 3.59 years would have been $98,375.50. The invoice had a due date of May 27, 2019 and detailed the invoice would no longer be valid after this date. Appellant did not submit payment to ASRS for this invoice.

On May 24, 2019, Appellant, through counsel, wrote a letter to ASRS requesting that ASRS allow him to purchase his credited service at Normal Cost instead of the APV cost.

On July 2, 2019, ASRS responded to Appellant’s counsel, advising that ASRS could not allow Appellant to purchase his credited service at Normal Cost instead of the APV cost.

On August 7, 2019, Appellant, through counsel, wrote a letter to ASRS requesting that ASRS reconsider its denial of Appellant’s ability to purchase his credited service at Normal Cost instead of the APV cost.

On September 12, 2019, ASRS responded to Appellant’s counsel, confirming that ASRS could not allow Mr. McCarty to purchase his credited service at Normal Cost instead of the APV cost.

On October 3, 2019, Appellant, through counsel, made a request for hearing to appeal ASRS’s denial of Appellant’s ability to purchase his credited service at Normal Cost instead of the APV cost.

Through the hearing appeal, Appellant argued that his retirement benefits cannot be constitutionally or contractually diminished or impaired and that ASRS’s use of the APV cost method instead of the Normal Cost method as to Appellant’s requested purchase of credited service is an unconstitutional diminishment, and contractual impairment, of Appellant’s public system benefits that were available to him when he became a member of ASRS. Appellant argued that the 2004 change from Normal Cost method to APV method cannot be retroactively applied to him because it would impair his contractual benefits, inured to him when he became a member in 1989, which included the entitlement within the ASRS to purchase credited service at the Normal Cost method. Regarding any limitation period, such as Ariz. Rev. Stat. § 12-821, Appellant had argued that he was required to exhaust his administrative remedies before seeking redress in court.

At hearing, ASRS argued that it was bound by the current applicable statute, Ariz. Rev. Stat. § 38-743(A) and (B), to calculate Appellant’s cost-of-purchase using the APV cost method and not the Normal Cost method. Regarding a possible application of a limitations period, ASRS had argued that Ariz. Rev. Stat. § 12-548(A)(1) provided that any claim for breach of contract had to be brought within six years after the cause of action accrued; ASRS’s position is that period began at the time of the 2004 legislative change.

CONCLUSIONS OF LAW

1. Appellant bears the burden of proof and, as such, must establish by a preponderance of the evidence that ASRS improperly denied the utilization of a Normal Cost methodology in calculating the March 1, 2019, the April 15, 2019, and the May 13, 2019, invoices in which ASRS used the APV methodology set forth in current Ariz. Rev. Stat. § 38-743(B).

2. “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” A preponderance of the evidence is “evidence which is of greater weight or more convincing than evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.”

3. Ariz. Rev. Stat. § 38-743 provides as follows:

If an active member of ASRS or a member who is receiving benefits pursuant to § 38-797.07 was previously employed by the United States government, a state, territory, commonwealth, overseas possession or insular area of the United States or a political subdivision of a state, territory, commonwealth, overseas possession or insular area of the United States, excluding any time worked for a prison while the member was incarcerated, the member may receive credited service for this prior employment if the member pays into ASRS the amount prescribed in subsection B of this section. ...

B. A member who elects to receive credit for service with the United States government, a state, territory, commonwealth, overseas possession or insular area of the United States or a political subdivision of a state, territory, commonwealth, overseas possession or insular area of the United States shall pay to ASRS an amount equal to the present value of the additional benefit that is derived from the purchased credited service using the actuarial assumptions that are approved by the board.

4. Based on the hearing record, and under the authority given to this Tribunal, the Administrative Law Judge concludes that Ariz. Rev. Stat. § 38-743(B) applies to Appellant’s credited service purchase requests. The weight of the evidence established that ASRS appropriately calculated the APV amounts of the cost-to-purchase regarding Appellant’s credited service purchase requests pursuant to Ariz. Rev. Stat. § 38-743(B). Appellant failed to establish that a Normal Cost methodology from a prior statutory provision, no longer in effect, would apply to any of his credited service purchase requests. Therefore, Appellant has not sustained his burden to establish by a preponderance of the evidence that ASRS improperly declined to utilize, or allow to be utilized, a Normal Cost methodology rather than the determined statutorily-applicable APV methodology.

RECOMMENDED ORDER

Based on the foregoing, it is recommended that the ASRS Board deny Appellant’s appeal.

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.

Done this day, September 3, 2020.

/s/ Kay Abramsohn

Administrative Law Judge

Transmitted electronically to:

Paul Matson, Director

Arizona State Retirement System