Court Opinion

ID: 4696384
Source: CourtListenerOpinion
Date Created: 2021-06-17 15:07:27.439702+00
Date Added: 2024-06-11T08:05:40.310402
License: Public Domain

RENDERED: JUNE 17, 2021
                                                            TO BE PUBLISHED

                Supreme Court of Kentucky
                                2019-SC-0315-DG

JEFFERSON COUNTY SHERIFF’S OFFICE                                      APPELLANT

                   ON REVIEW FROM COURT OF APPEALS
V.                         NO. 2018-CA-00406
                 FRANKLIN CIRCUIT COURT NO. 16-CI-00886

KENTUCKY RETIREMENT SYSTEMS                                              APPELLEE

           OPINION OF THE COURT BY CHIEF JUSTICE MINTON

                         REVERSING AND REMANDING

      This appeal concerns the application of Kentucky Revised Statute (KRS)

61.598, the pension-spiking statute. The statute is aimed at preventing

artificial increases in “creditable compensation” to pension-member employees

in the last five years preceding retirement with the effect of spiking the retiree’s

employment benefits and resulting in increased costs to the pension system.

      In the present case, the Kentucky Retirement Systems applied the

spiking statute to assess actuarial costs to the Jefferson County Sheriff’s Office

for an alleged pay increase it found where a JSCO employee took unpaid leave

for two months, causing a temporary decrease in gross compensation in that

year, but then returned to his pay before. The primary question before the

Court is whether the Retirement Systems properly applied KRS 61.598 in this

circumstance.
      We find that no true pay increase occurred to implicate the statute, that

the purported increase was essentially a return to the status quo, interrupted

by a bona fide illness, with no indication otherwise that the employer increased

the employee’s compensation or benefits. While the Retirement Systems

properly applied the language of the statute under a defensible interpretation,

it is an overly mechanical application that misses the substance of what really

happened here. The application would appear arbitrary and would seem to do

little, if anything, to further the purpose of the statute of preserving the

pension system. Accordingly, we reverse and remand to the trial court to

vacate the assessment imposed on JCSO.

                               FACTUAL BACKGROUND

      The facts at issue are clear and undisputed. Jerry Duncan worked as a

full-time deputy sheriff when he retired from the Jefferson County Sheriff’s

Office in October 2014. In that position, he was classified as a “hazardous-

duty member” of the County Employees Retirement Systems, one of the

pension plans administered by the Kentucky Retirement Systems. Jerry was

paid hazardous-duty pay at an hourly rate. Each year, his compensation

would increase by approximately 2% under a collective-bargaining agreement

with JCSO.

      In 2012, Duncan fell seriously ill, and between August 16 and October

15, 2012, he took unpaid leave for a period spanning approximately four two-

week pay periods. In total, he took approximately 270 hours of unpaid leave,

causing him to make $5,396.94 less in Fiscal Year 2012-2013 than the year

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after. Duncan recovered and returned to work full time in the same position

and for essentially the same compensation.

       Duncan’s annual compensation in his last five years of employment was

as follows:

           Fiscal Year                    Gross Annual    Percentage Difference
 (identified later by first number)       Compensation        from FY Prior
 2009-2010     (FY09)                 $43,170.64         n/a
 2010-2011     (FY10)                 $41,521.97         - 3.82%
 2011-2012     (FY11)                 $43,503.25         + 4.07%
 2012-2013     (FY12)                 $38,086.98         - 12.46%
 2013-2014     (FY13)                 $44,056.18         + 15.67%

As the chart shows, there was an approximately $5,400 difference in Duncan’s

gross pay between Fiscal Years 2012-2013 (FY12) when he took leave and

2013-2014 (FY13) when he returned. Notably, Duncan’s hourly pay and gross

annual pay returned to nearly what it was before he took leave.

       The Retirement Systems identified this difference as a spike in creditable

compensation under KRS 61.598, perceiving an increase in compensation from

FY12 to FY13. The Retirement Systems sought from JCSO an explanation as

to this difference in gross compensation and determined that Duncan did not

experience a bona fide promotion to cause the purported increase.

Accordingly, it imposed a $2,951.40 assessment on JCSO for purportedly

increased actuarial costs to the extent attributable to the increase over 10%.

In response, JCSO filed a Form 6481, Employer Request for Post-

Determination of Bona Fide Promotion or Career Advancement, in which it

confirmed the absence of a bona fide promotion and that the difference in pay

was attributable solely to Duncan’s unpaid sick leave. The Retirement Systems

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maintained its position, finding no exception under KRS 61.598 for unpaid sick

leave, that it considered the assessment appropriate given the lack of a bona

fide promotion or career advancement to justify the difference.

      JCSO timely pursued an administrative appeal. The Hearing Officer

assigned to JCSO the burden to prove Duncan experienced a bona fide

promotion and to explain the difference in compensation.1 The only witness,

JCSO’s human-resources officer, established the same facts the Retirement

Systems already relied upon. The Hearing Officer found in favor of the

Retirement Systems for the same reasons: a pay increase with no

corresponding promotion or career advancement. JCSO appealed to the

Retirement Systems’s Administrative Review Board, which affirmed, and

clarified the burden of proof was properly JCSO’s to prove the existence of a

bona fide promotion.

      JCSO timely filed for judicial review in Franklin Circuit Court. The

circuit court found for the Retirement Systems, finding the lack of promotion

supported by substantial evidence, that KRS 61.598 as applied was not

arbitrary, and that the circuit court was thus bound by the Board’s decision. It

found the 2013 version of KRS 61.598 contained no exception for unpaid sick

leave; that the statute was not overbroad or arbitrary, that its directive was

rationally related to a legitimate state interest; that it was not being improperly

      1 The Hearing Officer varied in its statement of the assignment of this burden of
proof as to whether it was JCSO’s or the Retirement System’s to carry but resolved the
hearing as if it had finally assigned the burden to JCSO.

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retroactively applied to JCSO since it applied to retirements “on or after

January 1, 2014;” and that the burden of proof was properly assigned to JCSO

under KRS 13B.090(7), as the assessment was not a penalty or depriving a

benefit to JCSO previously granted.

      JCSO appealed, and the Court of Appeals affirmed in all respects, finding

itself constrained by the language of the statute and concluding neither KRS

61.598 nor 105 KAR 1:140 Section 8 was arbitrary. This appeal followed.

                                         ANALYSIS

      Ultimately, this appeal turns on the interpretation and application of a

statute. This case has so far been determined by a mechanical application of

the General Assembly’s apparent directive. But the application and

interpretation of statutes are matters of law we review de novo.2 In a very

general sense, our review of the decision of an administrative agency is highly

deferential, and we reverse only if the decision was arbitrary, unsupported by

substantial evidence, or otherwise erroneous as a matter of law.3

      We find the application of KRS 61.598 in this circumstance erroneous as

a matter of law, and that the result was arbitrary. Accordingly, we reverse the

Court of Appeals as to how the statute applies in a situation like this.

      2   Wheeler & Clevenger Oil Co. v. Washburn, 127 S.W.3d 609, 612 (Ky. 2004).
      3See Hilltop Basic Res., Inc. v. Cnty. of Boone, 180 S.W.3d 464, 467 (Ky. 2005);
McNutt Constr./First Gen. Servs. v. Scott, 40 S.W.3d 854, 860 (Ky. 2001); American
Beauty Homes Corp. v. Louisville & Jefferson Cnty. Planning and Zoning Comm’n, 379
S.W.2d 450, 456 (Ky. 1964).

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  A. KRS 61.598 does not apply to JCSO because there was not a true
     increase in creditable compensation to the retiring employee.

     Fundamentally, the substantive issue is whether Duncan’s creditable

compensation increased when he returned to work after taking unpaid sick

leave. JCSO maintains that the difference in Duncan’s total compensation

between FY12 and FY13 should not be considered an increase because

Duncan’s pay, including his gross compensation, merely returned to the status

quo established in the years before he took leave. The Retirement Systems

justifies its assessment by characterizing the return to Duncan’s standard

gross pay as an increase in creditable compensation. And the Retirement

Systems is correct, and it is not at all in dispute, that the change was not

caused by a bona fide promotion or career advancement. But we agree with

JCSO, that the statute does not and was not meant to apply in this instance,

although a mechanical application of the statute would initially seem required.

Differing from the approach taken by the tribunals below, we do not perceive

the need for a separate, express exception for unpaid sick leave because we

hold that the plain language of the statute indicates the spiking statute does

not apply to the facts of this case.

     The 2013 version of the provision imposing cost assessments on

employers, then KRS 61.598(2),4 read as follows:

     4 The current version of the statute has the same substantive provision under

KRS 61.598(5)(a):
      For employees retiring on or after January 1, 2014, but prior to July 1,
      2017, the last participating employer shall be required to pay for any
      additional actuarial costs resulting from annual increases in an
      employee's creditable compensation greater than ten percent (10%) over
                                         6
      For employees retiring on or after January 1, 2014, the last
      participating employer shall be required to pay for any additional
      actuarial costs resulting from annual increases in an employee's
      creditable compensation greater than ten percent (10%) over the
      employee's last five (5) fiscal years of employment that are not the
      direct result of a bona fide promotion or career advancement. The
      cost shall be determined by the retirement systems and the system
      may promulgate administrative regulations in accordance with KRS
      Chapter 13A to administer this section.5

Creditable compensation is defined under KRS 61.510, in the simplest terms for

our purposes, as an employee’s gross annual compensation, a numerical figure

that typically appears on an employee’s W-2 form each year.6 But a related

word increase was left undefined in its statutory context. So the meaning of

the term increase under KRS 61.598 must derive its meaning implicitly from its

context and legislative intent. We ascribe an ordinary meaning to the word.7

Merriam-Webster defines increase as a verb, “to make greater in size, amount,

or number,” and as a noun, “something added (as by growth).”8 Some common

synonyms of the word include “augment, enlarge, or multiply.”9 Consistent

with these definitions, the term increase appears to be used under KRS 61.698

      the employee's last five (5) fiscal years of employment that are not the
      direct result of a bona fide promotion or career advancement. The cost
      shall be determined by the retirement systems.
      5   (emphasis added).
      6   See KRS 51.510(a).
      7  Ky. Occupational Safety & Health Rev. Comm'n v. Estill Cnty. Fiscal Ct., 503
S.W.3d 924, 929 (Ky. 2016) (“When interpreting an undefined term in a statute, such
as “complaint,” we look to traditional canons of statutory construction to determine
legislative intent. First, we interpret the law by applying the plain and ordinary
meaning of relevant language within the statute.”).
      8 Increase, Merriam-Webster.com Thesaurus, https://www.merriam-
webster.com/thesaurus/increase, (accessed May 13, 2021).
      9   Id.

                                          7
to refer to an upward change in creditable compensation between fiscal years.

In neither its ordinary use as a verb or noun do we find JCSO increased

Duncan's pay or that the change between FY12 and FY13 constituted an

increase. For KRS 61.598 to apply, there must be an increase in gross

compensation, not merely a change.

     To the credit of the Retirement Systems and the tribunals below, the

definition of creditable compensation essentially directs that gross

compensation be the measure for year-to-year change as it arrives at a figure

based on the numerical entry on an employee’s federal W-2. Increases in

creditable compensation under KRS 61.598 are directed to be viewed as

discrete changes in gross compensation from year to year. But we interpret the

term increase under KRS 61.598 to require another layer of analysis in cases

like this one.

     The increase inquiry may be more difficult to settle for employees working

for an hourly wage than for salaried employees because some fluctuation in

gross pay is to be expected for a variety of reasons foreseeable and

unforeseeable, justified and unjustified. But it is certainly indicative here that

the only meaningful difference in Duncan’s pay between fiscal years was his

pay conceptualized specifically and solely as differences in gross annual

compensation. Duncan’s hourly rate remained essentially the same from year

to year and was apparently already predetermined to increase no more than 2%

per year according to a collective-bargaining agreement with JCSO. As

Duncan’s work and pay merely returned to the status quo in years before he

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took unpaid sick leave, the facts demonstrate that any net increase was only

1.3% between fiscal years 11 and 13, his two highest compensated years of the

three considered—far less than the increase over 10% required to trigger KRS

61.598. We simply cannot view, as the Retirement Systems does, the annual

difference as a 15% increase in Duncan’s creditable compensation sufficient to

trigger KRS 61.598. The difference between fiscal years 12 and 13 could only

be considered an increase in the most relative and narrow sense of that word.

     JCSO would appear correct that the General Assembly used language to

target affirmative increases in compensation, especially those more

questionable increases in anticipation of retirement. This case does not

present that sort of arrangement or fact pattern, so our holding is more

consistent with the legislature’s purpose. In Duncan’s case we have in

actuality a temporary, not to mention justified, decrease in creditable

compensation, not an increase.

     The Court notes that it is not creating a different rule for hourly workers,

because creditable compensation, again, is defined primarily in terms of gross

annual compensation, and we do not wish to disturb or undermine that

definition. We only hold that the statute’s use of the word increase requires

some reasoned flexibility in application and perhaps sometimes another level of

thoughtful analysis. For purposes of determining whether there has been an

actual increase in creditable compensation, not merely a restoration of total

pay, the statute would require the Retirement Systems to undertake an

examination of the surrounding circumstances. KRS 61.598 does not require

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the Retirement Systems to view numerical differences in gross pay in a

vacuum, but in fact implicitly requires it to examine, holistically and

substantively, the reasons for a change in compensation. To be sure, the bona

fide promotion or career advancement element is an important determination to

make in most circumstances, but it is not the only operative term in the

statute. Increase is the guiding term, and we find the Retirement Systems’s

application here disconnected from the meaning of that word, rendering its

application of the statute arbitrary and unsupported by law and warranting

reversal. The statute does not apply, and the assessment was improper.

     We address other issues raised here more briefly, although they do not

ultimately affect the outcome of this case.

     1. The Retirement Systems is directed to identify compensation
        changes between each applicable year, not a single change over
        five years.

     This point already necessarily factored into our analysis above, but since

it is disputed by the parties, we clarify this element of the statute. JCSO

argues briefly that the plain language of the statute required the Retirement

Systems to determine whether there was a 10% total compensation increase

over the entire five years preceding retirement. We disagree.

     The 2017 version of KRS 61.598(2)(a) reads:

      [T]he systems shall, for each of the retiring employee's last five (5)
      fiscal years of employment, identify any fiscal year in which the
      creditable compensation increased at a rate of ten percent (10%) or
      more annually over the immediately preceding fiscal year's
      creditable compensation. The employee’s creditable compensation
      in the fiscal year immediately prior to the employee’s last five (5)
      fiscal years of employment shall be utilized to compare the initial

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      fiscal year in the five (5) fiscal year period.10

The 2013 version of the statute instructed substantively the very same thing,

with only clarifying language added in 2017, some of which is emphasized

above. The emphasized language shows that it is primarily the gross

compensation in each subject fiscal year that must be compared to the

immediately preceding fiscal year. KRS 61.598(5) is understood in relation to

the above Subsection (2).

     The General Assembly’s directions were clear to begin with and have only

become clearer over time with amendment to the same effect. The Retirement

Systems properly interpreted and applied the statute in taking the last five-

year-period preceding Duncan’s retirement, considered the three with the

highest compensation as a hazardous-duty employee, and then determined

whether there were any discrete compensation increases between each of the

applicable fiscal years. While it incorrectly identified a change in compensation

as an increase per KRS 61.598, the Retirement Systems properly confined the

identification of that change in total compensation as being between two of the

applicable fiscal years. We determine this method was correct as a matter of

law, that the statute’s plain language does not direct the Retirement Systems to

determine changes in compensation over a five-year period as JCSO argues.

      10   (emphasis added).

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     2. The burden of proving a bona fide promotion was properly placed
        on the employer.

     The Hearing Officer placed on JCSO the burden of proving the purported

pay increase was the result of a bona fide promotion or career advancement.

JCSO claims the burden of proof was misplaced, that the Hearing Officer

should have assigned the burden of proof to the Retirement Systems to prove

the negative inverse, that the increase it identified was not the result of a bona

fide increase. Ultimately, the issue does not bear on the outcome of this case,

because JCSO was correct that there was no compensation increase as a

matter of law. But the JCSO would be wrong to think it would not have

properly borne the burden of proof if the statute applied.

     The burden of proof in administrative proceedings is governed under KRS

13B.090(7), which reads:

      [T]he party proposing the agency take action or grant a benefit has
      the burden to show the propriety of the agency action or entitlement
      to the benefit sought. The agency has the burden to show the
      propriety of a penalty imposed or the removal of a benefit previously
      granted.

Thus, if an administrative agency is imposing a penalty or revoking a benefit

previously granted, the administration must carry the burden of proof. JCSO

more or less argues the assessment is a penalty or that it is being deprived of a

benefit, requiring the Retirement Systems to prove the lack of a bona fide

promotion.

      We disagree, first, because KRS 61.598 does not impose a penalty.

Penalties are punitive in nature; they punish someone for engaging in behavior

considered prohibited or unlawful. An assessment under KRS 61.598(3) is not

                                        12
punitive because employers are not prohibited or bound by law not to increase

employee compensation. They may do so at their discretion, and even up to a

10% increase, there is no effect at all on the employer. Only beyond that 10%

are actuarial costs imposed on the employer, and it is not because the

employer has done something unlawful or forbidden.

      The assessment is also clearly not a revocation of a benefit granted. To

find that would require us also to find participant-employers are somehow

entitled to place the actuarial costs of their own pay increases, even absent a

bona fide promotion, on other participants in the system. JCSO was not

previously guaranteed or given the right to increase compensation beyond 10%

without sustaining costs related to such increase. So even dubiously

conceptualized as a “benefit,” such was never granted by the Retirement

Systems. The Retirement Systems was correct to place the burden on JCSO for

purposes of the proceeding.

     3. JCSO’s constitutional objections are moot.

     JCSO raises various constitutional bases for why the statute is either

invalid or does not apply as it has been. But having resolved this case entirely

on statutory grounds, we need not opine the constitutional ramifications of

KRS 61.598, as we refrain from resolving moot issues in general and, where

possible, from disturbing the validity of statutes on constitutional grounds. We

resolve nearly identical constitutional claims under different circumstances in

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Kentucky Retirement Systems v. Jefferson County Sheriff’s Office,11 rendered

today.

                                      IV. CONCLUSION

      For the reasons stated, we reverse the decision of the Court of Appeals,

and remand the case to the trial court with instructions to vacate the

Retirement Systems’s assessment.

      Minton, CJ., Hughes, Keller, Conley, VanMeter and Lambert, JJ., sitting.

All concur. Nickell, J., not sitting.

COUNSEL FOR APPELLANT:

David Leighty
Priddy, Cutler, Naake & Meade, PLLC

COUNSEL FOR APPELLEE:

Leigh A. Jordan Davis

      11   2019-SC-0476-T (Ky. June 17, 2021) (Part III.E).

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