ALJDEC decisions subject to certification as final

22F-005-ARB · Arizona State Retirement System · 2023-02-09

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

Frank Milstead and Heston Silbert,

Appellants,

Arizona State Retirement System,

Respondent.

__________________________________

City of Mesa,

Intervenor.

No. 22F-005-ARB

ADMINISTRATIVE LAW JUDGE

DECISION

HEARING: September 13, 2022, with further hearing on September 14, 2022; the record was held open until January 23, 2023, for the submission of Closing Arguments and receipt of the transcript

APPEARANCES: Jennifer Kroll, Esq. represented Appellants Frank Milstead and Heston Silbert. Mark Fuller, Esq. represented the Arizona State Retirement System. Kristin Windtberg, Esq. and John Bullock, Esq. represented Intervenor City of Mesa.

ADMINISTRATIVE LAW JUDGE: Sondra J. Vanella

FINDINGS OF FACT

Pursuant to the Amended Notice of Hearing issued by the Arizona State Retirement System (“ASRS”) on April 29, 2022, the scope of the hearing in the above-captioned matter is to “determine whether grounds exist to justify ASRS’s appealable agency action and its application of A.R.S. §§ 12-821, 38-727, § 38-738(E), and H.B. 2050 (2014).”

Appellant Frank Milstead was the Chief of Police for the City of Mesa (“Mesa”) from March 22, 2010, through February 9, 2015.

Appellant Heston Silbert was Mesa’s Assistant Chief of Police from December 6, 2010, through February 12, 2015.

Mesa participates in the ASRS system for the benefit of its eligible employees.

Section 218 Agreement

When Appellants were hired by Mesa, A.R.S. § 38-727(1) provided that employees covered by the Security Act (the “federal old age and survivors insurance system”, 42 U.S.C. § 418), were eligible for ASRS membership. See A.R.S. § 38-727(a)(1) (2013) (eligible employees include “all officers and employees of political subdivisions establishing a retirement plan administered by the [ASRS] board pursuant to this article who as a result of . . . service for the political subdivision are included in agreements providing for their coverage under the federal old age and survivors insurance system”). The “agreements” to which this statute refers are “Section 218 Agreements,” which are voluntary but irrevocable agreements between a State or local government and the Social Security Administration.

In late 1951, Mesa signed and submitted a Section 218 Application and Agreement (“Section 218 Agreement”). Provision 10 of the Section 218 Agreement provided that it would become a binding agreement between the Applicant (Mesa) and the Employment Security Commission of Arizona upon “its acceptance and execution by the Employment Security Commission of Arizona (“ESCA”).”

On December 12, 1951, the ESCA signed the Section 218 Agreement.

Provision 7 of the Section 218 Agreement stated: “That the coverage as herein provided for all services of each of the eligible employees of [Mesa] shall be effective as of January 1, 1951 . . .”

Provision 3 of the Section 218 Agreement excluded Social Security coverage for all employee positions that were already covered by a retirement system as follows:

This application and agreement includes all services performed by each of the eligible employees of [Mesa] for whom coverage is requested, except the following:

Any service performed by an employee in a position, which, on the effective date of this agreement, is covered by a retirement system.

Previously, on November 5, 1951, Mesa had passed Ordinance 262, creating its own police pension program, effective November 1, 1951.

Consequently, when the Section 218 Agreement became a legally binding agreement, Mesa police were already “covered by a retirement system” under Ordinance 262, Mesa police pension program.

Mesa’s police pension program existed prior to the existence of the execution of the Section 218 agreement, notwithstanding the retroactive effective date contained in the section 2018 agreement.

In April 2009, shortly before Mesa hired Appellants in 2010, ASRS notified Mesa of ASRS’s position regarding the Section 218 Agreement, which had changed based on “additional documentation” that ASRS had received, as follows:

To summarize the relationship between the Section 218 agreement and the ASRS, all employers of the ASRS must be covered under a Section 218 agreement in order to participate in the ASRS. The 218 agreement does not include any group of employees who are already covered by a retirement system. Because the City covered fire and police positions under other public retirement systems before signing the 218 agreement, those positions may not be covered now under your 218 agreement, and therefore cannot participate in the ASRS.

Therefore, Mesa hired Appellants with the understanding, based on direction from ASRS, that Appellants were ineligible to participate in ASRS.

In 2014, shortly before Appellants left their Mesa employment, the Legislature passed House Bill 2050 (“HB 2050”). Section 8 of HB 2050 defined “eligible [ASRS] employees” as including “[a]n employee who is currently employed by an ASRS employer and who was not enrolled in ASRS because the employee was not included in agreements providing for the employee’s coverage under [Social Security].”

Separately, Section 8 required that employers enroll their eligible employees in ASRS, and gave the employees the right to purchase prior service credit on certain specified terms:

An ASRS employer shall enroll an eligible employee in ASRS and the eligible employee may have the previous period of continuous employment credited to the employee’s service credit for pension purposes if both of the following conditions are met:

1. The eligible employee elects to purchase eligible service credit within ninety days after the effective date of this act.

2. The eligible employee pays into the ASRS depository the amounts prescribed in this section within one hundred eighty days after the effective date of this act.

If the eligible employee does not meet the requirements of subsection A of this section, the eligible employee may purchase the eligible service credit at a later date pursuant to section 38-743, Arizona Revised Statutes.

ASRS notified employers of the change in the law reflected in HB 2050, both before and after its passage, and also addressed the subject in the ASRS Employer Manual. ASRS also created and disseminated a worksheet for employers to use.

Mesa was notified of HB 2050, and given information concerning the legislation and its impact, along with a worksheet to complete for eligible employees.

Mesa did not enroll Appellants in ASRS. Because Appellants were not enrolled in ASRS in 2014, Appellants did not have the opportunity to purchase service credit within the 90-day window provided in Section 8 of HB 2050.

Appellants contend that they are entitled to ASRS service credit for all of their Mesa service from 2010 through 2015 (by paying their own contributions to ASRS after receiving an invoice from ASRS), with Mesa being required to pay its share of contributions together with all accrued employee and employer interest because:

Appellants were included in Mesa’s Section 218 Agreement because, as of the January 1, 1951 effective date of that agreement, there was no other retirement system covering Appellants’ police department positions and because Mesa and ASRS permitted other similarly situated Mesa employees (Chiefs Beck and Gascon) to participate in ASRS notwithstanding ASRS’s later assertion that they should not have been included in ASRS because of the Section 218 Agreement.

Alternatively, Appellants argue that even if they were not covered by the Section 218 Agreement, Appellants’ appeals should be granted because they were required to be enrolled in ASRS when HB 2050 was passed effective July 24, 2014, while Appellants were both still employed with Mesa and should be permitted to purchase service credit for their continuous employment upon paying their own contributions and interest.

Heston Silbert’s Testimony

Mr. Silbert testified at hearing that during the hiring process, he inquired of Mesa as to participation in ASRS and was told that he could not participate in ASRS because he was ineligible to do so having previously retired from a public safety retirement system and due to “some agreement,” and that “was enough for him,” as retirement compensation was “not paramount.” Mr. Silbert testified that he would have accepted the position without any retirement benefits. Mr. Silbert testified that in lieu of participation in ASRS, Mesa provided “similar contributions” via a deferred compensation plan, he was appreciative to Mesa, and it was “not a big factor” for him. In 2013, Mr. Silbert requested that instead of contributing to a deferred compensation plan, Mesa contribute to a 401K plan and Mesa agreed to do so.

Mr. Silbert testified that in 2015, he inquired of the governor’s office if he could purchase his service credit from his time with Mesa. However, Mr. Silbert did not file a formal request to do so with either Mesa or ASRS.

Sometime in 2019, Mr. Silbert became aware that other similarly situated employees of Mesa were in fact participating in ASRS, specifically, Mesa Fire Chief Harry Beck.

Mr. Silbert testified that when he learned this information, he began to make further inquiries and confirmed with Chief Beck that he was participating in ASRS.

On November 17, 2021, Mr. Silbert filed his Contributions Not Withheld (“CNW”) request with ASRS for the time period December 6, 2010, through March 15, 2015. Mr. Silbert testified that at that point in time, he was unaware of the 2014 legislative change.

On January 7, 2022, ASRS denied the request.

At hearing, Mr. Silbert was questioned regarding a January 15, 2014, email issued by Gary Manning, Mesa’s Human Resources Director, to Mesa’s Department Heads, including Mr. Silbert and Mr. Milstead, the subject of which was “ASRS – 218 Update.” The email set forth the following in pertinent part:

Yesterday I attended a “218 Agreement Workgroup Stakeholder Meeting” at the state capitol. . . . Pat Klein from ASRS was there and was asked to brief the group on the upcoming plan to resolve the eligibility problem for Police and Fire civilians who have been deemed ineligible for ASRS due to the 218 agreements.

Part-1 – Legislation – Klein stated ASRS was moving forward with drafting legislation that would remove the 218 eligibility criteria. . . .

A chart was given (see attached) that described three groups of employees that would go into ASRS upon the effective date of the legislation (assuming it passes):

Group 1 – Currently employed, discovered and removed

Group 2 – Currently employed, but never enrolled

Group 3 - Currently employed, participating in the DC Plan

Mesa does not have any employees in groups 1 or 2. . . .

. . . .

Part-3 - Service Purchase – Employees in the above groups who become part of ASRS will be allowed to purchase their ASRS time. However, they must elect to do so in 90-days and must remit full payment within 180 days. . . . Employers will be invoiced for their portion of the full cost. Even if the employee chooses not to do any service purchase, the employer will still be invoiced the full cost.

Mr. Silbert testified that he did not read this email and that he was not sure if he received it. Mr. Silbert testified that it was not something he would “pay attention to” and would have thought it did not apply because it said “no one was eligible.” Mr. Silbert testified that he would have perceived this email as a “Human Resources issue.”

Mr. Silbert further testified that he was not informed of the July 2014 change in eligibility by either ASRS or Mesa, and if he had been told he would have elected to purchase his prior service credit. However, Mr. Silbert also testified that he did not know the cost of purchasing service credit, and therefore, he did not know how much money he would have needed to budget to pay for such.

Frank Milstead’s Testimony

Mr. Milstead testified that he was told during the hiring process with Mesa by Mr. Chris Brady, Mesa’s City Manager, that he was prohibited from participating in ASRS because he “came from another retirement system” and instead of participation in ASRS, Mesa contributed “to a qualified defined contribution plan (or plans) in an amount equal to the employer’s contribution to these benefits as provided to other employees in [ASRS].” Mr. Milstead testified that at the time he was hired by Mesa, he understood he was not enrolled in ASRS, retirement benefits were not important to him, and he would have accepted the position without retirement benefits because he was “more excited to head the department.”

Mr. Milstead testified that there are approximately 1,100 employees in the Mesa Police Department, and that in his position, he never answered payroll or pension questions, but would refer such questions to human resources, the city attorney, or the union.

Mr. Milstead testified that in 2019, he asked Harry Beck whether he was participating in ASRS while he was Fire Chief for Mesa and was informed that Chief Beck had been a member of ASRS. At that point, Mr. Milstead provided this information to Mr. Silbert, they retained counsel, and in November 2021, they filed their respective CNW requests.

On November 22, 2021, Mr. Milstead filed his CNW request for the period March 22, 2010, through February 9, 2015.

On January 7, 2022, ASRS denied the request.

Mr. Milstead testified that, like Mr. Silbert, he does not remember receiving or reading the January 15, 2014, email sent by Mr. Manning to Mesa’s Department Heads, including Mr. Silbert and Mr. Milstead, the subject of which was “ASRS – 218 Update.” Mr. Milstead testified that his assistant, as well as others, including legal counsel, had access to his email, and that he “would have expected someone to bring it to his direct attention” if it was to impact him. Mr. Milstead testified that he relied on staff and that staff also had access to delete his emails. However, if his staff believed an email was important enough to warrant his attention, they brought the email to him.

Mr. Milstead testified that he did not know what a Section 218 Agreement was. Mr. Milstead further testified that neither Mesa nor ASRS informed him that there was a change in the law and Mesa did not inform him that he could purchase service credit. Mr. Milstead testified that he does not know how much time he would have purchased in 2014 had he known about the change in the law when it occurred.

Mr. Milstead testified that he did not receive from Mesa a list of employees who were affected by the change in the law.

Mr. Milstead testified that in 2015, he inquired of the governor’s office if he could purchase his service credit from his time with Mesa and was told that he had to have participated in ASRS for five years prior to being eligible to purchase service credit. Mr. Milstead did not file a claim with Mesa or ASRS at that time and did not file a CNW request.

This administrative proceeding commenced with Appellants’ November 17 and 21, 2021 requests to remedy CNW errors by Mesa for failing to make required contributions for all of Appellants’ eligible service with Mesa and ASRS’s denial of Appellants’ appeals.

ASRS’s April 29, 2022 Amended Notice of Hearing acknowledged that both Appellants should have been placed in the ASRS system at the very latest in July 2014, when HB 2050 was enacted.

As of the hearing, Mesa had not enrolled Appellants in ASRS.

Jenna Golab’s Testimony

Jenna Golab, Program Manager for the Member Services Division of ASRS, testified regarding her extensive experience with ASRS.

Ms. Golab testified that shortly after the July 2014 legislative change, ASRS Employer Relations sent an email to all ASRS employers regarding HB 2050. The email informed ASRS employers of the following in pertinent part:

On July 23, 2014, Employer Relations sent out an email regarding the fundamental changes to ASRS membership criteria with the passage of HB 2050. The email included a spreadsheet along with directions, to assist our employers in submitting service purchase information in a standardized format so employers and employees would not be required to fill out a form for each individual service purchase request.

Ms. Golab testified regarding ASRS’s CNW process and referenced the 2014 ASRS Employer Manual which states in relevant part:

An ASRS employer may inadvertently fail to enroll and submit contributions for an eligible member for participation in the ASRS at the time the member became eligible. This is called a Contributions Not Withheld (CNW) error.

A CNW error may be discovered by the employer, the member or through an ASRS audit. In any case, the error must be corrected if it occurred within the last fifteen years. The employer is responsible for submitting and reporting required contributions that were due for an employee who met membership criteria even if the member has already terminated employment.

CNW errors are not corrected using the Online Contribution Reporting System. To assist employers in reporting eligible compensation that was earned and the PPE date in which it was earned, the ASRS has created the Verification of Contributions Not Withheld form. (See sample in this chapter) The employer may also choose to provide the information in an alternate format, such as a spreadsheet or payroll report, as long as it includes all information requested on the form.

Upon receipt of the CNW information, an audit of the member’s account will be completed, and:

□ The ASRS will issue an invoice to the employer for the amount of the employer contributions due plus any interest. The employer is required by law to pay the monies due within 90 days of the invoice. Amounts not received within 90 days are considered delinquent and subject to the assessment of additional interest charges or recovery actions by the ASRS, if applicable.

□ The ASRS will issue an invoice, along with payment options, to the member for the amount of the member contributions due. The member is required to make payment within 90 days after the employer has paid the employer amount. If the member waits beyond the due date to make payment, the member will pay the interest due on the remaining monies owed. (A.R.S. § 38-738(B)(1)).

NOTE: The payment options for a member to pay for a CNW are similar to those provided for service purchase. However, for an error that corrects only compensation history and not service credit history, the member may not elect to use a PDA. (See Chapter 7; Purchase of Service Credit - Service Purchase Payment Options)

When both the employer and employee contributions are received, the member’s account will be adjusted to reflect the compensation history and service credit.

Ms. Golab explained that a CNW request automatically generates to the employer because the employer is required to pay its costs to ASRS first and therefore, ASRS issues an invoice to the employer and then invoices the employee after the employer makes its payment.

Ms. Golab testified that a CNW error can be corrected up to fifteen (15) years from the time of the error. Ms. Golab further testified that if an employee is not enrolled and should have been, that constitutes an error in the employee’s record.

Ms. Golab explained that the CNW process is utilized when an employer inadvertently fails to enroll an eligible member. Ms. Golab testified that Appellants should have been enrolled in July 2014, and were not. Ms. Golab testified that her understanding is that Mesa’s failure to enroll Appellants in 2014 was inadvertent. Therefore, Appellants can submit a CNW claim for July 24, 2014 onward. However, for the time period of 2010 through July 24, 2014, Ms. Golab opined that Appellants were not inadvertently not enrolled, but rather they were not enrolled due to Mesa’s Section 218 Agreement. Ms. Golab expounded that if Appellants had received a determination from the Social Security Administration stating that January 1, 1951 is the controlling date of the Section 218 Agreement, ASRS would view the time period of 2010 through July 24, 2014 as a CNW claim.

Ms. Golab testified that alternate retirement agreements between employers and employees have been rejected by ASRS in the past. Specifically, Ms. Golab referenced a situation in which the City of Flagstaff wished to continue making contributions to an alternative retirement plan for its employee(s) in lieu of contributing to ASRS and ASRS instructed the following:

In 2013, A.R.S. § 38-955 was established as an alternate savings plan for employers to adopt for employees unable to participate in ASRS due to the employer’s Social Security Section 218 Agreement. The employer could instead establish their own savings plan in lieu of the plan established by A.R.S. § 38-955.

Effective July 24, 2014, HB 2050 removed the statutory requirements that an employer must be covered by the Social Security Section 218 Agreement and that an employee’s position must be covered under the employer’s Section 218 Agreement in order to participate in the ASRS plan.

In conclusion, the savings plan entered into by the employer and its employee is independent from any statutory requirements the employer must adhere to, specifically A.R.S. § 38-727 which was amended and effective July 24, 2014. The employer and employee may continue to submit

contributions into the City of Flagstaff’s 457 plan, but this does not relieve the employer and the employee from subsequent statutory requirements. Any contributions submitted to the City of Flagstaff’s 457 plan is in addition to submitting ASRS contributions.

If the employee is meeting membership under A.R.S. § 38-711(23)(b) and employed by the City of Flagstaff, both the employer and employee must submit contributions to the ASRS.

Ms. Golab summarized that ASRS rejected the City of Flagstaff’s appeal that making alternative contributions should suffice, and ASRS determined that all eligible employees should have been enrolled in ASRS effective July 14, 2014. Ms. Golab also clarified that any employees who were already participating in ASRS prior to July 24, 2014, that should not have been, were not penalized.

Chris Brady’s Testimony

Chris Brady has been Mesa’s City Manager since January 2006. Mr. Brady testified regarding a June 10, 2006 letter from ASRS to Mesa’s Senior Human Resources Specialist, that stated the following in pertinent part:

The City of Mesa is in the process of hiring a new Police Chief and you have asked if the position meets the requirements of membership under the Arizona State Retirement System (ASRS).

Through our communications I understand the Police Chief position currently described under your personnel rules does not meet the qualifications under Public Safety Personnel Retirement System (PSPRS) Plan. The position is an administrative position and not required to perform hazardous duty. Typically, this position would be covered under PSPRS, and would therefore be exempt from coverage under the City’s Section 218 agreement.

Due to the reclassification of the Police Chief position, it is now included under your Section 218 agreement, and is therefore eligible to participate in the ASRS.

The June 10, 2006 letter therefore advised Mesa that the Police Chief position was eligible to participate in ASRS.

Mr. Brady was also questioned regarding a June 11, 2009 letter from ASRS to Mesa’s Assistant Human Resources Director, that stated the following in pertinent part:

The purpose of this letter is to follow up on an email and a letter, which contained information regarding why police and fire positions are not eligible to participate in the Arizona State Retirement System (ASRS).

As background, the ASRS has started conducting audits for compliance with an employer’s Section 218 agreement to ensure that only individuals in eligible positions are participating in the ASRS. The Section 218 agreement mandates Social Security coverage under that section of the Social Security Act, but may exclude some classifications of positions from Social Security coverage, based on language in the agreement, the effective date and other factors. This is important to note because any employee in a position excluded from an employer’s agreement for Section 218 coverage is not eligible to participate in the ASRS with that employer (A.R.S. § 38-727).

Pursuant to federal law, a Section 218 Agreement does not include any group of employees who are already covered by a retirement system when the Section 218 Agreement is signed. See, Social Security Act Section 218 (d)(l) (42 U.S.C.A, Section 418 (d)(l)). Because the City of Mesa already covered fire and police positions under the Public Safety Personnel Retirement System before signing their Section 218 agreement, the positions are not covered under your 218 agreement and therefore cannot be covered under ASRS. It is the position, or classification of position, that determines whether an individual is covered under the ASRS, not the person’s personal circumstances or the working title of the position.

In reviewing our files, it appears there was communication between the City of Mesa and the ASRS that would suggest that the positions could be covered under ASRS. As a result, the district has submitted contributions for individuals in fire and police positions, specifically the Fire Chief and Police Chief. Originally we were told the individuals could not participate in

the Public Safety Personnel Retirement System (PSPRS) due to age and the positions themselves were being rewritten. We have since found out PSPRS allows individuals over the age of 50 to participate, and the position of Fire Chief and Police Chief are covered under that system.

Due to this information, all ASRS contributions to the ASRS for these positions must cease effective after July 1, 2009. The ASRS will retain the contributions made prior to July 1, 2009 and the employees will have the option when they terminate to either take a pension with the ASRS or a refund according to the laws in place at that time.

The June 11, 2009 letter therefore advised Mesa that the Police and Fire Chief positions were not eligible to participate in ASRS as ASRS had changed its position from its 2006 determination.

Mr. Brady was also questioned regarding a June 17, 2009 letter from Mesa’s Human Resources Department to ASRS, regarding ASRS eligibility, that stated the following in pertinent part:

I received your letter regarding the proposed discontinuation of eligibility of the City of Mesa’s Police Chief and Fire Chief as members of the Arizona State Retirement System (ASRS). The City of Mesa takes strong exception to this change in eligibility direction.

If you will recall, in 1998 my office worked closely with the retirement system to explain that the job duties of our Fire Chief have changed over the years. When Mesa was a small city, it was expected that the Fire Chief may have to respond to a hazardous duty call; now however, this position is completely managerial and handles high-level fiscal, budgetary, personnel and public relations responsibilities. The Fire Chief does not respond to a hazardous call in a firefighting capacity.

Due to these changes in duties, the City of Mesa was approved by ASRS to include the Fire Chief as an ASRS member. It had nothing to do with the age of the incumbent as noted in your correspondence. We relied on this documented ASRS approval and moved forward to finalize an employment contract between the City and our Fire Chief, a contract that includes confirmation from ASRS that he can and has been enrolled in that retirement system.

It is the City’s opinion that the ASRS has the responsibility to fulfill its written contract to include the present Fire Chief as an eligible member. To dissolve this contract would be a show of bad faith and certainly would create a legal liability for both the City of Mesa and ASRS.

Once again in 2006, the City of Mesa updated the job description for the Police Chief as this position no longer responded to police calls as a duty officer but, like the Fire Chief, handles higher level fiscal, budgetary, personnel and public relations responsibilities. Consequently, based on the written commitment from ASRS, the City included this commitment in the Police Chief’s contract and enrolled him in the ASRS.

Like the Fire Chief situation, the City of Mesa fully expects the ASRS to stand by its documented, approved contract and to permit our Police Chief to continue his membership in this system.

You have placed a very short time line for the City to respond to this proposal. Consequently, upon your return to the office, please contact me with ASRS’s response no later than June 23, 2009. If your office continues to deny these employees their previously approved contract eligibility, the City of Mesa will immediately seek all remedies available to us.

On June 26, 2009, ASRS responded to Mesa’s June 11, 2009 correspondence as follows:

Thank you for your response to our letter dated June 11, 2009. The Arizona State Retirement System (ASRS) understands that you based your hiring decision on information we provided. We also agree that we should hold your current Fire Chief, Harry Beck, and Police Chief, George Gascon, harmless. This means both gentlemen will continue to participate in the ASRS until their employment terminates and/or they retire from the City of Mesa.

Our original decision was based on information provided by the City and the laws at the time. We have since learned, and received additional documentation that proved there was a retirement plan in place that covered both positions. We also received recent clarification from the Fund Manager regarding Public Safety Personnel Retirement System (PSPRS) laws. The

position itself determines whether an individual can be covered under the City’s Section 218 agreement. The fact that the City changes the title of the position and job description does not mean the position is automatically covered under the ASRS. Under §38-842, PSPRS will cover an individual who is promoted through the ranks into an administrative position (non-hazardous) such as Fire Chief or Police Chief.

ASRS’s June 26, 2009 letter to Mesa sets forth the reasons why Chiefs Beck and Gascon were allowed to continue their eligibility in ASRS. It further placed Mesa on notice that “[b]ecause the City covered fire and police positions under other public retirement systems before signing the 218 agreement, those positions may not be covered now under your 218 agreement, and therefore cannot participate in the ASRS.” Therefore, ASRS instructed Mesa prior to its hiring of Appellants that Appellants could not participate in ASRS and Mesa justifiably relied on that information.

Mr. Brady testified that he was involved in the hiring of Appellants and discussed their benefits with them. Mr. Brady explained that Appellants were enrolled in a deferred compensation plan due to their ineligibility to participate in ASRS. Mr. Brady testified that he spoke with someone in Mesa’s Human Resources Department and was informed that Appellants could not participate in ASRS pursuant to the direction Mesa received from ASRS.

Mr. Brady was questioned regarding a July 24, 2014 email forwarded by Mesa’s Director of Human Resources that contained a July 23, 2014 email from ASRS Employer Relations. The email was addressed to ASRS Employers and was in reference to “HB 2050, Social Security Section 218 Agreement and ASRS Employers.” The email contains large, bold font, stating, “Critically Important and Time-Sensitive Information.” The email contains the following information:

Effective July 24, 2014, a significant and foundational change to the ASRS membership criteria will occur. With the passage of HB 2050 this legislative session, the employer requirement to have a Social Security Section 218 Agreement in effect as well as the employee requirement to be covered by that Agreement will be removed on July 24, 2014.

Therefore, effective July 24, 2014, the ASRS membership criteria will only require 1) an employer be a participating employer of the ASRS, and 2) an employee of an ASRS employer must work at least 20 weeks in each fiscal year and at least 20 hours each week. If the employee is meeting ASRS membership criteria and is not required to participate in anther state-wide defined benefit plan, the employer is statutorily required to deduct ASRS contributions and the employee is required to enroll in the ASRS.

Mr. Brady acknowledged that Mesa’s policy is to inform its employees about “major changes.” However, Mr. Brady testified that he was not aware of Mesa’s obligation to enroll Appellants in ASRS in July 2014, because he was not aware of the change in legislation, nor did he know about the Section 218 Agreement or Appellants’ CNW requests. Mr. Brady testified that he never spoke with anyone regarding the 2014 legislative change.

Patrick Klein’s Testimony

Patrick Klein retired from ASRS after a seventeen (17) year period of employment and after having held several different positions within ASRS.

Mr. Klein testified that ASRS’s External Affairs Division would have disseminated to ASRS employers information regarding HB 2050.

Mr. Klein referenced the Minutes of ASRS’s April 25, 2014 Public Meeting during which HB 2050 was discussed. Those Minutes indicated the following information was provided:

HB 2050 (ASRS membership; Section 218 requirements): This bill eliminates the requirement that members must be covered by an employer’s Social Security §218 Agreement and does not allow those already contributing to Social Security to opt out of ASRS membership. The bill allows for the closure of the §38-955 Defined Contribution (DC) Plan, because employees who would have been eligible for the DC Plan will now be required to contribute to the ASRS, and the DC Plan becomes unnecessary. The Governor signed this bill.

Mr. Klein referenced a June 6, 2015 email that was sent to him by Michelle Briggs, Employer Relations Manager for ASRS. That email stated:

EA sent out a formal notice to the 147 employers directly impacted by this change in July 2014 that basically stated that an employee will now be required by law to participate in ASRS if the employee is employed by an ASRS employer, meeting membership and not participating in another state-wide defined benefit plan.

For informational purposes only, the Nationwide DC plan was closed effective January 20, 2015. If an employer set up a DC plan from another source, that agreement is between the employer and employee and is irrelevant when making a determination if someone participates in ASRS or not.

Mr. Klein testified that ASRS sent notice to ASRS participating employers, however, ASRS cannot control whether its employers disseminate the information supplied by ASRS to their respective employees. Mr. Klein further testified that ASRS would have no way of ascertaining whether there were ASRS eligible employees that were not enrolled, as those employees would have to be identified by the individual employers which would then be obligated to contribute to ASRS for those eligible employees.

Mr. Klein referenced the following email sent from ASRS to ASRS employers, in support of his assertion that ASRS was relying on its employers to determine which of its employees were impacted by HB 2050:

To: ASRS Employers

From: ASRS Employer Relations

RE: HB 2050, revised spreadsheet

Dear Employer:

On July 23, 2014, Employer Relations sent out an email regarding the fundamental changes to ASRS membership criteria with the passage of HB 2050. The email included a spreadsheet, along with directions, to assist our employers in submitting service purchase information in a standardized format so employers and employees would not be required to fill out a form for each individual service purchase request.

We have since discovered the spreadsheet was not operating as intended and have resolved the matter. Attached you will find a revised spreadsheet and for ease, we’ve included the instructions again. The spreadsheet will be used to identify employees meeting the 20/20 membership criteria who were never enrolled in the ASRS or in the §38-955 DC plan, those who are enrolled in the DC plan, and those once enrolled in the ASRS but were removed from ASRS who wish to request a service purchase.

We would like to remind employers that Arizona Revised Statute 38-716 states “an employer of a member shall submit any reports, data, paperwork or materials that are requested by the ASRS and that are necessary to make eligibility determination and for the proper administration of the plan.”

The ASRS is in the process of reaching out to affected employee groups who will in turn notify their constituents of the right to purchase service under HB2050 and the requirement that a request be made within 90 days of the effective date of July 24, 2014. These employees will be instructed to request that their employer proactively provides salary and service information to the ASRS and if the employer is unable or unwilling to provide this information the employee can request to purchase the service directly through ASRS.

Nick Ponder’s Testimony

Nick Ponder was employed with ASRS from April 2009, through June 2017, and his last position with ASRS was as Legislative Liaison. Like Mr. Klein, Mr. Ponder testified regarding the Meeting Minutes from ASRS’s Public Meeting on April 25, 2014, which summarized the information he provided in regard to HB 2050.

Mr. Ponder explained that ASRS is “just an administrator” and relies on its employers to inform ASRS which of the respective employer’s individual employees are eligible for participation. There is no other way for ASRS to identify eligible employees without employers notifying ASRS of their eligibility. ASRS does not know of the existence of employees until they are identified by their employers and as such, ASRS cannot notify an employee of any legislative changes unless and until they are identified to ASRS by an ASRS employer.

Kimberly Call’s Testimony

Kimberly Call has been the payroll administrator for Mesa for the past nine years. Ms. Call testified that she makes no determinations as to which employees to place into ASRS.

Ms. Call testified regarding the alternate contributions made by Mesa for Mr. Milstead and Mr. Silbert via 401A and 457 plans.

CONCLUSIONS OF LAW

Appellants bear the burden of proof to establish by a preponderance of the evidence that: 1) they were eligible to participate in ASRS from the outset of their employment with Mesa commencing in 2010; or 2) alternatively, Appellants should have been enrolled in ASRS effective July 24, 2014. “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.”

The 2010 Claim

The Administrative Law Judge agrees with ASRS’s position that the interpretation of the Section 218 Agreement is a matter of federal law. Appellants have not sought out a determination from the Social Security Administration, the entity from which such clarification should come, and instead have chosen to file this administrative appeal, compelling this Tribunal to determine their rights under a federal law.

A federal decision on the interpretation of the Section 218 Agreement would have resolved Appellants’ claims about whether they should have been participants in ASRS since they were both hired by Mesa in 2010. During the course of the instant hearing, Ms. Golab testified that ASRS would abide by an official determination from the Social Security Administration that directed ASRS to utilize the January 1, 1951 date as the effective date of the Section 218 Agreement. However, Appellants chose not to avail themselves of such.

Appellants argue that because their positions were not covered under a pension plan until November 1, 1951, they were not covered under an existing pension plan on the retroactive effective date of the Section 218 Agreement of January 1, 1951.

The Administrative Law Judge disagrees. In this case, at the time Mesa passed its ordinance instituting a police pension plan on November 5, 1951, the Section 218 Agreement did not exist as the Agreement was not signed and did not become a “binding agreement” until December 12, 1951, pursuant to its explicit terms. Therefore, there was no Section 218 Agreement in place at the time Mesa police officers were covered under their pension plan. Mesa’s pension plan was already in place at the time the Section 218 Agreement was signed and became a binding agreement. The Administrative Law Judge interprets the retroactive date of January 1, 1951, contained in the Section 218 Agreement, as allowing those not covered by an already existing pension plan to be covered under Social Security with a retroactive coverage date to January 1, 1951.

Appellants’ argument that they should have been able to participate in ASRS since 2010 because ASRS permitted other similarly situated Mesa employees to participate in ASRS is not persuasive. Mesa was advised in April 2009, prior to Appellants’ respective hiring dates, that ASRS’s previously held position regarding participation in ASRS had changed upon receiving additional information, and that the two individuals referenced in the letter should not have been permitted to participate in ASRS, however, ASRS was going to hold them harmless.

The 2014 Claim

Appellants argue that even if they were not covered by the Section 218 Agreement, Appellants were required to be enrolled in ASRS when HB 2050 was passed effective July 24, 2014, while Appellants were both still employed with Mesa. HB 2050 eliminated the requirement for inclusion under a Section 218 Agreement and required that Appellants be permitted to elect to purchase their prior continuous service with Mesa by paying their own contributions. Notwithstanding the requirement to enroll Appellants in July 2014, and the requirement that after being enrolled, employees who were not previously in the ASRS system must be permitted to purchase service credit for their continuous employment upon paying their own contributions and interest, Mesa did not enroll Appellants in ASRS, nor were Appellants given the opportunity to purchase service for this period of employment as required by HB 2050.

The Administrative Law Judge concludes that Appellants are entitled to eligibility in ASRS as of July 24, 2014, with the passage of HB 2050. Because Appellants were eligible for participation in ASRS and Mesa was required by statute to enroll Appellants and failed to do so, Mesa’s error must be corrected through the CNW process. The error must be corrected if it occurred within the last fifteen (15) years and Mesa, as the employer in this case, is responsible for submitting and reporting required contributions that were due for Appellants because they met membership criteria. Mesa’s error occurred in July 2014, consequently, Mesa’s error occurred within the previous fifteen (15) years.

Statute of Limitations and CNW Requests

Mesa and ASRS argued that a threshold issue that must be addressed is the statute of limitations as it relates to Appellants’ claims.

Pursuant to A.R.S. § 12-821, “[a]ll actions against any public entity or public employee shall be brought within one year after the cause of action accrues and not afterward.” However, for the reasons set forth below, the Administrative Law Judge concludes that because the CNW process applies in this instance in order to correct Mesa’s error in failing to enroll Appellants in ASRS in July 2014, the one year statute of limitations is inapplicable to this case.

The CNW process requires an employer, in this case Mesa, to submit and report the required contributions that were due for an employee who met membership criteria even if the member had already terminated employment. Upon receipt of the CNW information, ASRS issues an invoice to the employer for the amount of the employer contributions due plus any interest. In this case, Mesa has not provided the required information to ASRS as of the hearing date. While there was a dispute as to whether Appellants were eligible from 2010 or 2014, there should have been no question that Appellants were eligible from July 24, 2014, onward given the legislative change mandating employers to enroll eligible employees as of that date. As such, Mesa was required to provide ASRS the contributions that were due for Appellants from that point on and it failed to do so. Mesa’s argument that it was paying alternate contributions for Appellants does not relieve Mesa of its statutorily required obligation.

In this case, Mesa was required by law to pay the monies due to ASRS within ninety (90) days of receiving an invoice from ASRS. However, ASRS could not possibly generate an invoice due to Mesa’s failure to report Appellants as eligible. Because ASRS could not generate an invoice to Mesa due to its lack of awareness of Appellants’ eligibility due to Mesa’s failure to report Appellants as eligible, ASRS could not possibly issue its corresponding invoice, along with payment options, to Appellants for the amounts of Appellants’ contributions due.

A.R.S. § 38-738(B) sets forth:

If less than the correct amount of employer or member contributions is paid into ASRS by an employer, the following apply:

1. The member shall pay an amount that is equal to the amount that would have been paid in member contributions for the period in question. For active members, payments shall be made as provided in section 38-747. For members who are inactive, retired or on long-term disability, payments shall be made using after-tax income and a personal check, cashier’s check or money order. If the member does not make the payment within ninety days after being notified by ASRS that the employer has paid all amounts due from the employer, the unpaid amount accrues interest until the amount is paid in full. The member is responsible for payment of the unpaid amount and interest. The interest rate is the interest rate assumption that is approved by the board for actuarial equivalency for the period in question to the date payment is received.

Section 8 of HB 2050 required that employers enroll their eligible employees in ASRS, and gave them the right to purchase prior service credit on certain specified terms:

1. The eligible employee elects to purchase eligible service credit within ninety days after the effective date of this act.

2. The eligible employee pays into the ASRS depository the amounts prescribed in this section within one hundred eighty days after the effective date of this act.

Notwithstanding the language mandating that an ASRS employer shall enroll an eligible employee in ASRS, in this case, Mesa failed to do so. Consequently, Appellants, as eligible employees, could not elect to purchase eligible service credit within ninety (90) days nor pay their portion within 180 days of July 24, 2014. Appellants could not meet the requirements of subsection A because Mesa failed to enroll Appellants in ASRS when they were eligible for enrollment. Because of Mesa’s failure, Appellants should not be required to purchase their service credit pursuant to A.R.S. § 38-743, at a higher calculation.

Appellants should not be penalized for Mesa’s error in failing to enroll them in ASRS when they were eligible for enrollment, and while it is speculative to assume that Appellants would have purchased their service credit at that time, it does not negate the fact that they would have had the option to do so at that time and should not be forced to incur the difference between the statutory calculation for contributions under section 8(A) – applicable when an employee elects to purchase credit within 90 days of the effective date of HB 2050, and makes payment within 180 days of the effective date – and section 8(B) – defining the purchase price for credit when an employee elects to purchase “at a later date.” In this case, Appellants are not “electing” to purchase at a later date - Appellants were precluded from electing to purchase their service credit within ninety (90) days of July 24, 2014, due to Mesa’s failure to enroll them despite the statutory obligation to do so.

RECOMMENDED ORDER

Based on the foregoing, it is ordered upholding Appellants’ appeals in part.

Appellants’ appeals are granted as to enrollment in ASRS effective July 24, 2014, and Appellants shall be permitted to purchase service credit for their continuous employment from that date forward pursuant to Section 8A of HB 2050.

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 forty (40) days from the date of that certification.

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-137160-45720000Done this day, February 9, 2023.

/s/ Sondra J. Vanella

Administrative Law Judge

Transmitted electronically or by mail to:

Paul Matson, Director

Arizona State Retirement System

By: OAH Staff

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