Opinion ID: 2614971
Heading Depth: 1
Heading Rank: 7

Heading: past practice as to percentage limitations

Text: The next issue is whether the Department may further limit the effect of leave cashouts by considering the employers' percentage limitations, or whether instead the Department is bound to follow its previous practice of ignoring these limitations. To recap, if an employer only cashes out a stated percentage of an employee's accrued leave, the Department's current practice is to use this limitation in a manner to correspondingly limit the number of days of accrued leave from the 2-year AFC period that would otherwise be included in calculating the AFC amount. The Department's benefit calculators first became aware of these percentage cashouts during the 1970's. The record reveals this was certainly known by 1976. The Department calculators ignored the percentage limitations despite this knowledge. In 1980, the Department issued a memorandum to payroll officers of the State's political subdivisions indicating a change in procedure. The memorandum stated that while under their previous procedure the Department had not taken percentage limitations into account, henceforth they would be considered. This change had the effect of reducing some employees' pension levels; whereas prior to 1980 all leave accruing during the 2-year AFC period was taken into account, after 1980 only a percentage of this leave was considered. [5] Public employee pension levels may be reduced only under limited circumstances. In Bakenhus v. Seattle, 48 Wn.2d 695, 698, 296 P.2d 536 (1956), this court held that public employee pension rights are contractual in nature, as the pension constitutes deferred compensation for services rendered. A public employee's right to a pension is a vested, contractual right based on a promise made by the State at the time an employee commences service. Washington Fed'n of State Employees v. State, 98 Wn.2d 677, 683, 658 P.2d 634 (1983) (citing Bakenhus, 48 Wn.2d at 700). Once an employee begins work, his or her pension rights may be modified only for limited purposes. Moreover, modifications reducing pension levels must be counterbalanced with increases in pension levels: Although pension rights may be modified prior to retirement, such modifications must be for the sole purpose of keeping the pension system flexible and maintaining its integrity. Even where permitted, the modifications must be reasonable and a disadvantageous modification must be ... accompanied by a corresponding benefit. If there is no counterbalance, the disadvantageous modification will be declared unreasonable. (Citations omitted.) State Employees, 98 Wn.2d at 683-84 (quoting Bakenhus, 48 Wn.2d at 701). Violation of these rights by the State amounts to an unconstitutional impairment of contracts. State Employees; Const. art. 1, § 23. In Washington Ass'n of Cy. Officials v. Washington Pub. Employees' Retirement Sys. Bd., 89 Wn.2d 729, 575 P.2d 230 (1978), this court extended the holdings of Bakenhus and State Employees to reach pension reductions caused by an administrative body rather than the Legislature. We held that the Department lacked the authority to abolish its 25-year practice of including leave cashouts in calculating AFC amounts. Despite County Officials' extension of the Bakenhus rule to cover administrative reductions in pension levels, the Department argues its change in procedure did not violate the employees' pension rights. In particular, the Department presents three separate contentions in attempting to distinguish County Officials from the present case. [6-8] First, the Department argues that the change was necessary in order to bring its practice in compliance with the statutes, and that it must be given leeway in correcting practices when errors become evident. It is difficult to give this argument much credence when the evidence shows that the Department waited some 4 to 10 years before acting to change its procedures. See County Officials, 89 Wn.2d at 732-34; State Employees, 98 Wn.2d at 687-88 (holding that even the Legislature cannot indirectly change a longstanding practice of the Department to the detriment of PERS I members). [4] Second, the Department argues that pension rights cannot attach to the pre-1980 practices because PERS management never officially adopted or approved of those practices. County Officials demonstrates the inadequacy of this argument. The practice at issue in that case began in 1952, it was approved by the PERS director by 1960, and it was brought to the attention of the PERS board of directors by 1974. County Officials, 89 Wn.2d at 732. This court found relevant the length of time that the practice had been in place  25 years  rather than the length of time that management had approved of the practice. County Officials, 89 Wn.2d at 733. We again decline to adopt the Department's position that an administrative practice cannot become binding until after the practice has been officially approved of by PERS managers. The proper focus is not on bureaucratic approval processes, but on the nature and duration of the administrative practices at issue. Third, the Department contends that here, unlike in County Officials, the record contains evidence that the plaintiffs had no contractual expectation in having the pre-1980 practices followed. Two of the three named plaintiffs wrote to the Department in 1986 after the Department had apparently calculated a pension amount for one of the plaintiffs without giving any credit for that plaintiff's cashed out sick leave. In requesting that credit for the sick leave be granted, these plaintiffs proposed a calculation of benefits that took into account King County's 25 percent limitation on cashing out sick leave. Accordingly, the Department contends that the plaintiff class could have had no contractual expectation that pensions would be calculated pursuant to the pre-1980 practices. The Department's argument relies on language in County Officials referring to contractual expectations: For 25 years, PERS has consistently included termination payments in the computation of average final compensation. During this period numerous expectations based upon [the Department's] practice have arisen in the minds of current employee-members of the system. To now hold termination payments not includable would violate those expectations and be contrary to the position of this court first expressed in [ Bakenhus ]. County Officials, 89 Wn.2d at 733. The Department seeks to transform this passage into a requirement that administrative practices do not violate pension rights unless the affected PERS I members knew about each technical interpretation by the Department and then consciously formed the expectation that each would continue. The Department reads too much into this passage. The Department's position ignores the fact that Bakenhus and State Employees do not pin their analyses on whether individual employees had specific expectations in certain practices. Rather, the cases established flat rules prohibiting the State from altering pension rights in a manner that is disadvantageous to the PERS I employees. These rules apply whether or not many of the employees knew the specifics of their pension rights and had any specific expectations in them. Moreover, the Department's position would have the effect of requiring exhaustive fact-based investigations into the precise knowledge and expectations held by individual PERS I employees and determinations about whether these expectations were sufficient to create vested rights. This approach is unworkable. 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.