SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION DOCKET NO. A-2480- 22 MICHAEL LENZ, Petitioner-Appellant,

v. BOARD OF TRUSTEES, PUBLIC EMPLOYEES' RETIREMENT SYSTEM, Respondent-Respondent.

__________________________

Argued May 20, 2024

– Decided July 11, 202 4 Before Judges Marczyk and Vinci. On appeal from the Board of Trustees of the Public Employees' Retirement System, Department of the Treasury, PERS No. xx6207. David B. Rubin argued the cause for appellant (Davi d B. Rubin, PC, attorneys; David B. Rubin, on the bri efs ). Jeffrey Padgett, Deputy Attorney General, argued th e cause for respondent (Matthew J. Platkin, Attorney General, attorney; Sara M. Gregory, Assistant Attor ney General, of counsel; Jeffrey Padgett, on the brief)

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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court. " Although it is posted on the internet, this opinion is binding only on the parti es in the case and its use in other cases is limite d. R. 1:36- 3.2 A- 2480

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PER CURIAM Petitioner Michael Lenz appeals from the final adm inistrative decision of the Board of Trustees ("Board"), Public Employees' Retirement System ("PERS"), rejecting an administrative law judge's (" ALJ " ) decision that Lenz' s retroactive salary increase be included as creditab le compensation for pension calculation purposes. Based on our review of the r ecord and the applicable legal principles, we affirm.
I. On February 1, 2008, Lenz was enrolled in PERS thr ough his employment with Hudson County Department of Roads and Property ("County"). Le nz was promoted to the position of manager of public prope rty in 2012. After receiving the promotion, Lenz submitted a budget request for an annual salary of five percent above the salary of his highest paid subord inate. This was based on the County' s purported un written policy "with respect to a five-percent diff erential between the salaries of particular supervisors and their next ranking subordinate." The County denied Lenz's request. A ccordingly, in June 2015, Lenz sued the County in the Law Division for violat ion of the policy. The complaint was subsequently removed to federal court

. He claimed he served in a supervisory capacity "at all times," even prior t o being promoted in 2012.3 A- 2480

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At some point prior to Lenz filing the lawsuit, he developed Parkinson' s disease. Thereafter, he applied for ordinary disab ility retirement benefits. Lenz was subsequently granted ordinary disability retire ment benefits and retired effective March 1, 2018. 1 On March 29, 2018, Lenz settled his litigation agai nst the County for $100,000 , a portion of which would include back pay for the a dditional gross salary he would have received in the years 20 14

- 2017

. The settlement included $78,163.47 in retroactive compensation that Lenz re quested be considered creditable compensation for his final average salar y for retirement purposes. The settlement provided:

1) $78,163.47 in "back pay" for the years 2014, 2015, 2016 and 2017 paid by Hudson County and $21,836.53 for "personal injury" paid by the Hudson County Insurance Fund Commission (the "IFC"); or 2) if the Division of Pension and Benefits (the

" Division ") does not accept the $78,163.47 amount as "back pay," then a $100,000 lump sum amount paid by the IFC. Paragraph 2.1(a) of the settlement stated that Len z would be paid:

1 Lenz testified he has been retired since February 1 , 2016. He asserts in his brief he retired sometime in 2017.4 A- 2480

- 22 [A] sum equivalent to the additional gross salary t hat Lenz would have received in each of the years 2014, 2015, 2016 and 2017 as stipulated on the chart annex ed hereto, which shall be designated as back pay and tendered to Lenz in a manner compliant with any Fac t Sheets or standards of [the Division] applicable to payments of back pay in employment litigation settlements, with such payroll and pension-related deductions and contributions applicable to that additional gross income, which will make up the st atutorily mandated employee contribution to the funding of the pension plan. Paragraph 2.3 provided the County would "file with the D ivision all

. . . certifications or statements necessary to effectuat e the agreed-upon retroactive salary increases," which the County provided in a M ay 7, 2018 letter. The Division rejected the settlement amount as not creditable compensation for pension purposes. The County subs equently wrote the
Di vision attempt ing to clarify portions of its original letter, but th e Division again rejected the County's explanation in Septembe r 2018. Lenz then appealed to the Board. On February 4, 20 19, the Board voted to deny the appeal. It found "[t]he retroactive sa lary increase . . . is . . . extra compensation that was made primarily in anticipatio n of retirement, contrary to N.J.A.C. 17:2-4.1, that is not creditable for pensi on-calculation purposes." The Board also granted Lenz's request to transmit the m atter to Office of Administrative Law for a hearing.5 A- 2480

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Lenz moved for summary decision with the ALJ . On July 17, 2020, the ALJ issued an order granting partial summary decisi on, but ruled that a hearing was necessary as to whether Lenz's retroactive sala ry increase wa s "extra compensation" under N.J.A.C. 17:2-4.1(a)(11) and (1 2). A hearing took place on March 4, 2021. The only w itness called by Lenz was Michael Dermody, Esq., who represented Hudson C ounty in the civil case. Dermody testified that supervisory personnel were p aid salaries at least five percent more than their highest paid subordinate, a nd that increased amount was included in their base salary. He testified regarding deposition testimony from other individuals employed by the County who confir med the five-percent policy, along with the County's answers to interrog atories, which acknowledged the existence of the policy. He further testified that Lenz received the same retroactive adjustment "any other similarly situate d employee would have received had they brought it to the County's attent ion." On January 27, 2023, the ALJ issued his initial de cision reversing the Board's determination after finding the salary incr eases in the settlement agreement we re credible compensation under N.J.A.C. 17:2-4.1(a) (11) and (12). He noted Dermody was a credible witness. The ALJ found the raises satisfied the criteria of N.J.A.C. 17:2-4.1(a)(11) because "t he evidence presented at the6 A- 2480

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hearing establishe[d] that the [five-percent] salar y adjustment Hudson County paid to Lenz was paid and included in the base sala ry of all employees deemed supervisors, like Lenz, and which he was entitled t o receive ." The ALJ also determined: [T]he evidence presented herein also establishe[ d] the

retroactive pay to Lenz satisfies N.J.A.C. 17:2- 4.1(a)(12) because the proofs show that the adjustm ent made by Hudson County was not made 'at or near the end of' Lenz's service, as he had left the County' s employ well before his civil case was settled. Moreover, "the testimony of Dermody establishe[d] t hat even if Lenz or any other similarly situated employee had brought the n on-payment of the [fivepercent] rule to the County's attention, they would have been entitled to the same retroactive adjustment 'across the board', based up on Hudson County's practice of doing the same." He further noted that although Dermody could not po int to

any across- th e-board adjustments for any group of individuals re lating to the five-percent policy, the five-percent polic y "was usually applied in the normal course of business." And , "Dermody also acknowledged that there were no oth er retroactive raises like that received by Lenz." On April 20, 2023, the Board issued its final admin istrative determination rejecting the ALJ's legal conclusion that Lenz's su bstantial salary increase was creditable compensation. Specifically, the Board initially noted:7 A- 2480

- 22 The ALJ found that Lenz's salary 'adjustment' was not increased 'at or near the end of Lenz's ser vice' because he had left employment prior to the parties settling his lawsuit. This finding ignores the fac t that Lenz filed his lawsuit in June 2015, his retirement became effective on March 1, 2018, and the parties settled the lawsuit on or about March 29, 2018. . . . The Board rejects this factual finding and notes that t he Agreement was contemporaneous with Lenz' s retirement. . . . The Board also notes that the ALJ failed to make any factual findings as to whether it was p roper to apportion the retroactive back pay into only the final three years of service, thus inflating Lenz's pensi on benefit. Next, the Board rejected the ALJ's recommendation t hat Lenz's salary increase be included as creditable compensation for pension calculation purposes under N.J.S.A. 43:15A-6(r). The Board fou nd as follows:

Based solely on the fact that Lenz had retired a fe w weeks prior to the execution of the Agreement, the ALJ found that the significant increase in his final th ree years of employment was not in anticipation of his retirement. The Board . . . rejects the ALJ's flaw ed legal analysis, and instead determine[s] that it is undisputed the Agreement was intended to increase his retirement benefit. The ALJ failed to conduct any analysis of whether including the settlement monies in the final three years was proper or simply used as a way to settle his lawsuit in a way most favorable to Le nz and the employer, with the PERS paying an inflated pens ion benefit over Lenz's lifetime. The Board concluded it was " undisputed " that Lenz's compensation was not included in his base salary despite his efforts to include the five-percent8 A- 2480

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rule in his salary. Thus, "[t]he negotiated retroa ctive salary increases simply do not represent his base salary. Rather, these ne gotiated salaries represent an individual salary adjustment that would allow Lenz to calculate his retirement benefit using a salary greater than what he actuall y earned." The Board determined "such an arrangement," whereby the parti es settled "years of salary disputes by incorporating all of the retroactive sa laries agreed [upon] into the final three years," violated "the stated purpose of N.J.S.A. 43:15[A]-6(r) and the implementing regulations, as it would allow an increase in retirement allowances without adequate compensation to the pen sion fund." Further, "the [settlement] only applie[d] the [five-percent] poli cy increase to . . . 2014 -2017, despite Lenz's assertion that the [five-percent] policy should have been applied starting in 2008." Thus, the Board f ound that "between 2008 and 2013, Lenz did not earn the salary upon which he seeks to calc ulate his retirement benefit and did not make contributions to the pension fund based on the higher salary." The Board further determined that "the Agreement w as clearly structured in contemplation of Lenz's retirement, as it applie s the compensation award only to the last three years of Lenz's employment, which conveniently coincides with the years used to calculate his retirement ben efit. See N.J.A.C. 17:2- 6.20(b)." The Board explained that "[ w]hen the salary adjustment clearly9 A- 2480

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contemplates the member's retirement," N.J.A.C. 17: 2-4.1(a) bars the "adjustment as extra compensation." The Board noted the "three years of retroactive salary falls under the definition of ex tra compensation" under N.J.A.C. 17:2-4.1(a)(11) because "it is not compens ation included in the base salary of all employees in the same position." The Board also found that "Dermody's testimony cal ls into question whether . . . other employees actually received the increase based upon the unwritten policy." Dermody testified that two Hudson County employees " did not receive the [five percent] . . . in their base salary and had to receive a retroactive adjustment." The Board found that the compensation Lenz received was not a "complete adjustment of his salary" inten ded to include the fivepercent policy during each year of his employment. The Board concluded:

[T]here is nothing in the record to establish that all employees in the same position as Lenz received a similar adjustment . . . to only certain years. Ra ther, . . . as Dermody testified, there was no across- the -board adjustment relating to the [five-percent] policy. .

. . Lenz simply cannot establish that all similarly sit uated employees received such a substantial increase. Th e Board finds that the compensation Lenz received fro m the Agreement is nothing more than an individual salary adjustment made in contemplation of retireme nt that is barred as extra compensation under [N.J.A. C. ] 17:2 -4.1(a)(12).10 A- 2480

- 22 II. Lenz argues the Board's rejection of the ALJ's deci sion was erroneous and should be reversed. He contends the Board erroneou sly rejected the ALJ' s finding that Lenz' s retroactive salary adjustments were pensionable. More particularly, Lenz argues "there can be no qu estion but that the retroactive salary adjustment agreed to in the sett lement was intended to put Lenz at least partially in the position he would ha ve been in had the County honored its longstanding '[five-percent] above' sal ary practice." He argues the settlement "merely righted a wrong by adjusting his salary to what it should have been . . . consistent with the County's established salary structure for similarly situated employees." Lenz argues his settlement did not involve an indiv idual salary adjustment unconnected to the overall salary structure of the employing agency. He contends "[a]ll the settlement did was a djust his salary to reflect the compensation he would have received if the County had paid him in accordance with the established salary structure applicable to all similarly situated employees." Lenz argues the timing of the settlement and why t he retroactive salary payments coincided with the last years of his emplo yment "has nothing to do with gaming the pension system to alter the actuari al assumptions upon which11 A- 2480

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the system depends for its integrity." Rather, the case was settled after Lenz had retired due to his medical issues, and because of a backlog in federal court, he would have had to wait a significant period of time to try the case. Lenz next argues the Board' s determination that the settlement "was contemporaneous with Lenz's retirement" was erroneo us because "for all intents and purposes, he retired in 2017," well before the settlement of this matter. Further, Dermody' s testimony confirmed Lenz retired in 2017, "well bef ore the case was settled, and that the settlement played no part in Lenz's retirement decision." Lenz notes the Board overturned the ALJ's decision , in part, because the ALJ failed to make findings as to whether it was pr oper to include the retroactive back pay into only the final three years of service . Specifically, Lenz asserts that he agreed "to limit the salary adjustment to t hree years for reasons that clearly made sense," such as his Parkinson's diseas e and the stress of the litigation affecting his health. Lenz asserts the Board improperly relied on the Co unty disputing that he served in a supervisory capacity based on the Count y' s interrogatory answers in the underlying suit. He notes that although the County initially dispute d Lenz' s claim, the County's witnesses "undercut" the County's earlier denials, which led12 A- 2480

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to the settlement. Moreover, he submitted an "unre butted sworn certification" in support of the County's longstanding practice of the five-percent policy and that he served in a supervisory capacity during all relevan t times. PERS did not introduce any evidence to rebut Lenz's certificatio n. He further cites to the letter from the County to the Division in July 2018, confi rming that "the amounts of increase of these back pay awards [to Lenz] represe nt an amount based on a County policy that has been shown to have been in e ffect for the member and do not exceed his claim under the lawsuit." Lenz next argues that "[n]othing in [the Board's] final decision was sufficient to overcome the ALJ's finding that Dermody's te stimony was credible and truthful." He notes the Board found Dermody's testimony called i nto question whether "other employees actually received the increase based on the unwritten policy" and that Dermody failed to identi fy other employees who held the same position as Lenz. Lenz disagrees because Dermody identified two employees who received similar salary adjustments, a nd Dermody testified both employees were similarly situated to Lenz. Lenz co ntends that like him , both employees were promoted to supervisory positions, and the ir pay was increased to comply with the five-percent policy. Regardless , he contends that "for purposes of the [five-percent] rule it would not ma tter whether an employee13 A- 2480

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performed precisely the same supervisory responsibi lities as another. All that mattered was whether the individual was a superviso r not making more than [five-percent] above those they supervised."
III. Our review of an administrative agency's final deci sion is limited. In re Carter, 191 N.J. 474, 482 (2007). We afford " a 'strong presumption of reasonableness' to an administrative agency's exerc ise of its statutorily delegated responsibilities." Lavezzi v. State, 219 N.J. 163, 171 (2014) (quoting City of Newark v. Nat. Res. Council, Dep't of Env't Pro t. , 82 N.J. 530, 539 (1980)). Absent arbitrary, unreasonable, or capricious actio n, or a lack of support in the record, the agency's final decision will be sustain ed. In re Herrmann, 192 N.J. 19, 27-28 (2007). In determining whether agency ac tion is arbitrary, capricious, or unreasonable, we must examine:

(1) whether the agency's action violates express or implied legislative policies, that is, did the agen cy follow the law; (2) whether the record contains substantial evidence to support the findings on whi ch the agency based its action; and (3) whether in app lying the legislative policies to the facts, the agency c learly erred in reaching a conclusion that could not reaso nably have been made on a showing of the relevant factors

. [In re Stallworth, 208 N.J. 182, 194 (2011) (quotin g Carter, 191 N.J. at 482-83).]14 A- 2480

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We defer to the Board's interpretation of the statu tes it is charged with enforcing. Thompson v. Bd. of Trs., Tchrs.' Pensio n & Annuity Fund, 449 N.J. Super. 478, 483 (App. Div. 2017) (quoting Richardso n v. Bd. of Trs., Police & Firemen's Ret. Sy s. , 192 N.J. 189, 196 (2007)). "'Such deference has been specifically extended to state agencies that admini ster pension statutes,' because 'a state agency brings experience and specialized k nowledge to its task of administering and regulating a legislative enactmen t within its field of expertise.'" Ibid. (quoting Piatt v. Bd. of Trs., Police & Firem en's Ret. Sys., 443 N.J. Super. 80, 99 (App. Div. 2015)). However, an appellate court is "in no way bound by the agency' s interpretation of a statute or its determination of a strictly legal issue." Richardson, 192 N.J. at 196 (quoting In re Taylor, 158 N.J. 644, 658 (1999)). Also, "[a] reviewing court 'may not substitute its own judgment for the agency's, even though the court might have reached a differen t result.'" Stallworth, 208 N.J. at 194 (quoting Carter, 191 N.J. at 483). Turning to the present case, we begin by reviewing N.J.S.A. 43:15A -6(r) , which the Board relied upon in its analysis. N.J.S .A. 43:15A -6(r) provides: "'Compensation' means the base or contractual salar y, for services as an employee, which is in accordance with established s alary policies of the15 A- 2480

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member's employer for all employees in the same pos ition but shall not include individual salary adjustments which are granted primarily in anticipation of the member's retirement . . . ." Accordingly, "the Board may only accept pension contrib utions and grant pension benefits based on a member' s 'compensation' as defined by N.J.S.A

. 43:15A -6(r)." DiMaria v. Bd. of Trs., Pub. Emps.' Ret. S ys., 225 N.J. Super. 341, 350, (App. Div. 1988 ). The implementing regulation provides that a PERS member's creditable compensation shall be limited t o base salary and "shall not include extra compensation." N.J.A.C

. 17:2 -4.1(a). Examples of extra compensation include:

7. Individual retroactive salary adjustments where no sufficient justification is provided that the adjus tment was granted primarily for a reason other than retirement;

. . . . 9. Compensation in the absence of services;

. . . . 11. Any form of compensation that is not included in the base salary of all employees in the same position or covered by the same collective bargaining agreement who are members of the PERS and who receive the compensation;16 A- 2480

- 22 12. Retroactive increments or adjustments made at or near the end of a member's service, unless the adjustment was the result of an across- the -board adjustment for all similarly situated personnel . .

. . [N.J.A.C

. 17:2 -4.1(a) .] We find the Board' s reasoning persuasive. Notwithstanding Lenz 's claim he "for all intents and purposes" retired in 2017, it is undisputed his effective retirement date was March 1, 2018

— shortly before the settlement was reached. Based on the record and timeline of Lenz' s retirement, the Board could reasonably conclude the retroactive salary increase s were given primarily in anticipation of his retirement. The Board reasonably concluded the retroactive increases fell under the definition of extra compen sation under N.J.A.C. 17:2- 4.1(a)(11) and (12). Specifically, the Board noted the compensation was not included in the base salary of all employees in the same position, and there was no indication the retroactive adjustment, at or nea r the end of Lenz's service, was the result of an across- the -board adjustment for all similarly situated personnel.
In In r e Puglisi, a police officer filed a civil rights laws uit against his employer, the city, alleging that various city admi nistrators and elected officials engaged in political discrimination. 186 N.J. 529, 531 (2006). The officer reached a settlement with the city, resulting in hi s promotion to the rank of17 A- 2480

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captain, his immediate commencement of a one-year t erminal leave period at a captain's salary, and his agreement to retire at th e end of the terminal leave period. Ibid. The Court concluded the payments ma de pursuant to the settlement were in anticipation of his retirement a nd affirmed the denial of pension credit for the settlement proceeds. Id . at 534. The Court explained the statutory definition of com pensation that excludes salary increases at the end of an employee 's career "protect[s] the actuarial soundness of the pension fund by prohibit ing the use of 'ad hoc salary increases intended to increase retirement allowance s without adequate compensation to the [pension] fund' in calculating pensions." Ibid.; see also Bd. of Trs. of Tchrs .' Pension & Annuity Fund of N.J. v. La Tronica, 81 N .J. Super

. 461, 470-71 (App. Div. 1963) (describing unusual salary increases or arrangements in the final years of employment as "t he local board['s]

. . . grand gesture of farewell at little expense" because the local board is not itself responsible for the pension payments that must foll ow over many years ). The concerns expressed in Puglisi and La Tronica we re shared by the Board here, which noted the settlement agreement "w as clearly structured in contemplation of Lenz's retirement, as it applies t he compensation award only to the last three years of Lenz's employment, which conveniently coincides with18 A- 2480

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the years used to calculate his retirement benefit. " See N.J.A.C. 17:2-6.20. The Board further noted the County rejected Lenz's effo rts to include the additional five percent several times over the years , and "[t]he negotiated retroactive salary increases simply do not represent his base salary. Rather, these negotiated salaries represent an individual salary adjustment that would allow Lenz to calculate his retirement benefit using a salary gre ater than what he actually earned." In re Snellbaker does not support Lenz's position. 414 N.J. Super. 26 (App. Div. 2010)

. There , we concluded that a retroactive salary received by means of a settlement can be creditable compensatio n when calculating the employee's pension benefit. Id. at 41. Snellbaker was the police chief of Atlantic City, and in that position he received no raises between 2002 and 2006, while his subordinate deputy chiefs received annual raises. Id. at 29-30. He filed a lawsuit against the city and sought, among other rel ief, retroactive salary increases for 2002 through 2005 under N.J.S.A. 40A: 14-179, which required the police chief to be paid more than the amount paid t o the highest-ran king subordinate officer. Id. at 30. The lawsuit was s ettled, and the settlement retroactively increased Snellbaker's salary from 2002 to 2005 to bring the city into compliance with the statute. Id. at 31. The salary increases were identical19 A- 2480

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to the raises Snellbaker's subordinates had receive d during the same period. Id. at 32. Snellbaker, unlike Puglisi, did not involve an " individual salary adjustment" unconnected to the overall salary struc ture of the employing agency, but instead involved a settlement intended to comply with a statutory mandate. Id . at 40- 41

. Here, unlike the salary increases in Snellbaker , Lenz's retroactive salary increases were not applied to all of the years for which he claimed he was underpaid. Rather, the salary increases were alloca ted to the final three years of his employment. This led the Board to conclude the increases , which "coincidentally" coincided with the years used to c alculate his retirement benefit, were not compensation under N.J.S.A. 43:15 A-6(r). The Board observed these salary adjustments would improperly allow Lenz to base his retirement on a salary he never earned. Moreover, it noted "such an arrangement," whereby the parties settled "years of salary disputes by incorporating all of the retroactive salaries agree d [upon] into the final three years violates the stated purpose of N.J.S.A. 43:15 [A]-6(r) and the implementing regulations, as it would allow an increase in retir ement allowances without adequate compensation to the pension fund." Indeed, there was ample evidence in the record to support the Board's decision.20 A- 2480

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We conclude the Board did not act arbitrarily, cap riciously, or unreasonably in denying Lenz's application to inclu de the salary increases from the settlement in determining his pension benefits, and its decision was fairly supported by the record. To the extent we have not specifically addressed an y of Lenz's remaining arguments, we conclude they lac k sufficient merit to warrant discussion in a written opinion. R. 2:11 -3(e)(1)(E). Affirmed.