1. society
2. work
3. retirement

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Susan Martin – AZ Bar No. 014226
Daniel L. Bonnett – AZ Bar No. 014127
Jennifer Kroll – AZ Bar No. 019859
Ravi Patel – AZ Bar No. 030184
MARTIN & BONNETT, P.L.L.C.
1850 North Central Avenue, Suite 2010
Phoenix, Arizona 85004
(602) 240-6900
[email protected]
[email protected]
[email protected]
[email protected]
Michael Napier – AZ Bar No. 002603
NAPIER, ABDO, COURY & BAILLIE, P.C.
2525 E. Arizona Biltmore Circle, Suite 135
Phoenix, Arizona 85016
(602) 248-9107
[email protected]
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Attorneys for Plaintiffs and Intervenors
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IN THE SUPERIOR COURT FOR THE STATE OF ARIZONA
IN AND FOR THE COUNTY OF MARICOPA
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FRANK PICCIOLI, et. al.,
Case No. CV-2012-010330
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Plaintiffs,
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v.
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CITY OF PHOENIX, et. al.,
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PLAINTIFFS’ AND INTERVENORS’
CLOSING ARGUMENT
Defendants.
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v.
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STUART CASEY, et. al.,
Intervenors.
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Table of Contents
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INTRODUCTION AND SUMMARY OF ARGUMENT ..............................................................1 3
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I. 5
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INCLUSION OF SICK LEAVE PAYMENTS IN FINAL AVERAGE
COMPENSATION WAS PART OF THE AGREEMENT BETWEEN
PLAINTIFFS AND THE CITY...........................................................................................8 A. Inclusion of Sick Leave Payments in Retirement Benefits Was Part
of the Negotiated Agreements .................................................................................8 B. The Parties’ Knowledge and Intention that Sick Leave Payments
Are Included in Compensation under the Retirement Plan is Clear
from the Language and Circumstances of the Agreements ...................................13 8
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II. 10
DEFENDANTS VIOLATED PLAINTIFFS’ VESTED RIGHTS, THE
ARIZONA CONSTITUTION AND THE RETIREMENT PLAN ...................................23 11
A. Defendants’ Changes to the Benefit Formula Diminished
Plaintiffs’ Pension Benefits in Violation of their Vested and
Constitutionally Protected Rights and Violated the terms of the
Retirement Plan......................................................................................................23 B. Evidence at Trial Clearly Established that Inclusion of Sick Leave
in Compensation and Final Average Compensation Is Part of the
Benefit Formula .....................................................................................................30 12
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III. DEFENDANTS VIOLATED OTHER PROVISIONS OF THE
RETIREMENT PLAN .......................................................................................................40 IV. DEFENDANTS VIOLATED THE ARIZONA AND FEDERAL
CONTRACTS CLAUSES .................................................................................................43 V. PLAINTIFFS NEVER CONSENTED TO CHANGE THE
COMPENSATION USED TO CALCULATE RETIREMENT BENEFITS....................45 18
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CONCLUSION ..............................................................................................................................48 21
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Plaintiffs and Intervenors (hereafter “Plaintiffs” except where otherwise indicated)
submit their closing argument.
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INTRODUCTION AND SUMMARY OF ARGUMENT
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The 16 year uninterrupted period of including sick leave paid at retirement in final
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average compensation constituted a binding contract between Defendants and Plaintiffs. The law
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is well settled that regardless of whether there was a “formal” rule or regulation, inclusion of
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unused sick leave paid at retirement in the calculation of compensation for purposes of
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calculating retirement benefits became a term of the City of Phoenix Employees’ Retirement
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Plan, City of Phoenix Charter (“Charter”) Chapter XXIV (“Retirement Plan”) through the
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Retirement Board’s deliberate, uninterrupted and universally known administration of the
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Retirement Plan to include it. Beginning in 1996, the City and the labor associations negotiated
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a series of agreements with the specific intent and understanding that the agreed upon portion of
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sick leave that could be paid retirement was compensation that would be included in the
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calculation of final average compensation under the Retirement Plan. Defendants’ unilateral
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modifications to those agreements deprived Plaintiffs and all covered Unit 2, 3 and 7 employees
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of the benefits of those negotiated agreements unlawfully reduced vested and constitutionally
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protected retirement benefits.
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For 16 years, the benefit formula under the Retirement Plan included unused sick leave
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paid at retirement in compensation. Inclusion of the amount of sick leave that was paid at
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retirement became a term of the Retirement Plan. The law is well settled that a public employee
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has a common law and an Arizona Constitutional “right in the existing formula by which his
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benefits are calculated as of the time he began employment and any beneficial modifications
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made during the course of his employment.” Fields v. Elected Officials' Ret. Plan, 234 Ariz. 214,
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220, 320 P.3d 1160, 1166 (2014) (citing Yeazell v. Capins, 98 Ariz. 109, 402 P. 2d 541 (1965);
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Thurston v. Judges' Ret. Plan, 179 Ariz. 49, 51, 876 P.2d 545, 547 (1994) (recognizing that
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“when the amendment [to retirement benefits] is beneficial to the employee or survivors, it
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automatically becomes part of the contract by reason of the presumption of acceptance”)). Under
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the law, the inclusion of payments for unused sick leave made at retirement was part of the
consideration for Plaintiffs’ employment and a benefit that the City was not free to modify to
Plaintiffs’ detriment.
The evidence at trial clearly established that the sick leave payouts were part of
negotiated agreements between the City and Plaintiff labor organizations and all parties to those
agreements intended to provide compensation at retirement for a portion of an employee’s
accrued, unused sick leave that would be used in the calculation of final average compensation if
the employee elected to do so. During 1996 negotiations with ASPTEA, the labor organization
representing the City’s Unit 7 employees under the then-existing version of the City’s Meet and
Discuss Ordinance, City of Phoenix Ord. G-1536, Phoenix City Code §2-223 et. seq., Ex. 312,
the City and ASPTEA agreed that Unit 7 employees would have the option of cashing out some
of their sick leave at retirement and the City advised ASPTEA that using that sick leave payment
in final average compensation instead of in credited service. In 1999, as a result of negotiations
under the City’s Meet and Confer Ordinance, Phoenix City Code §2-223 et. seq., the City and
AFSCME Local 2384 and AFSCME Local 2960 agreed that employees in Field Unit 2 and Unit
3, which were represented by those two unions, would receive the same benefits. For 16 years,
the agreements to provide compensation at retirement that would be used in final average
compensation under the Retirement Plan were administered in accordance with the parties’
agreements with full knowledge by the Retirement Board (“Board”).
The Retirement Board is responsible for the administration, management and operation of
the Retirement Plan and for construing and carrying into effect the Retirement Plan provisions.
Retirement Plan §4.1. Immediately following the conclusion of the 1996 negotiations, the
Retirement Board met twice and thoroughly discussed the City’s agreement to pay a portion of
accumulated sick leave at retirement and, effective July 1, 1996, the Board undertook inclusion
of those payments under the broad definition of compensation which is used to calculate
retirement benefits under the Retirement Plan. Compensation is defined as follows:
"Compensation" means a member’s salary or wages paid him by the City for
personal services rendered by him to the City. In case a member’s compensation
is not all paid in money the City Council shall, upon recommendation of the City
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Manager, fix the value of the portion of his compensation which is not paid in
money
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Retirement Plan §2.13. From the inception of the 1996 agreement to pay general city employees
a portion of their unused sick leave upon retirement through July 8, 2012, Defendants
intentionally included all payments for accrued, unused sick leave in final average compensation
for purposes of calculating retirement benefits under the Retirement Plan. It is also undisputed
that the Retirement Plan continues to include some amounts paid at retirement for accrued,
unused sick leave in the determination of compensation for some employees (but not others). In
addition to: the Retirement Board’s meetings in June and July 1996 and thorough discussion that
the sick leave payments would be part of compensation (including, inter alia, the City’s
obligation to fund such amounts under the Retirement Plan, Ex. 70, 71) and a related legal
opinion; and the actual inclusion of such payments in final average compensation for 16 years,
(which would be enough in and of itself to establish enforceable rights), the evidence at trial was
overwhelming that the Retirement Plan was deliberately administered, operated and construed to
include sick leave in compensation and final average compensation under the Retirement Plan
and that it was part of the binding and enforceable agreement between the parties and constituted
part of the retirement benefit rights of Plaintiffs. The evidence established, inter alia:
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The Retirement Plan consistently calculated the actuarial impact for inclusion of
sick leave payments in final average compensation in the Retirement Plan’s
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Comprehensive Annual Financial Reports, which are its statutorily required
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annual certifications and actuarial valuations transmitted to City Council,1 and the
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reports explicitly stated that inclusion of sick leave payments at retirement in final
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average compensation was a “Plan Provision” that began July 1, 1996. Trial
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Record (“TR”) 04/30/2015 (PM) (Donna Buelow), pp. 50-51. Joint Proposed
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Pretrial Order Stipulations of Material Fact and Law (“ST”) ¶25. See, e.g., Ex.
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Retirement Plan §28.1(b) and (c), Policy 117 (Ex. 43 and 311). These annual certifications also
state that “[r]esponsibility for the accuracy of the data, completeness, and fairness of the
presentation of the CAFR, including all disclosures, rests with the Retirement Board” Ex. 52, p.
4; 53, p. 3; 54, p. 3; 69, p. 3. All reports vouch for the accuracy of the financial information
included in the report and state that all necessary disclosures have been included. Id.
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Ex. 52, p. 68; 53, p. 68; 54, p. 66; 69, p. 68;
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appropriated the money and paid contributions to the Retirement Plan in
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accordance with their statutory obligations to fund the Retirement Plan.
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Retirement Plan § 28.1; Ex. 1, at D000139-140;
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The City and Retirement Plan filed sworn declarations from two of the attendees
at the 1996 Retirement Board meetings with this Court in 1997 (concerning a
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lawsuit in which an employee unsuccessfully sought the value of unpaid sick
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leave credits in final average compensation), confirming that all accrued, unused
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sick leave that the plaintiff in that case had elected to be paid at his retirement in
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December 1996 was included in his final average compensation under the
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Retirement Plan. Ex. 61, at ¶¶ 4, 5, 16, 18, 30, 32, 45, 47-51; Ex. 62, at ¶¶8, 9, 16,
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34, 77;
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In accordance with their statutory obligations under the Charter and the Phoenix
City Code to audit the City’s financial affairs and report the City’s financial
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obligations to the City Council and to the taxpayers,2 beginning with the audited
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financial reports for the City’s fiscal year 1997 (which ran from July 1, 1996 to
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June 30, 1997), the City Finance Department (whose leadership team, including
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the City Finance Director and City Treasurer, were also Retirement Board
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members), consistently reported to City Council, City Management and the public
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that sick leave payments at retirement were included in final average
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compensation under the Retirement Plan. Ex. 301-309. The City made the same
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representations concerning sick leave payouts and inclusion in final average
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compensation in connection with bond offerings in 2004 and 2005. Ex. 298, 299;
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Prior to July 2012, the Retirement Plan’s Summary Plan Descriptions which are
established to advise employees about their retirement benefits, TR 04/29/15
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For 16 years, based on the Retirement Plan annual certifications, the City Council
(PM) (Cathy Gleason), p. 74:2-12, stated that they are a “summary of certain
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See Charter Chapter III, §2(B)(6), Charter Chapter VIII, §5, City Code Chapter 2, §2-16.
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provisions of the Retirement Law and the administrative policies and procedures
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adopted by the COPERS Board in accordance with the Charter,” and reported that
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the Retirement Plan includes sick leave in compensation and final average
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compensation. Ex. 38;
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evidence describing Retirement Plan benefits from 1996 to July 2012, the fact that
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sick leave paid at retirement was part of the benefit formula under the Plan was
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not only mentioned, it was highlighted. See, e.g., Ex. 78; 79; 80; 81; 83; 85; 86;
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88; 89;
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retirement would be included in final average compensation under the Retirement
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Plan, TR 05/06/15 (Donna Buelow), p. 19:8- 21:19; Ex. 90, at FP-SC-00017; TR
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Every benefit projection and estimate from 1996 until 2012 estimated amounts of
accrued, unused sick leave at retirement and that all amounts of such leave paid at
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In every single written communication to Members of the Retirement Plan in
04/30/15 (AM) (Stuart Casey), p. 48;
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Employees were encouraged to save their sick leave in order to receive a payout
at retirement that would “maximize” their final average compensation at
retirement for Retirement Plan benefit calculation purposes in information
sessions about retirement benefits, retirement planning sessions, counseling
sessions and orientation sessions. At these sessions, held from July 1996 to July
2012, employees were told about their Retirement Plan benefits and final average
compensation, See, e.g., Ex. 78; 79; 80; 81; 82, 83; 85; 86; 88; 89, TR 04/27/2015
(PM) (Jason Stokes), p. 43:1-10; TR 05/11/15 (PM) (Rick Naimark), pp. 107-108;
TR 04/30/15 (AM) (Stuart Casey), pp. 13-14; ST ¶¶ 101-109, 114; Ex. 78-90;
Deposition of Janet Smith, dated March 19, 2015 (“Smith Dep. 03/19/2015”), pp.
64:13-65:10; Deposition of Donna Buelow, dated March 12, 2015 (“Buelow Dep.
03/12/2015”), pp. 10:3-39:1; Deposition of Ron Serio, dated February 17, 2015)
(“Serio Dep. 02/17/2015”), pp. 23:1- 24:13, 24:25-29:25, 32:8-18.
Defendants’ July 2012 “sick leave snapshot” changed the formula that had been in place
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for 16 years under the Retirement Plan by imposing, for the first time, a maximum for some
employees of the amount of sick leave payments made at retirement that could be used in the
formula for compensation for calculating retirement benefits under the Retirement Plan and
completely eliminated the benefit for others..
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Defendants’ assertions at trial that they could reinterpret the inclusion of the sick leave
payout as compensation 16 years after it became part of the benefit formula by implementing a
revision to Administrative Regulation (“AR”) 2.441 that was issued by the City Manager and
then “acknowledged” by the Retirement Board simply because they could not find evidence of a
vote or because “there was never a question asked” by the City or the prior Board where “that
said should this be included in compensation”3 does not comport with administrative agency
principles and the cases governing public employees’ rights to retirement benefits. The City
Manager had no authority to construe or alter Retirement Plan provisions except as one member
of the nine member Retirement Board. Even if he did, or if it really were the Retirement Board’s
determination, the law is clear that the Board’s deliberate and uninterrupted inclusion of sick
leave payments in compensation and final average compensation for 16 years became part of the
Retirement Plan benefit formula, regardless of whether the inclusion was a well-known
administrative de facto interpretation4 or an interpretation made by a prior Retirement Board as
Plaintiffs assert. For 16 years, all sick leave payments at retirement were intentionally included
in final average compensation and those Retirement Plan benefits were calculated and paid in
accordance with the Retirement Board’s authority to administer, manage and operate the
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See, e.g., TR 05/08/15 (Janet Smith), p. 71:2-13, TR 05/11/15 (AM) (Janet Smith), pp. 68:469:6; TR 05/11/15 (PM) (Rick Naimark), pp 29:11-30:2.
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Plaintiffs continue to object to Defendants’ failure to turn over numerous documents on
privilege grounds. See Plaintiffs’ Motion to Compel Testimony and Documents. Defendants
asserted privilege as to numerous documents including undisclosed legal review committee
minutes and attorney communications about investigations defended their actions based on a
purported absence of any evidence of prior interpretations of compensation by the Board based
on advice they received from counsel yet. This defense clearly waived any privilege that could
have applied. State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 60, 13 P.3d 1169, 1177 (2000)
(“A litigant cannot assert a defense based on the contention that it acted reasonably because of
what it did to educate itself about the law, when its investigation of and knowledge about the law
included information it obtained from its lawyer, and then use the privilege to preclude the other
party from ascertaining what it actually learned and knew.”).
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Retirement Plan and to construe and carry into effect the Retirement Plan provisions. Retirement
Plan §4.13.5
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Defendants were not free to unilaterally modify Plaintiffs’ bargained-for agreements nor
to reduce the benefits under the Retirement Plan benefit formula in 2012 by imposing limitations
on the amount of sick leave payments in compensation where none existed before. Defendants’
own witnesses conceded that the change reduced and diminished pension benefits, which was
confirmed by documents created by Defendants. See TR 05/06/2015 (Donna Buelow), at pp. 8182; TR 04/30/2015 (AM) (Scott Miller), at pp. 95:1- 97:1-9; Ex. 124; Ex. 314. These changes
violated Plaintiffs’ vested rights, the agreements reached, the Arizona and United States
Constitutions and the Retirement Plan.
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Defendants’ other defenses have no merit. Neither the unions nor ASPTEA consented to
the changes to their retirement benefits. None of the individual Plaintiffs nor anyone on their
behalf ever assented to Defendants’ unilateral change to their retirement benefits. There was no
consideration and no agreement to reduce pension benefits. During negotiations, AFSCME
Locals 2960 and 2384 refused to agree to any changes, and the City withdrew their proposals
without any changes. ASPTEA told the City when the subject came up that any such change
diminished their members’ pension benefits and that they would not agree. The City never even
presented ASPTEA with a proposal for a change. There was no change to AR 2.441 prior to
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Defendants attempted to establish at trial that the Retirement Board somehow interpreted the
Retirement Plan’s definition of compensation and determined a mistake had been made in May
2012 but the weight of the evidence established otherwise. The Retirement Program
Administrator testified, consistent with the Retirement Board’s minutes and Policy 195 that the
Retirement Board adopted on May 17, 2012 that the Board also never interpreted the Charter’s
definition of compensation in May 2012 and instead just agreed to adhere to the City Manager’s
implementation of AR 2.441 Revised. Ex. 41, at D001047; Ex. 42 at D000738-D000740; TR
04/30/15 (PM) (Donna Buelow), p. 106:118-p. 107:25. In stark contrast, the City Manager, who
is simply one vote on the nine member Retirement Board, has no authority under the City
Charter or City Code to unilaterally alter Retirement Plan provisions and benefits through an
Administrative Regulation. In any event, the Arizona courts have held many times that
diminishing and reducing a public employee’s retirement benefit formula is illegal, even if such
changes were performed entirely in accordance with the only proper statutory procedure for
changing the benefit formula. See, e.g., Fields v. Elected Officials' Ret. Plan, 234 Ariz. 214, 22122, 320 P.3d 1160, 1167-68 (2014) (legislative enactment that was entitled to presumption of
constitutionality and that modified Elected Officials Retirement Plan making it more difficult for
retired members to receive future benefit increases diminished and impaired the benefits of
retired members in violation of Arizona Constitution Article 29, § 1(C)).
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negotiations, AR 2.441 was not mentioned in negotiations nor listed in any negotiations minutes
with any of the Plaintiff labor associations. No revisions to the AR 2.441 took place until
AFTER negotiations concluded in 2012, and the practice from at least 1996 until the 2012
revision to AR 2.441 had always been that only after the parties had agreed to a change in
bargaining, and such a change was approved by the members of the bargaining unit and by City
Council, would a revised AR be drafted to reflect the agreed upon change.
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The statute of frauds also cannot apply as the agreements were completed upon
acceptance and start of employment when the rights to pension benefits were fixed and where, in
any event there were written agreements. See Plaintiffs’ Response to Defendants’ Motion to
Amend and Response to Defendants’ Motion in Limine No. 5, incorporated herein by reference.
I.
INCLUSION OF SICK LEAVE PAYMENTS IN FINAL
COMPENSATION WAS PART OF THE AGREEMENT
PLAINTIFFS AND THE CITY
A.
AVERAGE
BETWEEN
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Inclusion of Sick Leave Payments in Retirement Benefits Was Part of the
Negotiated Agreements
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The evidence was conclusive that the City and ASPTEA and AFSCME Locals 2384 and
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2960 negotiated agreements to include the sick leave payouts with the specific understanding and
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intent that those payments were included in the calculation of compensation under the
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Retirement Plan. Beginning in 1996, when ASPTEA negotiated the sick leave payouts at
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retirement, the Retirement Board included those payments in compensation under the Retirement
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Plan. Like the vacation payouts and other forms of payment at retirement that preceded it,
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following the negotiated agreements, the Retirement Plan included all amounts of sick leave paid
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at retirement in compensation. Both the Retirement Plan and the City repeatedly advised the
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employees and the public that these benefits were part of the Retirement Plan in actuarial
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valuations, annual financial reports and certifications of the Retirement Plan and the City, benefit
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estimates, presentations and other communications to Members of the Retirement Plan.
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The terms and conditions of Plaintiffs’ employment with the City of Phoenix are in
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multiple documents and include the terms of the Retirement Plan that have never been fully set
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forth in the MOUs for Units 2 & 3 or the MOA for Unit 7 (collectively, “the MOUs”). Contrary
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to Defendants’ arguments, the absence of a complete statement of the Retirement Plan provisions
in the MOUs and MOAs or all of the specific elements of Plaintiffs’ compensation in the
Retirement Plan does not negate the meaning of the MOUs or the intentions of the parties in
negotiating the agreements that the provisions of the Retirement Plan -- as all parties clearly
understood the Retirement Plan to operate over a 16 year course of dealing -- would continue.
Under Arizona principles of contract interpretation, courts must always look beyond the terms of
the written agreements; the meaning of a contract must be determined “in light of the parties'
intentions as reflected by their language and in view of all the circumstances.” Smith v. Melson,
135 Ariz. 119, 122, 659 P.2d 1264, 1266 (1983). There is no question that the City’s
representations that the payment of sick leave would be included in final average compensation
were consistent with the contemporaneous operation of the Retirement Plan that already included
vacation pay and other forms of pay at retirement and that immediately and continuously
included sick leave payments in the determination of compensation for calculating Retirement
benefits as soon as those payments were agreed to by the parties. When interpreting a contract, it
is fundamental that a court attempt to ascertain and give effect to the intention of the parties at
the time the contract was made if at all possible.” Taylor v. State Farm Mut. Auto. Ins. Co., 175
Ariz. 148, 153, 854 P.2d 1134, 1139 (1993) (internal quotation and citation omitted). In other
words, the written document is “not the agreement but only evidence thereof.” Id.
The evidence at trial was overwhelming that the parties negotiated and agreed to sick
leave payouts at retirement and continued to agree to those payouts with the understanding and
intention that the payments were to be treated as compensation under the Retirement Plan. This
understanding and intent was well within the established practice of the Retirement Plan that all
similar payments and for 16 years, the sick leave payments themselves were consistently treated
as compensation under the Retirement Plan. Demasse v. ITT Corp., 194 Ariz. 500, 505, 984 P.2d
1138, 1143 (1999) (“When an employer chooses to include a handbook statement “that the
employer should reasonably have expected the employee to consider as a commitment from the
employer,” that term becomes an offer to form an implied-in-fact contract and is accepted by the
employee's acceptance of employment.”); Schade v. Diethrich, 158 Ariz. 1, 10, 760 P.2d 1050,
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1059 (1988) (“By these acts the parties clearly manifested their joint understanding that they
were bound by their promises. In view of this, it cannot be said that the trial court made an
agreement for the parties which they did not make themselves.”); Black v. Solomon & Relihan,
P.C., No. 1 CA-CV 11-0738, 2012 WL 6061005, at *3 (Ariz. App. Dec. 6, 2012) (“the conduct
of Plaintiff and Relihan after the alleged agreement supports an inference of mutual assent”)
(citing Schade, 158 Ariz. at 9, 760 P.2d at 1058; Restatement (Second) of Contracts § 33 cmt. a
(1981)).
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As set forth below, the intent of the agreements to include the compensation paid at
retirement for the accrued, unused sick leave in final average compensation was confirmed at
trial through overwhelming evidence including, by, inter alia:
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The fact that in 1996 when ASPTEA negotiated the sick leave payments at
retirement, the City Manager drafted an Administrative Regulation, AR 2.441,
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that confirmed the agreements reached between the City and the labor unions and
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ASPTEA that sick leave payouts were compensation and intended to and were
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being used as calculation under the Retirement Plan.6 Defendants then took the
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issue to the Retirement Board, advised the Retirement Board that the City was
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paying for the actuarial impact and that the Retirement Board did not voice any
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opposition and that See also Ex.17, 15 AR 2.30 (stating that benefit of unused
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sick leave included “increased retirement benefits”);
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The 16 year practice following commencement of payment in which all pay for
unused sick leave was included in compensation when calculating retirement
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benefits;
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Bargaining history including Plaintiffs’ testimony about communications during
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Although Defendants have attempted to assert that the sick leave payments are not
compensation for services rendered, this is clearly incorrect. Employees only accrue paid sick
leave during months in which they are in paid service for the City. Personnel Rule. ST ¶ 34;
Ex.45. In addition, the City’s agreement with ASPTEA provides that compensatory time (which
is overtime pay and clearly compensation for time worked) will be converted to sick leave if the
employee changes job classifications and the employee’s vacation bank is full. Section 3-4 (“If
the employee’s vacation leave bank is at the maximum allowable amount, time will be converted
to sick leave.”).
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negotiations and testimony and documents establishing that when negotiating
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proposed changes to increase the amount of sick leave paid at retirement, the City
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made the impact of the changes to the Retirement Plan part of the negotiations
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and a bargaining consideration;
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which told employees to “maximize their final average compensation” by saving
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up their sick leave so they could receive a payout at retirement that would be
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included in compensation in calculating retirement benefits and not a single
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communication to the contrary or even that indicated that the practice could
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change;
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Each and every communication about final average compensation for 16 years,
Language in Pay Plans, the ARs, the MOUs, MOAs and memoranda summarizing
ASPTEA agreements;
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Retirement Plan actuarial certifications, annual financial reports, Retirement
Board minutes and other Retirement Plan documents;
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City audits, annual financial reports and communications to bond holders;
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The City’s attempt to negotiate a change in 2012 to impose a limitation where
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none existed before.
The City’s attempted repudiation of its 16 year bargaining history with Plaintiff labor
organization is invalid to alter the right to pension benefits based on sick leave payments at
retirement that had already become an established term and condition of employment.
Defendants’ assertion at trial and during negotiations that the agreement to provide compensation
in the form of sick leave payments at retirement that would be used for final average
compensation for calculating retirement benefits was somehow just a retirement “policy” that
could be changed does not provide a justification to evade their obligations under their
agreements with Plaintiffs. The City entered into binding contracts to provide benefits that all
parties intended as compensation under the terms of the Retirement Plan. Defendants were not
free, 16 years later, after unsuccessfully attempting to negotiate a change at the bargaining table
to unilaterally implement that same change by management fiat. Even if Defendants’ unilateral
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conduct did not reduce pension benefits, it would still be unlawful because an employer may not
unilaterally impair the bargained-for agreement, but whereas here, the public employer’s
unilateral conduct impairs and diminishes pension benefits, that conduct is also invalid under
Yeazell v. Capins. 98 Ariz. 109, 115-16, 402 P. 2d 541, 545-46 (1965). As the United States
Supreme Court stated when discussing collecting collective bargaining agreements and
relationships in a series of cases known as the Steelworkers trilogy, not every term of the
agreement is written in one single document and one must often look to the practices and history
of the relationship between parties to determine what terms are covered by the agreement and
bargained for relationship between the parties and what has been left to management authority.
It is not unqualifiedly true that a collective-bargaining agreement is simply a
document by which the union and employees have imposed upon management
limited, express restrictions of its otherwise absolute right to manage the
enterprise, so that an employee's claim must fail unless he can point to a specific
contract provision upon which the claim is founded. There are too many people,
too many problems, too many unforeseeable contingencies to make the words of
the contract the exclusive source of rights and duties. One cannot reduce all the
rules governing a community like an industrial plant to fifteen or even fifty pages.
Within the sphere of collective bargaining, the institutional characteristics and the
governmental nature of the collective-bargaining process demand a common law
of the shop which implements and furnishes the context of the agreement. We
must assume that intelligent negotiators acknowledged so plain a need unless they
stated a contrary rule in plain words.
A collective bargaining agreement is an effort to erect a system of industrial selfgovernment. When most parties enter into contractual relationship they do so
voluntarily, in the sense that there is no real compulsion to deal with one another,
as opposed to dealing with other parties. This is not true of the labor agreement.
The choice is generally not between entering or refusing to enter into a
relationship, for that in all probability pre-exists the negotiations. Rather it is
between having that relationship governed by an agreed-upon rule of law or
leaving each and every matter subject to a temporary resolution dependent solely
upon the relative strength, at any given moment, of the contending forces. The
mature labor agreement may attempt to regulate all aspects of the complicated
relationship, from the most crucial to the most minute over an extended period of
time. Because of the compulsion to reach agreement and the breadth of the
matters covered, as well as the need for a fairly concise and readable instrument,
the product of negotiations (the written document) is, in the words of the late
Dean Shulman, ‘a compilation of diverse provisions: some provide objective
criteria almost automatically applicable; some provide more or less specific
standards which require reason and judgment in their application; and some do
little more than leave problems to future consideration with an expression of hope
and good faith.’ Shulman, supra, at 1005. Gaps may be left to be filled in by
reference to the practices of the particular industry and of the various shops
covered by the agreement. Many of the specific practices which underlie the
agreement may be unknown, except in hazy form, even to the negotiators.
United Steelworkers of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 579-81 (1960). See also
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Demasse, 194 Ariz. at 506, 984 P.2d at 1144 (“once an employment contract is formed—whether
the method of formation was unilateral, bilateral, express, or implied—a party may no longer
unilaterally modify the terms of that relationship.”). See also Perry v. Sindermann, 408 U.S. 593,
601-02 (1972), holding:
A written contract with an explicit tenure provision clearly is evidence of a formal
understanding that supports a teacher's claim of entitlement to continued
employment unless sufficient ‘cause’ is shown. Yet absence of such an explicit
contractual provision may not always foreclose the possibility that a teacher has a
‘property’ interest in reemployment. For example, the law of contracts in most, if
not all, jurisdictions long has employed a process by which agreements, though
not formalized in writing, may be ‘implied. Explicit contractual provisions may
be supplemented by other agreements implied from ‘the promisor's words and
conduct in the light of the surrounding circumstances.
10
11
(citations omitted).
12
Even if the City Manager were free to unilaterally modify the terms of the Retirement
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Plan, which he was not, the City Manager was not free to unilaterally modify agreements
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intended to provide compensation that would be included in final average compensation under
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the Retirement Plan. However, although the City Manager has authority to negotiate
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compensation subject to approval by the City Council, neither the City nor the City Manager
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have any authority to change the Retirement Plan and certainly not through an administrative
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regulation purporting to alter the calculation of retirement benefits. See Retirement Plan §4.1, 4.2
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(authority and responsibility for administration, management and operation of the Retirement
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Plan and for construing and carrying into effect the Retirement Plan provisions vested in
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Retirement Board of which City Manager or designee is one member only); Charter Chapter III,
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Section 2B (powers and duties of the City Manager include power to direct and supervise
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departments and agencies except as otherwise provided by Charter); Phoenix City Code §2-48
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(City Manager may create change and abolish offices, departments or agencies, boards and
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commissions except for Retirement System).
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B.
The Parties’ Knowledge and Intention that Sick Leave Payments Are
Included in Compensation under the Retirement Plan is Clear from the
Language and Circumstances of the Agreements
Despite Defendants’ attempts to argue to the contrary, the evidence established that the
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City and ASPTEA and AFSCME Locals 2384 and 2960 negotiated agreements to pay a portion
of accrued unused sick leave at retirement with the specific understanding and intent that those
payments were included in the calculation of final average compensation under the Retirement
Plan. Payment of sick leave payments at retirement and their inclusion in compensation for
purposes of calculating retirement benefits began as part of negotiated agreements between the
City and Plaintiff labor organizations in 1996 for ASPTEA. In 1998 (to be effective the second
year of the two year memoranda of understanding), AFSCME Locals 2384 and 2960 also
negotiated the sick leave payout provisions.
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Charlene Limbeck, who participated in the 1996 negotiations, testified that ASPTEA and
the City negotiated that employees represented by ASPTEA would have the option of cashing
out some of their sick leave at retirement and the City advised ASPTEA that using that sick leave
payment in final average compensation instead of in credited service. In other words, the
payouts were converted from sick leave credited service to a payout that was compensation
under the Retirement Plan. TR 04/27/15 (AM) (Charlene Limbeck), pp. 29:1-30:6, 32:20-38:24.
ASPTEA agreed that the employee would have a choice – they could receive either the sick
leave payout as part of final average compensation and those hours would not be included in the
service credit. TR 04/27/15 (AM) (Charlene Limbeck), p. 38:17-24 (City advised ASPTEA that
the sick leave payout “would be…part of the final average compensation calculation. Rather than
years- years of service affecting the percentage, it was affected [sic] the dollar amount, it was
just shifting it over to part of the comp – overall compensation.”). Part of the bargain and
agreement reached in connection with the sick leave payout was that ASPTEA was asked to and
did agree to give up a $20 per month health insurance premium for every 500 hours of sick leave
an employee had accumulated.7
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7
While Defendants attempted to discredit that bargain and exchange by testimony from Janet
Smith by implying that giving up the health insurance premium coincided with institution of the
MERP program, TR 05/08/15 (Janet Smith), p.98:8-18, in fact the MERP Program did not start
until 1998, two years after ASPTEA negotiated for they agreed to drop the retiree insurance
premium supplement in exchange for the assurance that the sick leave payments would be
included in the computation of their compensation for retirement benefit purposes. Ex. 294, at p.
2 (noting “no increase in MERP since 1998 when ASPTEA negotiated this benefit”); Ex. 7, Ex.
8, at p. 3 ¶4(D); Ex. 9, at p. 3 ¶4(D); Ex. 10, at p. 3 ¶4(D); Ex. 11, at p. 3 ¶4(D).
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In 1996, when the sick leave payouts at retirement were first negotiated, ASPTEA did not
have written agreements. Rather, under the Meet and Discuss Ordinance then in effect, the City
Manager had authority under the then-existing version of the Meet and Discuss Ordinance to
meet and discuss with ASPTEA representatives on matters relating to wages and fringe benefits
and to make recommendations to the City Council for approval of agreements reached during
that process. City of Phoenix Ord. G-1536, Ex. 312, at §§ 2-223, 2-229 & 2-231.8 In May 1996,
the City announced to the Supervisory and Professional Employees represented by ASPTEA
through a letter from Carlos Arauz, the City Personnel Director and also a Member of the
Retirement Board the sick leave payout program, stating, in relevant part:
10
The City Manager has recommended, and the City Council has endorsed, the
following changes in wages and benefits for supervisory and professional
employees:
***
A program to pay a portion of an employee's accumulated sick leave at the time of
retirement will begin for those employees who retire on or after July 1, 1996. To
qualify, the employee must have a minimum of 1,000 hours of accumulated sick
leave. The first 500 hours of leave do not qualify for payment. Of the remaining
hours, 20% will be paid at the employee's base hourly rate of pay. An individual
must be classified as "supervisory/professional" at the time of retirement and must
have completed one full year in this category immediately prior to retirement.
Sick leave is currently used in the Retirement System to calculate total service.
With the institution of this sick leave payout program, the service credit will be
reduced by the total number of hours compensated. Also, with the introduction of
this new payout program, the plan that provided $20 per month toward health
insurance premiums based upon total sick leave accrued will be discontinued for
those employees retiring on or after July 1, 1996.
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Ex. 7.
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The fiscal year 1996-1997 Pay Ordinance, S23753, passed by City Council June 26,
1996, effective July 1, 1996, discontinued the $20 per month supplement for unused sick leave
for persons retiring on or after July 1, 1996. The Pay Ordinance further provided that the City
Manager was “authorized to issue an administrative regulation establishing guidelines for the
cash payment of a portion of accumulated sick leave hours at retirement for Executives, Middle
8
In 2006, the City’s Meet and Discuss Ordinance was amended and ASPTEA first began
entering into written Memoranda of Agreement (“MOA”) with the City. Ex. 6, City of Phoenix
Ord. G-4854. When the City and ASPTEA entered into its first written MOA under the 2006
Meet and Discuss ordinance, Art. 3.7 of the MOA provided: “Sick Leave Conversion at
Retirement….employees “shall be eligible for payment of an amount of compensation equal to
twenty five (25%) of his base hourly rate for all hours in excess of two hundred and fifty (250)
hours in accordance with AR 2.441.” Ex. 37.
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Managers, and Professional and Supervisory employees.” Ex. 47, at Sections 12(x), (uu). The
Pay Plan in the Pay Ordinance further provided that for Meet and Discuss/City manager
Represented Units:
Effective July 1, 1996, upon retirement employees with a minimum of 1,000
hours of accrued and unused Sick leave, excluding the first 500 hours, will be
paid for 20% of the remaining hours at base hourly wage
Ex. 47, at p. 186 (emphasis supplied). Consistent with the agreement reached during the meet
and discuss process, the Pay Ordinance and applicable provisions of the Meet and Discuss
Ordinance in effect at the time, the City Manager, with the approval of the City Council, issued
Administrative Regulation (“AR”) 2.441 with an effective date of July 1, 1996. Ex.8. AR 2.441,
dated July 1, 1996, provided that if a supervisory and professional employee had a minimum of
1,000 hours of accrued but unused sick leave at retirement, the first 500 hours were “base hours”
(that could not be paid out) but that an employee could elect to be paid 20% of his or her accrued
and unused sick leave hours in excess of 500 at the employee’s base rate of pay at the time of
retirement. Ex. 8. The AR further provided that if the employee elected to receive a cash
payment of his unused, accrued sick leave, those hours would be deducted from the total number
of retirement service credit hours. Ex. 8, at p. 2 ¶4(B). In other words, any accumulated unused
sick leave that was converted to compensation at retirement and included in final average
compensation was deducted from the unused sick leave bank for that Member. Id. Only the sick
leave remaining after the conversion of a portion of unused sick leave for cash was available for
and used to calculate additional service credit for the pension benefit calculation under the
Retirement Plan. Id.
The fact that the agreements intended to include sick leave in compensation is completely
confirmed by the presentations made by the City Manager’s designees and the Personnel
Director and the comments at the Retirement Board meetings. During the July 1996 Retirement
Board meeting, Deputy City Manager Manion represented to the Retirement Board that “the new
sick leave plan was part of labor negotiations and that the actuarial impact was covered in the
City’s budget through employer contributions.” Ex. 70 at p. 70-6. Mr. Arauz, City Personnel
Director and Retirement Board Member, indicated that the Retirement Plan’s actuary had been
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consulted and provided an estimate of the impact to the System and that the “City has budgeted
this amount to be available to Finance to be put in the Pension Plan.” Id.9 Mr. Manion further
advised the Retirement Board that “the cost of the sick leave program was calculated into the
benefit package” and that “100% of the cost would be reimbursed to the retirement fund” and
that “this included both employer and employee contributions.” Id. Assistant Personnel Director
Don Walsh and Phil Kundin, who together negotiated contracts with ASPTEA on behalf of the
City, including the 1996 agreement,10 also attended the July 1996 Retirement Board meeting in
which the sick leave payout at retirement was discussed . Ex. 71.
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During 1998, AFSCME Local 2384 on behalf of the members of Field Unit 2 and
AFSCME Local 2960 on behalf of the members of Unit 3, sought the benefits that ASPTEA had
obtained in 1996 and likewise secured an agreement entitling their respective bargaining unit
employees to have the same sick leave payout benefits that ASPTEA represented employees had
already begun to enjoy effective the second year of the 1998-2000 MOUs. TR 04/28/15 (AM)
(Luis Schmidt), pp. 106:8-107:18; TR 05/08/15 (Debra Novak-Scott), pp. 98:4-14, 98:18-100:14,
103:18-105:14. Ex. 25, at Art. 39; Ex. 33, at Art. 31. Article 31 of the 1998-2000 MOU between
AFSCME 2960 and the City provided, in relevant part:
17
SICK LEAVE CONVERSION AT RETIREMENT
Effective July 12, 1999, a unit member who has accumulated a minimum of one
thousand (1,000) qualifying hours or more of accrued and unused sick leave at the
time of a duty related retirement shall be eligible for payment of an amount of
compensation equal to twenty (20%) of his base hourly rate for all hours in excess
of five hundred (500) hours.
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Ex. 33. Article 39 of the 1998-2000 MOU between AFSCME 2384 and the City provided, in
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relevant part:
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SICK LEAVE CONVERSION AT RETIREMENT
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9
Mr. Arauz had also sent out the May 1996 Memo to the City’s Professional and Supervisory
Employees advising them that “[t]he City Manager has recommended and the City Council has
endorsed” the sick leave payouts effective for the 1996-97 Fiscal Year. Ex. 7.
10
See TR 04/27/15 (AM) (Charlene Limbeck), pp. 44:22-45:4.
17
Effective at the beginning of the first pay period in July, 1999, (July 12, 1999) the
following benefits shall apply:
Upon retirement, bargaining unit employees with a minimum of 1,000 hours of
accrued and unused sick leave, excluding the first 500 hours, will be paid for 20%
of the remaining hours as base hourly wage
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Ex. 25.
5
In 1999, the Unit 7 employees represented by ASPTEA also received an increased
6
amount of sick leave payout at retirement. Instead of being entitled to a payout if they had 1,000
7
hours and being paid for 20% for all hours above 500 hours, effective July 1, 1999 ASPTEA
8
employees could now receive a payout of sick leave at retirement if they had a minimum of 750
9
hours and could receive 20% of all hours above 250 hours as opposed to the previous 500 hour
10
requirement. Ex. 48, at p. 173.
11
The Fiscal Year 1999-2000 Pay Ordinance, which was enacted June 16, 1999, provided
12
that the City Manager was “authorized to issue an administrative regulation establishing
13
guidelines for the cash payment of a portion of accumulated sick leave hours at retirement for
14
employees excluding sworn Public Safety personnel.” Ex. 48, at Section 12(zz). In addition to
15
the ASPTEA sick leave payout at retirement provisions, the Pay Plan included provisions for
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sick leave payout at retirement negotiated in the Field Unit 2 and Unit 3 MOUs. Ex. 48, at p.
17
164. A revised AR 2.441 was issued effective July 1, 1999 that included the increased amount of
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sick leave payout for ASPTEA employees and the amounts that were set forth in the MOUs for
19
“All other COPERS-eligible employees” including Field Unit 2 and Unit 3. Ex. 9, at p. 2 ¶3(B)
20
(emphasis supplied). This is clear evidence that the bargaining parties understood and intended
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the sick leave payments would be included in the calculation of their final average compensation
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under the Retirement Plan.
23
The amount of sick leave that could be paid out at retirement increased as a result of
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negotiated changes for employees represented by ASPTEA and Unit 2 effective July 1, 2000 and
25
increased for employees represented by Unit 3 effective July 1, 2001. Ex. 24 Art. 39; Ex. 32 Art.
26
31. The amount of sick leave that could be paid out at retirement increased again as a result of
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negotiated changes for employees represented by ASPTEA, Unit 2 and Unit 3 effective July 1,
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2002. Ex. 23 Art. 39; Ex. 31, at FP006869. Just as in 1996 and 1998 and 1999, following the
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negotiated changes that were effective in 2000, 2001 and 2002, the City’s Pay Ordinances and
Pay Plans were revised and AR 2.441 was revised to reflect the negotiated changes. Ex. 10, 11,
50, 51. No further changes to sick leave payouts at retirement or retirement benefits were agreed
to between the City and AFSCME Locals 2384, 2960 and ASPTEA after July 2002. Ex. 18-27,
26-29, 34-36, 77.
The labor organizations had no reason to doubt the City’s promises during negotiations
that sick leave paid at retirement would be compensation that would be included in final average
compensation for calculating retirement benefits. Not only was the practice consistent for 16
years, the payments fit within the broad definition of compensation under the Retirement Plan
§2.13, and travel allowances, lump sum vacation payouts and other payments at retirement were
also included in compensation under the Retirement Plan. Ex. 69, at p. 68 (FP-WP-000072), Ex.
61, at ¶4, 5. The language and structure of the MOUs with AFSCME Local 2960 and AFSCME
Local 2384 and agreements and MOAs with ASPTEA as well as the language and structure of
the ARs and Pay Plan and Pay Ordinances showed the parties’ intent to ensure the language of
the sick leave payout at retirement provisions was compensation within the definition of
compensation under the Retirement Plan and to ensure that the sick leave that could be used for
credited service was “converted” to a payment that would be used in the calculation of final
average compensation under the Retirement Plan if the employee so elected. . The provisions in
the MOUs and MOAs themselves were entitled “SICK LEAVE CONVERSION AT
RETIREMENT” and used the language “compensation” and “wages” which are used in
Retirement Plan §2.13.
The agreements also used the language “base hourly rate” and “base hourly wage” which
was the same language used in the Pay Ordinances, Pay Plans, Administrative Regulations
governing sick leave payouts and also in the Administrative Regulations governing other forms
of compensation paid to City employees which, at the time of this litigation, have consistently
been included in the calculation of compensation and final average compensation under the
Retirement Plan benefit formulas, including vacation payouts, holiday payouts, out-of-class pay,
longevity pay, shift differential, tool allowance, overtime pay and show-up-time pay. See Ex.
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62, ¶87. See also id, ¶ 85 (the words “base hourly rate or standard rate, are clear and well
understood. They have been consistently interpreted and understood by all for decades.”); TR
05/08/15 (Janet Smith), pp. 170:15-171:12 (longevity pay), pp. 171:13-172:17(callout pay); pp.
172:18-173:18 (standby pay); pp. 173:19-174:15 (tool allowances); Deposition of Donna
Buelow, dated Feburary 13, 2013 (“Buelow Dep. 02/13/13”), p. 25:8-17, 29:15-24 (vacation
pay); p. 27:3-21 (travel allowance); Smith Dep. 03/19/2015, p. 55:1-8 (overtime); p. 54:10-15
(shift differentials). Similarly, Pay Plans addressing the sick leave payout at retirement
provisions and AR 2.441 and revisions thereto that were issued following negotiations likewise
used other language and were structured to confirm that the payments were intended to be
compensation under the Retirement Plan. See id. See also, e.g., Ex. 9, AR 2.441 effective July
1, 1999 at p. 2 ¶3(B) (making clear that it applied not only to employees represented by
ASPTEA, but to “All other COPERS-eligible employees” as well. (emphasis supplied).
The sick leave conversion provisions were also placed in the MOUs, MOAs and Pay
Ordinances with other items of compensation. Effective for the Pay Plans for fiscal year 20002001 (the same year there were negotiated increases to the amount of sick leave that could be
paid at retirement and AR 2.441 was revised, Ex. 24 Art. 39; Ex. 32 Art. 31), Janet Smith, who
was then the City’s Personnel Director of Compensation and Information Services, reorganized
the Pay Plan and Pay Ordinance to place the sick leave payout at retirement provisions in the
“Compensation” section. TR 05/11/15 (AM) (Janet Smith), pp. 25:24-29:7, Ex. 49. In 2004, the
AFSCME Local 2384 MOU and AFSCME Local 2960 MOUs were reorganized at the City’s
request and the sick leave conversion provisions were placed in the Articles governing
compensation with the other items of compensation that have been included in the computation
of final average compensation under the Retirement Plan benefit formulas. TR 05/06/15 (Debra
Novak-Scott), pp. 172:14-174:19; Ex. 31; Ex. 22, at Article 3.
Since the first ASPTEA
agreement in 2006 and in all MOAs thereafter, the sick leave payout at retirement provisions are
also in Article 3, governing compensation. See Ex. 37, 38 39. See Orfaly v. Tucson Symphony
Soc'y, 209 Ariz. 260, 264, 99 P.3d 1030, 1034 (Ariz. App. 2004) (statutory definition of wages is
based on compensation an employee has a reasonable expectation to be paid; collective
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bargaining agreements defining
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will be honored); Arizona Laborers,
Teamsters & Cement Masons Local 395 Health & Welfare Trust Fund v. Hatco, Inc., 142 Ariz.
364, 367, 690 P.2d 83, 86 (Ariz. App. 1984) (“Words in a collective bargaining agreement
should be given their reasonable meaning. The rule of contract construction that language should
not be interpreted so as to render it illusory or meaningless is equally applicable to labor
agreements.”) (citing Penn Packing Co., Inc. v. Amalgamated Meat Cutters, 497 F.2d 888 (3rd
Cir.1974); Anderson v. Pension & Ret. Bd. of City of Milford, 355 A. 2d 283, 285 (Conn. 1974)
(sick pay was part of the employee’s compensation because the parties agreed that it was: “Since
the words chosen by the parties are fairly susceptible of only one interpretation, there was no
need for the trial court to apply additional rules of interpretation”); Int'l Bhd. v. City of Redding,
210 Cal. App. 4th 1114, 1121, 148 Cal. Rptr. 3d 857, 861 (Cal. App. 2012), review denied (Jan.
16, 2013) (“With this express language, the MOUs were ratified by the city council.
Consequently, then-active employees' vested right to future retiree medical insurance premium
benefits was legislatively authorized, expressly.”); Sartor v. Town of Manchester, 312 F. Supp.
2d 238, 244 (D. Conn. 2004) (enforcing parties’ contract to classify leave payments as wages for
retirement purposes: “The Agreement clearly states that Sartor's leave payments would be
classified as “wages,” rather than special payments or remuneration”).
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those expectations
Plaintiffs testified that since 1996, Defendants included the financial impact of the sick
leave payouts at retirement when “costing” and discussing proposals made by the Plaintiff labor
associations regarding the amount of sick leave paid at retirement.11 TR 04/28/2015 (AM)
(Frank Piccioli), p. 36; TR 04/27/2015 (AM) (Charlene Limbeck), pp. 33-34; TR 04/27/2015
(PM) (Jason Stokes), pp. 4-8; TR 04/28/2015 (AM) (Luis Schmidt), pp. 102-103; TR 05/06/2015
(Debra Novak-Scott), pp. 115-118. This testimony is consistent with the documentary evidence
including the wage and benefits documents and budget documents presented to the Unions and
ASPTEA during negotiations and the 1996 Retirement Board minutes in which Deputy City
11
In 2006, the City made an effort to provide more formal, costing documents that included a
specific 9% “charge” based on the Retirement Plan impact of including sick leave in final
average compensation, but the testimony of witnesses who actually attended and participated in
negotiations was consistent that before 2006, the City still advised the labor organizations during
negotiations that they would be “charged” for this impact. Id.
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Manager and Retirement Board Member Pat Manion explained that “the cost of the sick leave
cash out program was calculated into the benefit package” and that “100% of the cost would be
reimbursed to the retirement fund,” and that the costs “included both employer and employee
contributions.” Ex.71, at p. 2; see also Ex. 96-102. Assistant Personnel Director Don Walsh and
Phil Kundin, who together negotiated contracts with ASPTEA on behalf of the City, including
the 1996 agreement,12 also attended the July 1996 Retirement Board meeting in which the sick
leave payout at retirement was discussed. Ex. 71.
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The evidence that the parties intended that the payment for unused sick leave was to be
included in final average compensation under the Retirement Plan is also consistent with other
negotiations over retirement benefits. In or around 2006, primarily to address the income tax
implications of payments of accumulated leave, including sick leave, made at retirement, the
City also negotiated with ASPTEA over inclusion of all accumulated leave payments including
the sick leave payments made to employees at retirement paid to the City’s 401(a) deferred
compensation Plan. The City’s discussions resulted in additional payments to employees at
retirement of an extra 2.35% of the accumulated leave payment to compensate employees for the
difference between the 10% penalty for early withdrawal of 401(a) funds and an assurance that
not only would the sick leave payments continue to be included in the calculation in final
average compensation but that the additional 2.35% would also be included in final average
compensation for benefit calculation purposes under the Retirement Plan.
Ex. 108. The
agreement between the City and ASPTEA prepared by Lera Riley, Retirement Board Member
(see e.g., Ex. 316), and Personnel Director confirmed that sick leave payments were part of
compensation under the Retirement Plan benefit calculation formula:
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Both the accumulated leave payment and the additional 2.35% payment will be
subject to the retirement contribution and related tax withholdings as required in
order for them to be covered compensation for purposes of the pension
calculation.
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Ex. 108, at FP008229.
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See TR 04/27/15 (AM) (Charlene Limbeck), pp. 44:22-45:4.
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All of the evidence clearly established that for 16 years, the sick leave payments were
intended to be compensation for purposes of calculating retirement benefits under the Retirement
Plan. Defendants’ attempts to unilaterally alter their obligations 16 years later were invalid.
II.
DEFENDANTS VIOLATED PLAINTIFFS’ VESTED RIGHTS, THE ARIZONA
CONSTITUTION AND THE RETIREMENT PLAN
A.
Defendants’ Changes to the Benefit Formula Diminished Plaintiffs’ Pension
Benefits in Violation of their Vested and Constitutionally Protected Rights
and Violated the terms of the Retirement Plan
Since the payment of a portion of accrued, unused sick leave began, the uninterrupted 16
year period of its inclusion in compensation and final average compensation was, as of July
2012, part of the Retirement Plan benefit formula and part of Plaintiffs’ rights that could not be
diminished under Arizona law and the Constitution.
Under Arizona law, “[a] public employee has a right to rely on the statutory or
contractual provisions governing benefits as they existed at the time he entered into the contract
of employment.” Godbey v. Roosevelt Sch. Dist. No. 66 of Maricopa County, 131 Ariz. 13, 21,
638 P. 2d 235, 243 (App. 1981) (citing Yeazell v. Capins, 98 Ariz. 109, 402 P. 2d 541 (1965)).
A change that is beneficial to employees in computation of retirement benefits “automatically
becomes part of the contract…” Thurston v. Judges' Ret. Plan, 179 Ariz. 49, 50, 876 P.2d 545,
546 (Ariz. 1994). The Arizona Constitution provides further protections for public retiree
benefits by providing, inter alia, that:
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Membership in a public retirement system is a contractual relationship that is
subject to article II, §25, and public retirement system benefits shall not be
diminished or impaired
Article 29 of the Arizona Constitution §1(C).
Defendants’ unilateral changes to the deliberate policy and practice of including
payments for accrued unused sick leave in the calculation of compensation and final average
compensation for existing Retirement Plan Members changed the formula for calculating
benefits and diminished Plaintiffs’ retirement benefits in violation of their vested rights and the
Arizona Constitution. Fields v. Elected Officials' Ret. Plan, 234 Ariz. 214, 221-22, 320 P.3d
1160, 1167-68 (2014). In Fields, the Arizona Supreme Court held that that the changes to the
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plan’s funding policy diminished and impaired the retirement benefits of retired judges in
violation of the State Constitution Article 29, § 1(C) because, inter alia, “it makes it more
difficult for retired members to receive future benefits by increasing the rate of return required to
fund an increase from 9% to 10.5%. S.B. 1609 also makes it less likely that retired members will
receive the maximum 4% increase in benefits by tying increases to the Plan's funding ratio.” 234
Ariz. at 221-22, 320 P.3d at 1167-68 ¶36. In so holding, the court rejected the argument that the
benefit increases after retirement were not part of the “benefit” protected by the Arizona
Constitution’s Pension Clause. 234 Ariz. at 219, 320 P.3d at 1165. Noting that the legislature
has never promised to pay a specific dollar amount, but “rather it has provided a formula by
which the promised amount is calculated” the court held that the benefit that was protected under
the Pension Clause of the Arizona Constitution included the formula that produces the promised
benefit.
Id. The court also held that retired judges had vested rights in the formula used to
calculate future benefit increases and rejected the argument that it was not a vested right because
the formula was “contingent upon future events—for example, a rate of return sufficient to
trigger the benefit increase.” 234 Ariz. at 220-21, 320 P.3d at 1166-67 ¶30. See also Yeazell, 98
Ariz. 109, 402 P.2d 54 (change in formula for final average compensation from highest 3 years
to highest 5 years was unlawful and violated vested rights even though Yeazell was only in the
system 10 years out of his 20 years total at the time of the change from highest three to highest
five years);13 Norton v. Ariz. Dep't of Pub. Safety Local Ret. Bd., 150 Ariz. 303, 304, 723 P.2d
652, 653 (1986) (PSPRS interpretation and change of position regarding eligibility of
communications technician to participate in PSPRS retirement system could not be applied to
employee despite his termination and subsequent reinstatement in the PSPRS system when he
was reemployed because such change violated vested rights); Yeazell, 98 Ariz. 109, 402 P.2d 54
(change to formula used to calculate final average compensation from highest three years to
highest five years of salary was unlawful); Pendergast v. Arizona State Ret. Sys., 234 Ariz. 535,
13
Defendants’ changes unlawfully reduced the benefits of both Intervenors who have now
retired and suffered harm and the active Members of the Retirement Plan like the individual
Plaintiffs and the members of the Units 2, 3 and 7 that Local 2384, Local 2960 and ASPTEA
represent. See Fields, 234 Ariz. at 220-21, 320 P.3d at 1166-67 ¶30; Yeazell, 98 Ariz. 109, 402
P.2d 54.
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539, 323 P.3d 1186, 1190 (App. 2014), review denied (Jan. 6, 2015) (right to purchase service
credit for retirement benefits is a benefit that cannot be diminished or impaired).
In Norton, the Arizona Supreme Court rejected a similar argument that Defendants made
at trial that a subsequent determination by an administrative board that changed a prior practice
or statutory interpretation could somehow alter an employee’s contractual rights to retirement
benefits. In Norton, the court held that the Public Safety Personnel Retirement System
(“PSPRS”) violated the plaintiff’s vested rights when PSPRS determined that the plaintiff could
not reinstate his membership and prior service credits in the PSPRS system upon his subsequent
reemployment. 150 Ariz. at 306, 723 P.2d at 655. At the time the plaintiff terminated
employment as a communications technician and withdrew his contributions, PSPRS had a rule
that members who left and returned within to two years could repay their contributions and
reinstate their prior credit. Id. at 304, 723 P.2d at 653. After the plaintiff terminated his
employment as a communications technician, the Arizona law enforcement merit system council,
the board responsible for designating the category of employees eligible for membership in the
PSPRS system changed its prior practice and determined that the position of communications
technician was no longer eligible for inclusion in the PSPRS system. After that council
determination was made and less than two years after he terminated employment, the plaintiff
was re-hired into his prior position as a communications technician. Id. Based on the council
determination that communications technicians were not eligible for inclusion in the PSPRS
system, the Local Retirement Board of the PSPRS system denied Norton reinstatement in the
PSPRS system when he was reemployed. Id. Citing Yeazell, the Arizona Supreme Court reversed
the lower court’s ruling and held that by determining that Norton was no longer eligible for
ongoing membership and inclusion in the system, PSPRS violated his vested rights:
Norton had a contractual interest in returning within two years to his job and its
pension plan as it had been before his resignation. He had the right to leave his
employment, if he wished, with the knowledge that if he was reemployed within
two years, not only would his service credits be reinstated, but also his
membership in PSPRS.
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Id. at 306, 723 P.2d at 655.
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Similarly, in Bowles v. Washington Dep't of Ret. Sys., 847 P.2d 440, 447 (Wash. 1993),
Washington’s Supreme Court rejected the argument that Defendants made at trial here, that
because there was somehow never some “official” adoption or approval (that was simply not
required) of the practice of including all accrued, unused sick leave paid at retirement in
compensation, that practice could not have become part of the employees’ vested rights. Even
though it had already agreed with the state’s newly adopted interpretation of the pension statute
at issue and had held that the only sick leave payouts that could be included in final average
compensation under the statute were those based on sick leave that had accrued in the last two
years of employment, the Washington Supreme Court reached a similar conclusion that all sick
leave payments must be included in final average compensation because to do otherwise would
violate the employees’ vested rights. Id. at 446-48. The court held, inter alia, “we … decline to
adopt the Department's position that an administrative practice cannot become binding until
after the practice has been officially approved of” by the retirement system’s managers. Id.
(emphasis supplied). The court held: “The proper focus is not on bureaucratic approval
processes, but on the nature and duration of the administrative practices at issue.” Id. In finding
that the state’s undisputed administrative practice of including all unused sick leave payments in
final average compensation could not be eliminated without violating the vested rights of state
employees, the court explained:
We look instead to whether the duration and nature of the administrative practice
is such as to create vested rights in their future continuation. Here, the Department
consistently and routinely refused to take into account employers' percentage
limitations for a period of 4 to 10 years after learning of the existence of these
limitations. The Department's own 1980 memorandum terms its action as a
“change”, not just a clarification, of practice. We conclude that after 4 to 10 years
of consistent application, the practice was no longer in an experimental phase but
had become an established policy. We conclude the Department violated the
pension rights of PERS I employees when it reduced pension levels by changing
its practices with regard to employers' percentage limitations.
Id. at 448.
In Kranker v. Levitt, 281 N.E.2d 840, 841 (1972), a case cited and relied on by the New
York Court of Appeals in Kleinfeldt v. New York City Emps.' Ret. Sys., 324 N.E.2d 865, 868–69
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(NY 1975), which in turn was cited with approval by the Arizona Supreme Court in Fields,14
New York’s highest court affirmed a ruling that found that the state’s uniform course of conduct
of including cash payments of accumulated vacation in determining salary for the computation of
retirement benefits created a valid contract and gave rise to vested rights that could not be
impaired. There, as here, the state admitted that such payments had been included in computing
final average benefits for a number of years, that the inclusion had been known to the legislature
and the cost of the disputed retirement benefits had been repeatedly appropriated by the
legislature, and had conceded that inclusion was somehow just an “administrative act” of the
Comptroller who was authorized “to adopt… rules and regulations for the administration” of the
system. The court rejected those arguments stating:
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The Comptroller's formula in arriving at an employee's ‘final average salary’
has included the thirty days vacation pay ingredient, in fact he is still
employing this benefit. There is no doubt that the Legislature was aware of
this course of conduct of the contracting parties. This act of the Comptroller
when accepted and acted upon by the employees, became a contract and there
was no doubt as to what the contract meant. It must be presumed that the
Legislature had knowledge of the appropriations provided in the approved
budgets for the past thirty years. Under these circumstances the practical
construction of the parties by a uniform course of conduct under all
administrations of the State government for more than thirty years is of
controlling importance. So, when the meaning of a statute is doubtful, a
practical construction by those for whom the law was enacted, (employees), or
by public officers whose duty it was to enforce it, (here the Comptroller and
Legislature), acquiesced in by all for a long period of tiem [sic], * * * ‘is
entitled to great if not controlling influence.’ Chicago v. Sheldon, 9 Wall. 50,
54, 19 L.Ed. 594; also People ex rel. Williams v. Dayton, 55 N.Y. 367, 378.)
…Obviously thousands of retired employees have been benefited over a long
period of time without objection as to the legality of the method by which
these benefits were bestowed, and it would now seem too late to raise a
question fraught with such dangerous consequences for all public servants
both active and retired. There is no question but that portion of Chapter 503 of
the Laws of 1971 which excludes accumulated vacation pay is obnoxious to
Article 5, Section 7 of the New York State Constitution.
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Id. Here, just as in Norton, Kranker and Bowles, there is similarly no question that the agency
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charged with managing, administering and construing the statute did so during Plaintiffs’
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employment in a deliberate manner without any objection, and that the City was aware of the
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14
234 Ariz. at 220, 320 P.3d at 1166 (noting New York’s Constitutional protections for
28 public employee retirement benefits, NY Const. Art. 5 § 7, which is nearly identical to
the Arizona Constitutional protections contained in Ariz. Const. Art. 29 §1(C).)
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practice, appropriated funds for the practice and went to the voters numerous times to amend the
Charter without ever proposed that the Charter be amended or drafted to remove the sick leave
payments from the definition of compensation.
The 16 year deliberate inclusion of sick leave in retirement benefits by the administrative
body charged with administration, management and operation of the Retirement Plan and for
construing and carrying into effect the Retirement Plan provisions, Retirement Plan §4.1 is
dispositive proof that inclusion of sick leave in compensation was a term of the Retirement Plan.
In Long v. Dick, 87 Ariz. 25, 29, 347 P.2d 581, 583-84 (1959), the Arizona Supreme Court
rejected a challenge to the formula that had been used by the State Superintendent of Schools for
computing “average daily attendance” at schools for purposes of school funding for the past 12
years. The court acknowledged that the language of the statute appeared broad enough to
encompass both parties’ competing interpretations of the statute but held that the it was
“persuaded…by reason of uninterrupted administrative interpretation” as demonstrated through
the administrative agency’s 12 years of administering school funding was correct. The court
noted that despite changes to the statute in the intervening years, the administrative practice had
remained the same demonstrating that no substantive changes had been made by the legislature:
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In our final conclusion in this case, we give controlling weight to the fact that
during this twelve-year period, the members of the legislature were repeatedly
made aware of the operation of the statute and must have known its administrative
interpretation and application. Yet, no change of any material or substantial nature
occurred in the method of computing daily attendance for high schools. …
Acquiescence in meaning over long periods of time, if not manifestly erroneous,
will not be disturbed. We are impressed with the argument that a clearer
indication of legislative intent can scarcely be found, and that there is here not
merely acquiescence on the part of the legislature, but as a practical effect, an
endorsement of administrative conduct.
Long, 87 Ariz. at 28, 347 P.2d at 583-84 (citation omitted).
As in Long, here the statutory definition is broad enough to encompass a meaning that is
consistent with the agency’s long-standing uninterrupted practice. See Retirement Plan § 2.13.
Similarly, the Retirement Plan and the City made the City Council and the public well aware of
the deliberate practice of inclusion of sick leave payments in final average compensation under
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the Retirement Plan. From the time the sick leave payments began in 1996 and continuing for 16
years, both the Retirement Plan and the City transmitted and published audited comprehensive
annual financial reports setting forth the Retirement Plan’s intentional inclusion of sick leave
payments in final average compensation to the City Council and to the voters of the City of
Phoenix who, through their power to vote on amendments to the City Charter, are the ultimate
authorities on the Retirement Plan. Changes to the Retirement Plan were enacted and
recommended during those 16 years but no changes were enacted to the definition of
compensation or final average compensation. The benefits becoming part of the formula for
calculating retirement benefits under the Retirement Plan and part of the employees’ contracts of
employment through the deliberate and well-known uninterrupted administrative practice of
inclusion of sick leave in final average compensation and acquiescence by the City. See also
Bohannan v. Corp. Comm'n, 82 Ariz. 299, 303, 313 P.2d 379, 382 (1957) (“Uniform
acquiescence of meaning, if it is not manifestly erroneous, will not be disturbed, at least in cases
of doubt, for injustices are likely to result after a long period of time during which many rights
will necessarily have been acquired.”); N. Haven Bd. of Ed. v. Bell, 456 U.S. 512, 535 (1982)
(“Where ‘an agency's statutory construction has been ‘fully brought to the attention of the public
and the Congress,’ and the latter has not sought to alter that interpretation although it has
amended the statute in other respects, then presumably the legislative intent has been correctly
discerned.’”) (quoting United States v. Rutherford, 442 U.S. 544, 554, n. 10 (1979), quoting
Apex Hosiery Co. v. Leader, 310 U.S. 469, 489 (1940)); United States v. Kennedy, 278 F.2d 121,
122-26 (9th Cir. 1960) (“The fact that Congress continued the same appropriation with
knowledge of this administrative understanding and practice constitutes virtual ratification of the
administrative construction.”).
Having administered the Retirement Plan consistently for 16 years, the Retirement Board
was not free to change the administrative practice based on a sudden determination that the 16
year practice purportedly no longer comported with the Retirement Plan in order to follow an AR
that the City Manager had no authority to enact. Defendants’ actions violated Plaintiffs’ vested
rights, the Arizona and United States Constitutions, the Retirement Plan and the Board’s own
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policies. See Board Policy 47, Ex. 41, at D000893 (“Employee has a right to be retired under the
pension plan in force when his employment began and that such right continues until the
employee manifests an intention to be bound by modifications to the pension plan provided in
subsequent legislation.”). See Kubby v. Hammond, 68 Ariz. 17, 22, 198 P. 2d 134, 138 (Ariz.
1948) (“We deem it significant that for seventeen years the officers of the City of Phoenix
charged with construing and administering the ordinance in question have held that defendant's
type of business was permitted in ‘Class B Business Districts.’”); Natural Res. Def. Council v.
U.S. E.P.A., 526 F.3d 591, 607-08 (9th Cir. 2008) (rejecting argument that prior agency practice
and rule was one of “administrative convenience only and concluding that agency’s “inconsistent
and conflicting position …causes its interpretation of amended section 402(l)(2), as reflected in
the storm water discharge rule, 40 C.F.R. § 122.26, to be an arbitrary and capricious one.”); Nat'l
Wildlife Fed'n v. Nat'l Marine Fisheries Serv., 524 F.3d 917, 932 (9th Cir. 2008) (citations
omitted) (interpretation of a statute that gives no force to portions of the text are disfavored and
interpretation is “unreasonable in light of the regulation's prior interpretation and application.”);
U.S. Parking Sys. v. City of Phoenix, 160 Ariz. 210, 212, 772 P. 2d 33, 35 (“where it clearly
appears that the board's position is wrong, we need not defer to the board. Particularly is this so
where there is no showing of a long-standing interpretation by the agency. ”); Comm'r of Internal
Revenue v. Monarch Life Ins. Co., 114 F.2d 314, 323 (1st Cir. 1940) (“Thus for thirteen years,
the administrative practice supported the taxpayer's contention. The Commissioner should not
now be permitted to apply retroactively against the petitioner any new regulations made after the
tax years in question, particularly after Congressional re-enactment under the previous
regulations.”).
B.
Evidence at Trial Clearly Established that Inclusion of Sick Leave in
Compensation and Final Average Compensation Is Part of the Benefit
Formula
For 16 years, inclusion of all payments for accrued, unused sick leave was included in
compensation in calculating retirement benefits under the Retirement Plan. Even before the sick
leave payments began, the Retirement Board recognized that it had an obligation to consider
whether the payments met the Charter’s definition of compensation and to determine the
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formulas for final average compensation. See Ex. 70 (Retirement Board member Warren stating
in June 1996 Retirement Board must be part of any issue involving retirement and requesting
sick leave payout program be placed on next Retirement Board agenda).
At the June and July 1996 Retirement Board meetings, the inclusion of sick leave
payments in compensation under the Retirement Plan was thoroughly discussed and assurances
were made to the Retirement Board that the actuarial impact of inclusion of the payments in final
average compensation had been reviewed and that both the City and the employees would be
responsible for funding the increases in the Retirement Benefits resulting from the parties’
agreement to commencement payment of sick leave at retirement. Ex. 70, 71. The Retirement
Board also discussed and made clear that the Retirement Plan would be required to elect to have
the sick leave payout not count as service credit under the Retirement Plan. Ex. 71. Former
Retirement Program Administrator, Duamel Vellon and Michael Hamblin, former attorney for
the City, attended both the June and July 1996 meetings. Id. At the July 1996 meeting, eight of
the nine Retirement Board members attended, including: Mr. Warren; the Retirement Board
Chair Beth Ford; City Personnel Director Carlos Arauz; Finance Director Kevin Keogh, Deputy
City Manager Pat Manion and City Treasurer Barbara Alvarez.. Ex. 71.
From that point forward, the Retirement Plan included in its statutorily required annual
certifications to City Council that inclusion of sick leave payments at retirement in compensation
was a “Plan Provision.” See Ex. 69, at p. 68 (FP-WP-000072), Ex. 52, 53, 54, (stating under
“Summary of Plan Provisions” that “Inclusion of the sick leave payout in the calculation of final
average compensation began July 1, 1996.”). Less than a year later, both Retirement Program
Administrator Vellon and City Assistant Personnel Director Walsh who attended both the June
1996 and July 1996 Retirement Board meetings confirmed in sworn statements submitted in
another litigation in which the City and Retirement Plan were successful that sick leave
payments at retirement were included in final average compensation under the Retirement Plan.
In Baldwin v. City of Phoenix et. al. No. CV 96-22584 (Maricopa Cty Super. Ct.), Defendants
confirmed that the plaintiff, Mr. Baldwin, who retired from the City in December 1996, already
had the portion of his unused sick leave hours paid at retirement paid included in final average
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compensation. Defendants also distinguished between the sick leave payments at retirement and
similar payments and the right to be paid for the value of unpaid sick leave credits have the value
of those credits likewise included in final average compensation. The sworn statements, inter
alia, recited the Retirement Plan provisions for compensation and final average compensation
and stated that amounts “not paid in cash to, or for, the employee” have not been included in
compensation, salary or wages, but that accrued unused sick leave that the employee elected to
be paid at retirement was included in final average compensation under the Retirement Plan. Ex.
61, at ¶¶ 4, 5, 16, 18, 30, 32, 45, 47-51; Ex. 62, at ¶¶8, 9, 16, 34, 77.
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The City Auditor and the City Finance Director, who is a Retirement Board member,
likewise certified that the sick leave payments are part of the benefit formula and included in
final average compensation under the Retirement Plan and did so continuously and repeatedly
from the 1996-1997 fiscal year through the 2011-2012 fiscal year. In October 1997, Finance
Director Kevin Keogh transmitted the City’s Comprehensive Annual Financial Report
(“CAFR”) for the fiscal year ending June 30, 1997, in which he stated that City Management
took full responsibility for the statements contained therein and that “[t]o the best of our
knowledge and belief, this report is accurate in all material respects…” Ex. 301, at p. 301-10.
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The 1997 CAFR confirmed both the start of the sick leave payments to the employees
represented by ASPTEA and that such payments were intended to be included in compensation
under the Retirement Plan as follows:
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Compensated Absences
Beginning July 1, 1996, the City began converting excess sick leave into cash
payments at termination for Supervisory, Professional, Middle Management and
Executive employees. … The June 30, 1997 annual financial report will be the
first audited report to include an accrual for Supervisory, Professional, Middle
Management and Executive employees and an actuarially determined total sick
leave liability.
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Ex. 301, at p. 301-60. Under the heading “Sick Leave” the 1997 CAFR states in relevant
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part:
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Sick leave is continuously accumulated at the rate of 15 days per year but can
only be taken in the event of illness. With the exception of police, firefighters,
and supervisory, professional, middle management and executive employees,
sick leave is not convertible to a cash benefit. However, upon retirement, for
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every 173 hours of unused sick leave, one month of creditable service is
allowed in determining a General Employee Retirement Plan pension. A
balance of over 80 hours after making the above calculation will allow an extra
month of creditable service. The dollar amount of any cash payment as
described below is included in the final average compensation, but the hours
used are excluded from credited service.
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Ex. 301, at p. 301-85 (emphasis supplied). Each and every CAFR thereafter, from Fiscal Year
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1997 to 2012 say exactly the same thing -- that payment for accrued, unused sick leave is
7
included in final average compensation under the Retirement Plan. Bond offering disclosures
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also advised the investing public and the SEC that sick leave payouts at retirement are part of
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final average compensation under the Retirement Plan. Ex. 298, 299.
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The Retirement Board, Retirement System staff, and the City and its Management team
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also repeatedly and consistently confirmed that payments for accrued, unused sick leave were
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included in compensation under the Retirement Plan. The Retirement Plan’s Summary Plan
13
Descriptions, which are established to advise employees about their retirement benefits, TR
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04/29/15 (PM) (Cathy Gleason), p. 74:2-12, state that they are a “summary of certain provisions
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of the Retirement Law and the administrative policies and procedures adopted by the COPERS
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Board in accordance with the Charter,” reported that the Retirement Plan includes sick leave in
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compensation and final average compensation. Ex. 38.
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Any applicable lump sum payments for vacation, compensatory time, etc.,
will be added to your last three years before comparison with other periods of
payment….
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Id. at D000246.
Also, Pat will have the option of receiving compensation for a portion of
unused sick leave. The vacation and sick pay is added to Pat’s highest 36
months of wages when figuring her FAS. Her vacation and sick pay increased
her three-year average.
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Pat’s FAS is calculated as follows:
$51,000
2004 Salary
$52,000
2005 Salary
$53,000
2006 Salary
$5,700
VACATION PAY & SICK PAY
$161,700
TOTAL
The total for the past three years will then be divided to calculate her
monthly FINAL AVERAGE SALARY.
$161,700.00 divided by 36 equals $4,491.67 per month.
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Thus, Pat’s FAS is $4,491.67 per month.
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Ex. 38, first page and pp. 7-8 (D000247); Ex. 39, first page and pp. 6-7.
descriptions also advise employees that if they have questions, they should review the audited
financial reports, or attend presentations or seminars or attend counseling sessions by the
Retirement Systems offices. Id., at p. 20 (D000260).
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The summary plan
Each and every one of those audited financial reports, counseling sessions, presentations
and seminars provided the same information as well as new orientation sessions, (until a few
months prior to July 2012 when the sick leave snapshot was effective) with respect to unused
sick leave payments made at the time of retirement - all of those payments would be included in
final average compensation if the last year of retirement was one of their highest years. TR
04/30/15 (PM) (Donna Buelow), pp. 34:13-36: 24. Every single class, seminar and presentation
provided to Plaintiffs and all other Members of the Retirement Plan at retirement planning
seminars and sessions from 1996 until a few months prior to July 2012 advised Retirement Plan
Members that their final average compensation under the Retirement Plan included all payments
for unused sick leave at retirement. TR 04/30/15 (PM) (Donna Buelow), pp. 39:8-14.15 Estimates
prepared by the City’s Retirement office were prepared using the Retirement System’s computer
system, which was programmed to estimate future retirement benefits by including estimated
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See, e.g., Ex. 78 (received by Plaintiff Willie Price in or around 2000: “These [sick leave
payout] hours (238.5) reduce the sick leave service credit conversion for retirement, but
increases [sic] Final Average Compensation (FAC)”); 79 (showing calculation of sick leave
payout that increases the Final Average Compensation); 80 (“Increasing Your Final Average
Compensation •Comp Time Payout • Sick Leave Payout •Vacation Sellback • Vacation
Payout”); 81 (“Final Average Salary (FAS) If highest 36 months is final 36 months FAS includes
all retirement applicable payouts at retirement including sick leave, vacation and comp-time”);
82 (“Increasing Your Final Average Compensation •Comp Time Payout • Sick Leave Payout
•Vacation Payout”); 83 (“• Final Average Compensation If high 36 months is last 36 months we
include all retirement applicable payouts at retirement including sick leave, vacation and comptime”); 85 and 87 (received by Plaintiff Joan Olson in 2007: “•Final Average Salary (FAS) •If
high 36 months is last 36 months we include all retirement applicable payouts at retirement
including sick leave, vacation and comp-time.”), 86 (received by Joan Olson in 2006:
“•Increasing Your Final Average Salary If high 36 months is last 36 months we include all
retirement applicable payouts at retirement including:•Comp Time Payout •Sick Leave Payout
•Vacation Payout”), 88 (attended by Plaintiff Stuart Casey and Paul Ennis in 2012: “•Final
Average Salary (FAS) •Applicable payouts to the 401a/457 plans will be added to your last 3
years of retirement-applicable earnings before comparison to other periods of earnings •Sick
Leave (if qualified by MOU/Employee Agreements) •Vacation •Comp-Time”); 89 (received by
Plaintiff Vivian Escobar in or around late 2003 or early 2004, Trial Transcript Day Five am, at
p. 8:4-19: “•Final Average Compensation (FAC) If high 36 months is last 36 months we include
all retirement applicable payouts at retirement including sick leave, vacation and comp-time.”).
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sick leave accruals and all payouts of those future sick leave accruals in the calculation of
retirement benefits without any limitation on the amount of future payouts of sick leave that
could be included in final average compensation. See Ex. 90, at FP-SC-00017.16
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When the Arizona State Correctional Officer Retirement Plan (“CORP”) system was
opened up to City 911 dispatchers, educational materials were prepared by the Retirement Plan
and information meetings were held informing City 911 dispatchers about the differences
between the Retirement Plan and the CORP system. This information advised employees that
one of the important differences between the CORP Plan and the Retirement Plan was that all
sick leave was included in final average compensation under the Retirement Plan. Ex. 84
(received by Plaintiff Willie Price in or around 2002: “•Final Average Compensation •Phoenix –
Includes payments at retirement for unused vacation and sick time.”).
dispatchers had no interest in going to the CORP system even though they could retire earlier
under that plan partly because of the differences between that system and the Retirement Plan.
TR 04/27/2015 (PM) (Jason Stokes), p. 43:1-10.
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Ultimately 911
The educational materials provided at seminars held in September 2006 regarding the
deferred compensation payments made to the 401(a) Plan that the City negotiated with the labor
associations likewise advised employees with their election materials that
“Both the
accumulated leave payment and the additional 2.35% payment are subject to the regular
retirement and tax withholdings in order for them to be covered compensation for purposes of
the pension calculation.” Ex. 110, at FP-VE-000035. See also TR 05/06/15, p. 8:4-19 (stipulation
that Plaintiff Escobar received Ex. 110 in or around September 2006). The materials provided to
ASPTEA at that time also advised that no future Retirement Plan changes were planned and that
the Retirement Plan “will count AL [Accumulated Leave] as compensation for purposes of
calculating FAC. This is consistent with current practice.” Ex. 112, at FP008162, FP008166.
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For example, Plaintiff Stuart Casey received a retirement benefit estimate in February 2012
that was calculated by projecting that 25% of Mr. Casey’s projected sick leave hours above 250
(704.75 hours) included in his final average compensation at his base hourly rate. TR 04/30/15
(AM) (Stuart Casey), pp. 41-43. However, at retirement only 664.75 of Mr. Casey’s 704.75 sick
leave hours eligible for a payout were included in his final average compensation. Ex. 90, at FPSC-00017; TR 04/30/15 (AM) (Stuart Casey), p. 48.
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Defendants’ witnesses, including Deputy City Managers, Retirement Board members,
supervisors and human resources and labor relations staff, testified that it was well known that
sick leave was included in the calculation of compensation under the Retirement Plan. As Ms.
Steward, the former labor relations director for the City testified, employees knew “because
that’s just what the practice was. That’s what was happening…it was just a known practice that
was occurring.” TR 04/28/2015 (PM) (Lori Steward), pp. 85:18-86:9. In other words, “[i]t was
general knowledge.” Id. at p. 87:2-9. Employees were encouraged to save up their sick leave and
told that one of the important reasons that they should save up is so that they could “maximize”
their final average compensation. Supervisors used it as an incentive and the City used it as a
retention tool. TR 05/11/2015 (PM) (Rick Naimark), pp. 107-108; TR 04/30/2015 (AM) (Stuart
Casey), pp. 13-14.
In addition to all of the Retirement Plan and City certifications, communications,
seminars, certified financial reports and bond offerings, their requirements to certify the actuarial
contributions, the summary plan descriptions, educational and other materials establishing the
inclusion of sick leave in final average compensation, the evidence shows that both the
Retirement Board and the City were constantly aware of and endorsing the fact that this
inclusion was indeed a term of the Retirement Plan. In addition to all of the documents,
communications and financial reports, the Retirement Board looked at the sick leave payouts in
other contexts as well. For example, in October 2002, the Retirement Board adopted Policy 173,
which defines for purposes of sick leave service credit, what constitutes the “unused service
credit” which distinguishes between the sick leave that is paid out at retirement and is
compensation (or “eligible payment”) and the unused sick leave that must be included in
Retirement Plan service credit. The policy provides that unused sick leave under the Retirement
Plan is the amount of sick leave as to which the individual has not elected to receive any
payment. Ex. 41, at D001000. TR 04/30/2015 (PM) (Donna Buelow), p. 106:118-p.107:25.
The Retirement Board also periodically conducted experience reviews and reviewed the
actuarial analyses prepared by the Retirement Plan’s actuaries. During these reviews, the Board
would discuss the elements of compensation and the impact that sick leave, along with other
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components of compensation, had on other components of the Plan. TR 05/06/2015 (Donna
Buelow), pp. 28:7-29:17. For example, in April 2005, at a meeting of the Retirement Board that
was also attended by the City Manager, the Retirement Plan’s actuary, and the Retirement
Program Administrator in a discussion in which the Minutes reflect the City Manager, and the
rest of the Retirement Board actively participated, the Retirement Board discussed the payment
for unused sick leave and its inclusion in final average compensation. Ex. 316. The Retirement
Plan’s actuary reviewed the actuarial assumptions with the Board including the actuarial
assumptions that were used for inclusion of lump sum payments in compensation under the
Retirement Plan. TR 05/06/2015 (Donna Buelow), pp. 28:7-29:17. During that review, the
actuary explicitly advised the Board that the “current assumed increase due to lump sum
payments and granting of service credit for portions of unused sick leave is 9%.” Ex. 316, at
D003661.
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Defendants cannot deny that all payments for unused sick leave were intentionally
included in compensation for 16 years. Instead, Defendants asserted that they are free to act as if
history began on the moment the then-current Retirement Board, consisting primarily of City
employees who reported up to the City Manager, acceded to political pressure and agreed with
the City to stop including such amounts in the calculation of benefits under the Retirement Plan
(even though the Retirement Plan was receiving updates from the Pension Reform Task Force
and the Task Force never recommended such a change for current employees, Ex. 149, 150, 315,
at D003782, and despite the fact that the actuaries hired to advise the Task Force had concluded
that such a change, the impact of eliminating all payments in compensation and final average
compensation for accrued vacation and sick leave payments at retirement even for new and
current employees was actuarially speaking, a “pebble” which was a small amount, TR
05/06/2015 (Donna Buelow), pp. 56:3-57:1; Ex. 315, at D003782).17 At trial, Defendants’
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17
This political pressure was apparently motivated by press coverage after the former City
Manager Frank Fairbanks collected a relatively large retirement benefit that included the value of
his sick leave payment at retirement, which was 60% of his accrued, unused sick leave in his
compensation. See also TR 04/29/15 (PM) (Lori Steward), pp. 39:9-16, 16:13-25-17:1-12
(“There had been a lot of public attention to the pension system, not necessarily just with the
City of Phoenix, it’s a nationwide issue right now, but specifically in Phoenix there had been
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witnesses also asserted that the prior Board did not vote or somehow determine whether
compensation under the Retirement Plan included the sick leave payments made at retirement
and that it was just an “administrative default” and that because “there was never a question
asked before the “City or the Board that said should this be included in compensation” there was
somehow no prior determination. See, e.g., TR 05/08/2015 (Janet Smith), Day 6, p. 71:2-13, TR
05/11/2015 (AM), pp. 68:4-69:6; TR 05/11/2015 (PM) (Rick Naimark), pp 29:11-30:2. While
this is contrary to the evidence, it is also a red herring.18 Under its own policy in effect for
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some media stories, a lot of attention of our public officials starting to talk about the pension.
The mayor even initiated a task force….”). Craig Harris, Arizona Pension Systems A Soaring
Burden, ARIZ. REP., Nov. 14, 2010 (available at http://www.azcentral.com/news/articles/
2010/11/12/20101112arizona-pension-funds.html); Craig Harris, Generous Pension Benefits for
Arizona Elected Officials, ARIZ. REP., Nov. 15, 2010 (available at http://www.azcentral.com
/news/articles/arizona-pension-funds-elected.html); Craig Harris, Arizona Pension Plan for
Police, Fire Adds to Cost, ARIZ. REP., Nov. 16, 2010 (available at http://www.azcentral.com/
news/articles/arizona-pension-funds-publicsafety.html); Craig Harris, Some Retired Teachers
Rehired While Drawing Pensions, ARIZ. REP., Nov. 18, 2010 (available at http://www.azcentral.
com/news/articles/arizona-pensions-funds-schools-doubledipping.html); Craig Harris, Arizona’s
Convicted Officials Still Get Pension from State, ARIZ. REP., Nov. 19, 2010 (available at
http://www.azcentral.com/news/articles/arizona-pensions-funds-convicted.html); Craig Harris,
Big Pension Costs Also A Big Burden for Other States, ARIZ. REP., Nov. 20, 2010 (available at
http://www.azcentral.com/news/articles/arizona-pensions-funds-national.html); Craig Harris,
Pension Reform A Difficult Task, ARIZ. REP., Nov. 21, 2010 (available at http://www.
azcentral.com/news/articles/arizona-pensions-funds-solutions.html); Craig Harris, Retiring
Arizona Public Employees Get to Cash in Years of Unused Sick Days, ARIZ. REP., Dec. 20, 2011
(available at http://www.azcentral.com/news/articles/2011/12/20/20111220arizona-retiringpublic-employees-get-cash-years-unused-sick-days.html); Craig Harris, Phoenix Mayor Phil
Gordon Picks City Pension-Reform Panel, ARIZ. REP., Jan. 22, 2011 (available at
http://archive.azcentral.com/community/phoenix/articles/20110122phoenix-mayor-phil-gordonpension-reform-panel.html). The former City Manager’s Retirement Plan compensation based on
sick leave was far in excess of the sick leave accrued by the average Retirement Plan retirees at
the time. TR 05/11/2015 (PM) (Rick Naimark), pp. 85-87 ($9,000 is “roughly what a sick leave
payout was” for Retirement Plan retirees at the time). The City Manager’s pension benefits were
also far larger than the average Retirement Plan retiree’s benefits which were $28,000 or less.
TR 05/11/2015 (PM) (Rick Naimark), p. 86:13-17. It appears that he was also paid excess
benefits under an Excess Benefit Arrangement that is nowhere in the Charter but is instead found
only under Policy 174, an Excess Benefit Arrangement that was designed to fulfill
“constitutional and contractual obligations to provide full retirement benefits” to employees in
excess of those allowed under the Internal Revenue Code, Ex. 41, at D001001.
18
Nothing in the Retirement Plan mandates that the Board had to adopt a “formal” rule before its
interpretation could be effective. The Retirement Plan provides only four instances that address
Retirement Board rules and regulations, none of which require that the interpretation of
compensation or final average compensation must be formally set forth in a rule: § 14.1
(providing Retirement Board must adopt “appropriate” rules and regulations “consistent with the
provisions of this Article” fixing and determining “the amount of service to be credited any
member”) § 4.2(a) (rules and regulations governing elections); § 25.4 (rules and regulations for
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decades (from 1943), a policy that was reaffirmed in 1995 right before the sick leave payments
were considered, the Board shall determine the formulas for determining final average
compensation. Policy 27, Ex. 311, at D002883. After 16 years of intentionally including the sick
leave payments made at retirement in compensation under the Retirement Plan, such terms were
part of the Retirement Plan’s definition of compensation. Regardless of whether inclusion of sick
leave in final average compensation was the result of the Retirement Board’s intentional and well
established administrative practice, a deliberate “policy decision” or based on the determination
in 1996 that compensation under the Retirement Plan actually did require inclusion of the sick
leave payments, Defendants’ 2012 change to Plaintiffs’ retirement benefits to limit that
compensation where none existed before was unlawful under Arizona contract law, the Arizona
Constitution and the Retirement Plan because it unilaterally changed the retirement benefits
promised in the contract of employment.19 See, e.g., Fields, 234 Ariz. at 221-22, 320 P.3d at
1167-68; Norton, 150 Ariz. 303, 304, 723 P.2d 652.
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payment of contributions following death of a Member); and § 26.3 (rules and regulations
regarding installment refunds of accumulated contributions). In each of these instances, the
Retirement Board has adopted Policies including Policy 173, Ex. 41, at D001000 (defining what
is considered unused sick leave that must be included in Retirement Plan service credits and
providing that unused sick leave under the Retirement Plan is only the amount of sick leave as to
which the individual has not elected to receive any payment). In the other instances, the Board
has also adopted Policies. Policy 3, Ex. 41, at D000869-74 (election procedures for Board
members); Policy 54, Ex. 41, at D000901 (surviving spouse eligible for pension cannot opt for
lump sum payment of contributions); Policy 178, Ex. 41, at D001012 (permitting refunds of
contributions made in installment payments if member dies before distributions begin) Policy 55,
Ex. 41, at D000902) (repayment of contributions made by an employee to the retirement fund are
not to be considered wages). The lack of specific policies on the inclusion of sick leave payouts
in retirement benefits where no rules or regulations are required under the Retirement Plan does
not mean the inclusion of sick leave in compensation over 16 years can be ignored. The Board
here consistently described the inclusion of sick leave in final average compensation as a term of
the Plan.
19
The Court previously denied summary judgment on the issue of whether the payments violated
the Charter to both parties, and Plaintiffs therefore do not understand that the Court’s ruling
providing some pre-trial guidance was intended to constitute law of the case. Under Advisement
Ruling Entered January 7, 2014, at p. 3. Even if it were, however, evidence developed at trial
makes it clear that despite the Defendants’ assertions that there was some sort of mistake, the
Retirement Plan was intentionally administered and construed for 16 years to include the unused
sick leave payments as compensation under the terms of Retirement Plan §2.13. See, e.g.,
Kranker, 327 N.Y.S.2d at 261 aff'd, 281 N.E.2d 840 (“when the meaning of a statute is doubtful,
a practical construction by those for whom the law was enacted, (employees), or by public
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III. DEFENDANTS VIOLATED OTHER PROVISIONS OF THE RETIREMENT PLAN
Plaintiffs respectfully submit that inclusion of unused sick leave paid at retirement in
compensation and final average compensation are terms of the Retirement Plan and are vested
and contractual rights protected under Arizona law and the United States Constitution, even in
the absence of an agreement that such payments are salary or wages within the definition of
compensation set forth in §2.13 (or that the 16 year inclusion of such payments in wages and
salary is conclusive), the Charter amply provides for inclusion of the payments of sick leave at
retirement as compensation under the second sentence of the definition of Compensation in
§2.13. That section states:
In case a member’s compensation is not all paid in money, the City Council shall, upon
recommendation of the City Manager, fix the value of the portion of his compensation
which is not paid in money.
That is precisely what happened to the payment of unused sick leave at retirement. Following the
meet and discuss negotiations with APTEA in 1996, and consistent with the Meet and Discuss
ordinance in effect at that time which did not provide for Memoranda of Agreements, upon the
recommendation of the City Manager in accordance with the ASPTEA agreement, the City
Council’s 1996 pay ordinance provided:
(uu) The City Manager is hereby authorized to issue an administrative regulation
establishing guidelines for the cash payment of a portion of accumulated sick
leave hours at retirement for Executives, Middle Managers, and Professional and
Supervisory employees.
Ex. 47, at Section 12(x), (uu).
21
There is no question that the value of sick leave when used during the course of
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employment has a fixed value. It is the base hourly rate paid to the employee for a day of
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employment. In contrast, up until the agreement reached with ASPTEA in 1996, the right to
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accumulate sick leave hours from year to year was a right and benefit of employment that had no
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fixed value. In 1996, upon agreement with ASPTEA and authorization from the City Council in
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officers whose duty it was to enforce it, (here the Comptroller and Legislature), acquiesced in by
all for a long period of tiem [sic]…”). See Dancing Sunshines Lounge v. Industrial Com’n of
Ariz., 149 Ariz. 480, 482-83, 720 P.2d 81, 83-84 (1986) (law of case is policy doctrine with
many exceptions including when there has been a change in the essential facts or issues in the
case or when there has been a substantial change of evidence); see also Cal X-Tra v. W.V.S.V.
Holdings, L.L.C., 229 Ariz. 377, 395, 276 P.3d 11, 29 (App. 2012).
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the pay ordinance, the value of the portion of unused sick leave that was agreed to be payable at
retirement was fixed. The amount of compensation so fixed was not the amount of compensation
paid for sick leave when used. Rather, in agreeing to the sick leave payout and fixing the amount
of compensation, the City (by delegation to the City Manager) established a significantly lesser
value of compensation -- 20% of the employee’s “base rate of pay, ” (later changed to 25%).
Not only was the compensation for unused sick leave fixed in the AR, the term “Base rate of
pay” was also specifically defined in the very first Sick Leave Payout Administrative Regulation.
The 1996 version of A. R. 2.441 states:
9
Base rate of pay- the hourly pay rate paid the employee immediately prior to retirement
excluding premium pay or any other form of additional compensation.
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Ex. 8.
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The AR of course, goes on to specify that payment of the allowed amount of unused sick
13
leave shall be at 20%. In so doing the City clearly fixed a value to a new form of compensation
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that previously had not been paid in money, but in the form of the unlimited right to accrue sick
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leave hours during employment for use, if need be, at any time a legitimate illness or family
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illness arises. Id.; See also, Ex. 45, Personnel Rule 15c2.
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The fact that the payment of a portion of accrued and unused sick leave at retirement falls
18
comfortably within the second sentence of the definition of compensation in Section 2.13 is also
19
confirmed by the sworn declaration of the City’s chosen declarant in the case of Baldwin v. City
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of Phoenix. Ex.62. In that case, the Plaintiff sued the City and the Retirement Plan claiming,
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inter alia, that the value of all amounts expended on the plaintiff’s behalf including the value of
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sick leave not paid in cash at retirement (but rather used to increase the plaintiff’s sick leave
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credited service) and the value of premiums for health, life, and dental insurance, and Medicare
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and old age taxes, etc., should have been included in the calculation of the plaintiff’s Final
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Average Compensation under the Retirement Plan. The Retirement Plan and the City defended
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on the grounds that only those amounts actually paid to the employee or received by the
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employee were compensation and should be included in Final Average Compensation under the
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Retirement Plan.
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While admitting that lump sum payments of accumulated sick leave and accumulated
vacation leave were compensation that an employee was entitled to receive and have included in
final average compensation under the Retirement Plan, the City and the Retirement Plan took
pains to distinguish those payments from amounts that were not actually paid or authorized to be
paid to the employee. The City’s declarant, Assistant Personnel Director for the City, Donald
Walsh, stated, inter alia: “The Board and the City manager have consistently since 1953,
excluded health, life and dental insurance premiums from compensation under the plan because
they are not a “member’s salary or wages paid to him” since they are not paid to or received by
the member.” Ex. 62 at p. 5, 6. Mr. Walsh added that old age insurance and Medicare payments
are likewise paid to the federal government and not paid to the employees. Id. In contrast, the
City stated that holiday pay “is and historically has been included in ‘compensation for pension
calculation purposes,” as were vacation pay and lump sum payments of accumulated vacation,
pay for personal leave days and sick leave. The City likewise confirmed that payment of unused
sick leave at retirement was also included in the retirement benefit calculations stating: “Any
lump-sum sick leave payment is already included in ‘compensation’ for FAC purposes under the
Plan.” Id. at p. 7, ¶34.
In making the point that only those payments of sick leave which the City
had
authorized and for which it had fixed a monetary value constituted compensation for Retirement
Plan benefit calculation purposes, Mr. Walsh traced the history of the authorization for the
payment of accumulated sick leave at retirement and took pains to make clear that while
accumulated sick leave played an important and valuable role in protecting the City’s employees
throughout their employment, prior to July 1, 1996 when the City authorized and fixed the value
of the payment of unused sick leave, “there is no ‘cash value’ of any accumulated sick day while
a person is working.” Id. at p.11 ¶ 56.
At trial, the City attempted to argue that the second sentence of the definition of
compensation in §2.13 is limited to the furnishing of such items as free housing or utilities and
has no application to the agreements with Plaintiffs and City’s determinations setting the value of
unused sick leave (currently set at 25 % of the employee’s base hourly rate). However, the
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examples cited by the City confirm, rather than refute, application of the second sentence of the
definition of compensation in §2.13 in this case. Indeed, the City’s declaration in the Baldwin
case stated:
4
“individuals who, usually at the request of and for the convenience of the
employer receive free housing and utilities, for example, as perquisites, are
entitled to have the fair market value of such perquisites added to their actual cash
pay so that the percentage applied [in the retirement plan formula]is applicable to
the true base salary, which includes the fair market value of the perquisites.”
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Id. at p. 4 ¶17.
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Use of the word “perquisite” is just another way of saying that housing or utilities are a
benefit of the job.20 So, too, is the unlimited right to accrue paid sick leave during employment.
Both are “perquisites” of employment that can be reduced to a monetary value by the City, and
in this case, the value is currently set at 25% of an employee’s base hourly rate. As such, the
payments of unused sick leave at retirement are within the definition of compensation under the
Charter and must be included in the calculation of final average compensation under the benefit
formula contained in the Retirement Plan.
IV.
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DEFENDANTS VIOLATED THE ARIZONA AND FEDERAL CONTRACTS
CLAUSES
Defendants’ changes and reductions in pension benefits violated Article I, Section 10 of
the United States Constitution, which provides that “[n]o State shall … pass any Bill of
Attainder, ex post facto Law, or Law impairing the Obligation of Contracts ….” and 42 U.S.C. §
1983 by imposing a limitation on the amount of sick leave payouts at retirement included in
Plaintiffs’ compensation and final average compensation used to calculate retirement benefits.
See United States Trust v. New Jersey, 431 U.S. 1 (1977); Barnes v. Ariz. State Ret. Sys., No. CV
2011-011638 (Ariz. Super. Feb. 1, 2012), at p. 3 (finding statute increasing contribution is
substantial impairment of state contract “and no significant and legitimate public purpose exists
for the breach”). Defendants also violated Article II, §25 of the Arizona Constitution, which
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20
See e.g. Black’s Law Dictionary defining the word “perquisite” to mean: “A privilege or
benefit given in addition to one's salary or regular wages. — Often shortened to perk.” Black's
Law Dictionary (10th ed. 2014).
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provides that “[n]o bill of attainder, ex-post-facto law, or law impairing the obligation of a
contract, shall ever be enacted” which is interpreted in the same manner as the United State
Constitution.
By imposing a limitation on the amount of sick leave payouts at retirement included in
Plaintiffs’ compensation and final average compensation used to calculate retirement benefits,
Defendants impaired the City’s contracts with Plaintiffs. Plaintiffs gave up rights, compensation
and benefits in exchange for the promises made by Defendants to include their accrued unused
sick leave in the calculation of retirement benefits. The City witnesses admitted they used the
inclusion of the sick leave payout as compensation to encourage employees not to use their sick
leave to save money and to retain valuable City employees toward the end of their careers. TR
05/11/2015 (PM) (Rick Naimark), pp. 107-108; TR 04/30/2015 (AM) (Stuart Casey), pp. 13-14.
Mr. Casey testified that he stayed with the City in part because of the increase in his pension
benefits he knew he would receive when he retired. TR 04/30/2015 (AM) (Stuart Casey), pp. 1314. The ability to include unused accrued sick leave in the calculation of compensation for
retirement benefits is an important right and influenced the agreements made and City
employees’ decisions in using sick leave and in maintaining employment with the City. “The
contract clauses of the federal and Arizona Constitutions are designed to assure that a law will
not deprive a party of the benefit of its contract.” McClead v. Pima Cnty., 174 Ariz. 348, 359,
849 P.2d 1378, 1389 (App. 1992) (citing Tower Plaza Investments, Ltd. V. DeWitt, 109 Ariz.
248, 252, 508 P.2d 324, 328 (1973). In Fund Manager, Pub. Safety Pers. Ret. Sys. v. City of
Phoenix Police Dep't Pub. Safety Pers. Ret. Sys. Bd., 151 Ariz. 487, 491, 728 P.2d 1237, 1241
(App. 1986), the court held that a disability benefit was not a vested retirement benefit but
remanded the case to the lower court to determine whether the elimination of that benefit
violated the contracts clause, stating: “Important benefits, such as accidental disability
retirement, most certainly influence decisions to secure public employment.”
Defendants have not met their burden to escape liability on their interference with
Plaintiffs’ contractual rights. Political expediency, which was clearly a significant motivator of
the change, does not meet Defendants’ burden to show that their interference was necessary to
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achieve an important public purpose. TR 05/11/2015 (PM) (Rick Naimark), pp. 109:17-110:1-25
(Pension Reform Task Force was put together in response to pressures on the pension system);
TR 04/28/2015 (PM) (Lori Steward), pp. 39:9-16 (“[T]here was a lot of pressure on our
retirement system, so it was one of the priorities the City [M]anager that I get the direction from
the negotiations.”), 16:13-17:12 (“There had been a lot of public attention to the pension system,
not necessarily just with the City of Phoenix, it’s a nationwide issue right now, but specifically in
Phoenix there had been some media stories, a lot of attention of our public officials starting to
talk about the pension. The mayor even initiated a task force….”). See State of Nev. Employees
Ass'n, Inc. v. Keating, 903 F.2d 1223, 1228 (9th Cir. 1990) (“Nevada should not have interfered
with the refund right of public employees when it was looking for ways to fund an increase in
post-retirement benefits. States are not free to consider substantial contractual impairments on a
par with other policy alternatives.”).
V.
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PLAINTIFFS NEVER CONSENTED TO CHANGE THE COMPENSATION
USED TO CALCULATE RETIREMENT BENEFITS
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Defendants did not come close to showing that Plaintiffs ASPTEA, AFSCME Local 2960
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and AFSCME Local 2384 had somehow agreed or could agree to modify their retirement benefit
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formulas or to re-characterize certain compensation as no longer constituting compensation
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under the Retirement Plan. Under Yeazell, 98 Ariz. at 115-16, 402 P.2d at 545-46 and Demasse.,
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194 Ariz. at 508, 984 P.2d 1138, 1146, “[t]he burden is on the employer to show that the
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employee assented with knowledge of the attempted modification and understanding of its
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impact on the underlying contract.” There was no assent by any of the Plaintiff labor
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organizations nor by of any of the individual Plaintiffs or Intervenors to modify their contracts of
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employment to limit the amount of unused accrued sick leave that can be included in
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compensation or final average compensation for purposes of calculating retirement benefits
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under the Retirement Plan Retirement Plan.
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Consistent with established law, Plaintiff union and ASPTEA representatives testified
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they would not bargain away vested rights for their members. TR 04/27/2015 (AM) (Jason
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Stokes), pp. 33-34; TR 04/28/2015 (AM) (Frank Piccioli) pp. 39-40; TR 04/28/2015 (AM) (Luis
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Schmidt) pp. 124-125. See Lawrence v. Bd. of Educ. of Sch. Dist. 189, 503 N.E.2d 1201, 1207
(1987) (plaintiff was entitled to receive compensation for accumulated sick leave days at time of
retirement based on rights vested under prior collective bargaining agreements allowing for such
payments and those rights could not be modified even though provisions providing for
compensation were eliminated in collective bargaining agreement in force at time of plaintiff’s
retirement); Matter of Morris School Dist. Bd. of Educ., 708 A.2d 762, 769 (NJ Super. App. Div.
1998) (“Whereas a [u]nion may bargain as to prospective matters such as seniority rights, future
conditions of employment, etc., it cannot bargain away the accrued or vested rights of its
members. So without explicit authority or a power of attorney from the individual members, the
[u]nion in this case could not bargain away the vested rights of its membership, including
plaintiffs’ vested rights.”) (alterations in original) (quoting Hauser v. Farwell, Ozmun, Kirk &
Co., 299 F.Supp. 387, 393 (D.Minn.1969).
Unilateral promulgation of AR 2.441 Revised after binding and enforceable agreements
had been signed with each of the three Plaintiff employee labor organizations (because another
union, Local 777, had signed an agreement to modify retirement benefits), is not evidence of
consent on the part of Plaintiffs. As the court said in Yeazell, “one party to a contract cannot by
his own acts release or alter its obligations. The intention must be mutual.” 98 Ariz. at 116, 402
P.2d at 546 (citation and quotation omitted). In order to establish that there was an effective
implied-in-fact agreement or modification, thereto, “there must be: (1) an offer to modify the
contract, (2) assent to or acceptance of that offer, and (3) consideration.” Demasse, 194 Ariz. at
506, 984 P.2d at 1144. Defendants utterly failed to establish assent or consideration with respect
to all three Plaintiff labor organizations. The City never even made an offer to ASPTEA and
withdrew its offers to AFSCME Locals 2960 and 2384 after each union rejected them.
Each of the Meet and Discuss and Meet and Confer representatives at trial testified that
they did not agree to modify their contracts and would never have done so. There was simply no
evidence to the contrary. TR 04/28/2015 (AM) (Frank Piccioli), pp. 39-41, 75; TR 05/06/2015
(Debra Novak-Scott), p. 133; TR 04/27/2015 (PM) (Jason Stokes), pp. 32-33; TR 04/27/2015
(PM) (Ronald Ramirez), pp. 83-85; TR 04/29/2015 (AM) (Luis Schmidt), pp. 11-12. There was
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no Tentative Agreement (“TA”) was signed approving any changes and the City withdrew their
proposed sick leave changes during negotiations with AFSCME Local 2384 and AFSCME Local
2960 and never presented ASPTEA with a TA. TR 04/28/2015 (PM) (Lori Steward), p. 106;
Deposition of Kathy Haggerty, dated March 19, 2015 (“Haggerty Dep. 03/19/2015”), p. 42:6-17;
Deposition of Tiana Roberts, dated April 2, 2015 (“Roberts Dep. 04/02/2015”), pp. 55:20-57:10.
Smith Dep. 03/19/2015, pp. 21-25; Deposition of Lisa Esquivel, dated March 13, 2015
(“Esquivel Dep. 03/13/2015”), pp. 51:3-55:9, 80:13- 85:20; Serio Dep. 02/17/2015, pp. 48:1053:6.21
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Defendants’ argument that Plaintiffs somehow agreed to the 2012 changes because the
City threatened that something worse could be done to the unions following negotiations fails to
show that the unions or ASPTEA agreed to the changes. Likewise, the argument the City
asserted that the Plaintiff labor associations “should have known” that the City would
unilaterally revise AR 2.441 after the City and labor associations agreed to 2012 MOUs and
MOA that made no changes to sick leave compensation at retirement has no merit. Defendants’
speculation that Plaintiffs somehow “should have known” that Defendants through the City
Manager would unlawfully implement a change to retirement benefits through AR 2.441 is not
consent to modify their agreements with the City or to implement unlawful changes to the
Retirement Plan. Nor does the fact that the City can modify some ARs mean the City had any
authority to modify retirement benefits to deprive the labor associations of the benefits of their
bargain during the term of an MOU. See, e.g., United Steelworkers of Am. v. Warrior & Gulf
Nav. Co., 363 U.S. 574 (1960) (where collective bargaining agreement was silent as to any
limitation on employer’s right to submit to subcontract notwithstanding inclusion of statement
that matters which were “strictly a function of management” should not be subject to arbitration,
grievance arising because of employer's action in contracting out work previously done by its
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The City’s witnesses were also not credible. Lisa Esquivel claimed, for example, that she did
not remember ASPTEA claiming the proposed change to their MOA presented during
negotiations was unlawful and when confronted with the minutes she signed, said she could not
remember. Janet Smith claimed the proposed change was somehow “protective” despite calling
it in May 2012 a “concession” with the one unit, Unit 1 that agreed to it, and a change imposed
by management direction and not through the meet and confer process with another group. Ex.
76; Smith Dep. 03/19/2015, pp. 24:17 -25:2.
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employees was subject to arbitration, since phrase “strictly a function of management” must be
interpreted as referring only to that over which contract gave management complete control and
unfettered discretion). As set forth above, the City Manager has no authority to change or
construe the Retirement Plan through an AR. The right to construe the Plan is vested with the
Retirement Board and the City Manager is just one member of the nine-member Retirement
Board. The City Manager has absolutely no authority to alter the definition of compensation
under the Retirement Plan.
Defendants also failed to proffer, let alone prove, evidence any consideration Plaintiffs
allegedly have received in exchange for purportedly modifying their vested rights to pension
benefits. See Demasse, 194 Ariz. at 507, 984 P.2d at 1145 (“Separate Consideration, beyond
continued employment, is necessary to effect a modification.”) (citations omitted); Walter v.
Prestige Staffing, LLC, 1 CA-CV 07-0628, 2008 WL 2406138 (Ariz. App. June 10, 2008)
(finding lack of consideration in temporary contract where employee never performed work
under agreement). “Consideration necessary to modify an existing contract is any benefit to the
promisor or detriment to the promisee that supports the new promise.” Gilbert Unified Sch. Dist.
No. 41 v. CrossPointe, LLC, CV 11-00510-PHX-NVW, 2011 WL 6153610, at *12 (D. Ariz.
Dec. 9, 2011) (citing Demasse, 194 Ariz. at 506, 984 P.2d at 1144). Here there was a complete
absence of any evidence of consideration.
CONCLUSION
For the foregoing reasons, Plaintiffs respectfully request that the Court enter judgment in
favor of Plaintiffs and Intervenors on liability on all counts of the Complaint. As the issue of
remedies was deferred, Plaintiffs respectfully request that the Court set forth proceedings to
determine Plaintiffs’ remedies and attorneys’ fees and costs.
Respectfully submitted this 29th day of May, 2015.
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MARTIN & BONNETT, PLLC
By:
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/s/ Susan Martin
Susan Martin
Daniel L. Bonnett
Jennifer Kroll
Ravi Patel
1850 N. Central Ave. Suite 2010
Phoenix, AZ 85004
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NAPIER, ABDO, COURY & BAILLIE, P.C.
Michael Napier
2525 E. Arizona Biltmore Circle, Ste 135
Phoenix, Arizona 85016
Attorneys for Plaintiffs and Intervenors
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CERTIFICATE OF SERVICE
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Original of the foregoing electronically filed this 29th day of May, 2015 with:
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Clerk of the Court
Maricopa County Superior Court
Central Court Building
201 W. Jefferson Street
Phoenix, AZ 85003
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COPY of the foregoing electronically served this 29th day of May, 2015 on the following
counsel for Defendants:
J. Mark Ogden
Kristin Culbertson
LITTLER MENDELSON,P.C.
Camelback Esplanade
2425 E. Camelback Road
Suite 900
Phoenix, AZ 85016
Susan Hoffman
LITTLER MENDELSON, P.C.
Three Parkway
1601 Cherry Street
Suite 1400
Philadelphia, PA 19102
Wesley E. Stockard
LITTLER MENDELSON, P.C.
3344 Peachtree Road N.E.
Suite 1500
Atlanta, GA 30326
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s/R. Patel
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