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Retirement System?s exclusion of salary increase for retirement calculation affirmed

By Harvey Randall, Esq.

Retirement System?s exclusion of salary increase for retirement calculation affirmed
Matter of Holbert v New York State Teachers? Retirement System, 43 A.D.3d 530

Gary M. Holbert served as the Superintendent of the Fallsburg Central School District from 1996 to 2003. In 1999, Holbert and the school district entered into a contract whereby Holbert?s ?base annual salary? for the 1999-2000 school year would be $91,000. The contract also provided that Holbert would receive a $5,000 tax sheltered annuity, as well as other benefits, together with the option of receiving health insurance benefits or, in lieu thereof, a buyout for the waiver of health insurance coverage. The contract expressly provided that ?[Holbert] will be given the option to place any compensation, tax sheltered annuity, health buyout, mileage, etc. in his regular salary that would be . . . part of the Teacher?s Retirement System? (emphasis by the Appellate Division).

In 2000, Holbert and the school district entered into a new contract that provided that Holbert?s ?base annual salary? for the 2000-2001 school year would be $118,855.

In December 2001, the parties renegotiated the contract and agreed that Holbert would be paid a ?base annual salary? of $130,320 for the 2001-2002 school year, $140,816 for the 2002-2003 school year, and at an annual rate of $143,816 for the period from July 1, 2003 to August 31, 2003.

Neither the 2000 nor the renegotiated contract contained any provision for any travel reimbursement, a tax sheltered annuity or the health insurance buyout stipulated in the 1999 contract. Holbert retired on September 1, 2003.

Ultimately the New York State Teachers? Retirement System sought clarification from the school district of the amount of Holbert?s base salary and fringe benefits during the relevant time period. The school district provided some information, but it offered no explanation for ?the disappearance of the benefits in the later contracts or for the unusually large 2000-2001 raise.?

The Retirement System then issued a preliminary determination in August 2005, in which it concluded that that Holbert had $72,939 in excess salary increases during the 2000-2004 school years and these increases were not includable in establishing his ?three-year final average salary? the purpose of determining his retirement allowance.

The reported salary for the third year preceding Holbert?s retirement and the sudden contractual absence of other non-reportable benefits, the System decided, reflected the school district?s agreement with Holbert to exchange separately listed benefits for a large ?regular salary? increase in anticipation of his retirement.

The System credited Holbert with a 7.6% raise, the next largest salary increase for an administrator in Holbert?s district, and computed his salary for the following years by applying the same percentage raises to his recalculated 2000-2001 salary.

Holbert?s challenged the System?s the preliminary determination and when the System issued its final determination adhering to the reduction of Holbert?s final three years? average salary by $72,939. It then calculated Holbert?s retirement allowance based on his ?revised? final average salary. Holbert he sued.

The Appellate Division, upholding Supreme Court?s dismissal of Holbert?s petition, affirmed the System?s determination.

The court said that the Education Law Section 501(11)(b), in relevant part, provides:

??Final Average Salary? shall mean the average regular compensation earned as a teacher during the three years of actual service immediately preceding his [or her] date of retirement . . . exclusive of any lump sum payments for sick leave, annual leave or any other form of termination pay; provided, however, if the compensation earned in any [12] months exceeds that of the previous [12] months by more than [20%], the amount in excess of [20%] shall be excluded in the computation of final average salary? (emphasis in the Appellate Division?s decision).¹
The Appellate Division explained that the purpose of Section 501 (11) ?is to prevent artificial inflation of final average salary by payments made in anticipation of retirement,? citing Matter of Moraghan v New York State Teachers? Retirement System., 237 AD2d 703, and other cases.

In determining what constitutes average regular compensation within the meaning of the statute, courts must look to ?the substance of the transaction and not to what the parties may label it.? Further, said the Appellate Division, ?employers and employees cannot agree to alter the rights and obligations of either with respect to the retirement system.?

As the Retirement System?s regulations specifically provide that ?[r]egular salary earned shall exclude . . . payments which are not part of the salary base? the Appellate Division, citing 21 NYCRR 5003.1[a], concluded that the Retirement System did not act arbitrarily and capriciously in determining that the annuity should be excluded and that Holbert?s base salary for 1999-2000 was $91,000, despite the claims of Holbert and the school district to the contrary.

In addition, the court said that the System did not act irrationally in concluding that the disproportionate raise constituted termination pay given in anticipation of retirement. In particular, said the court:

we note the above-quoted language in the 1999 contract evincing the intent of the school district and Holbert to permit him to hide non-regular compensation from respondent by reporting it as ?regular salary,? and the 30.6% raise for the following year coupled with the disappearance of both the quoted contractual language and the listed non-regular benefits that Holbert sought permission to report as regular salary. Moreover, the timing of the large raise, which materialized on the eve of retirement and was disproportionate to any other raises received by Holbert, had the effect of inflating Holbert?s final average salary, but the contracts between Holbert and the school district did not obligate him to assume any additional duties to account for the raise. Finally, the 30.6% raise was disproportionate to that received by other administrators in Holbert?s district for the 2000-2001 school year, the highest of which was 7.6%.

The System could not lawfully credit Holbert with a raise of over 20%. Although the Appellate Division agreed, as Holbert urged, there were other methods to calculate his final average salary for retirement purposes, it decided that ?[a]t best, Holbert has shown that a rational basis exists for [the Retirement System] to have exercised its judgment to reach a different result, which is insufficient to merit judicial interference?

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¹ Most educators have a 10-month professional obligation and typically may elect to receive their full annual salary over 21-pay periods or over 26-pay periods.

Full post as published by New York Public Personnel Law on April 16, 2008 (boomark / email).