Court Opinion

ID: 9396065
Source: CourtListenerOpinion
Date Created: 2023-05-19 14:06:21.631385+00
Date Added: 2024-06-11T17:19:13.696242
License: Public Domain

RENDERED: MAY 12, 2023; 10:00 A.M.
                            TO BE PUBLISHED

                  Commonwealth of Kentucky
                            Court of Appeals

                                NO. 2022-CA-0518-MR

KENTUCKY RETIREMENT
SYSTEMS, NOW KENTUCKY
PUBLIC PENSIONS AUTHORITY                                                  APPELLANT

                 APPEAL FROM FRANKLIN CIRCUIT COURT
v.               HONORABLE THOMAS D. WINGATE, JUDGE
                         ACTION NO. 18-CI-00860

DEPARTMENT OF PUBLIC
ADVOCACY                                                                     APPELLEE

                                       OPINION
                                      AFFIRMING

                                     ** ** ** ** **

BEFORE: CETRULO, DIXON, AND EASTON, JUDGES.

EASTON, JUDGE: The Appellant, Kentucky Retirement Systems, now Kentucky

Public Pensions Authority (“KPPA”),1 seeks relief from the Order of the Franklin

Circuit Court, which reversed the Final Order issued by the Board of Trustees of

1
 We will refer to the new name of KPPA even though actions reviewed were taken when the
name was Kentucky Retirement Systems.
KPPA (the “Board”). The circuit court concluded the Board erred when it

determined the Department of Public Advocacy (“DPA”) must pay the actuarial

costs associated with a greater than ten percent increase in the salary of one of

DPA’s former employees for one of the last five years of her employment.

Recognizing the substantial financial impact on state agencies should the precedent

of this KPPA decision be upheld, the Justice and Public Safety Cabinet and the

Cabinet for Health and Family Services collectively filed an amicus brief, for

which we granted leave. Upon review, we conclude the Franklin Circuit Court

correctly applied the law to undisputed facts, and we affirm.

                  FACTUAL AND PROCEDURAL HISTORY

             DPA is a participating agency in KPPA. Mary Rafizadeh

(“Rafizadeh”) was a former, full-time employee of DPA, and was a participant in

the pension administered by KPPA. Measuring the last five fiscal years of

Rafizadeh’s employment requires us to list the preceding year to see the increase

complained of by the KPPA, which was for Fiscal Year 2002. Between Fiscal

Year 2001 and Fiscal Year 2006 (“FY01-FY06”), Rafizadeh’s last years of

employment with DPA, Rafizadeh received the following compensation:

             FY01                    $54,117.38
             FY02                    $59,529.12
             FY03                    $65,990.10
             FY04                    $67,236.72
             FY05                    $68,863.80
             FY06                    $55,736.19

                                         -2-
DPA was Rafizadeh’s last participating employer with KPPA prior to her

retirement in 2016.

                On September 23, 2016, KPPA sent a letter and Notice of Pension

Spiking Details to DPA, advising that Rafizadeh received an annual increase in her

creditable compensation greater than ten percent for one of the last five years of

her employment. Specifically, KPPA stated increases in compensation from FY01

to FY02 totaled a greater than ten percent increase. The total increase was 18.1%.

KPPA considered this increase to be “pension spiking” as defined by KRS2 61.598.

KPPA decided DPA, as Rafizadeh’s last participating employer, was responsible

for paying the additional actuarial costs resulting from this increase, unless DPA

could show that such increase was the direct result of a bona fide promotion or

career advancement. KPPA determined the actuarial costs to be in the amount of

$1,805.67.

                In response, DPA submitted an Employer Request for Post-

Determination of Bona Fide Promotion or Career Advancement. Attached was a

document indicating Rafizadeh received a reallocation, a legislative salary change,

and increment increases during FY01 and FY02. On August 30, 2017, KPPA sent

DPA its decision. KPPA determined the greater than ten percent increase in

2
    Kentucky Revised Statutes.

                                          -3-
creditable compensation for Rafizadeh was not the direct result of a bona fide

promotion or career advancement.

             DPA then formally requested an administrative hearing to contest the

decision that Rafizadeh’s pay increase constituted pension spiking. An

administrative hearing before a Hearing Officer was held on February 21, 2018.

Erwin “Ernie” Lewis (“Lewis”) and Sherri Payne (“Payne”) testified on behalf of

DPA. Other than supporting exhibits for DPA, no other evidence was introduced.

             Lewis was the Public Advocate of Kentucky from 1996 to 2008.

Early in his tenure, Lewis organized the “Blue Ribbon Group” to fulfill his goal of

increasing salaries for DPA employees, whom he described as historically

underpaid and subject to “horrific” caseloads. The Blue Ribbon Group was

comprised of twenty members from the legislative, executive, and judicial

branches of our state government as well as attorneys and other community

members. The Blue Ribbon Group compared the salaries of public defenders in

Kentucky to the salaries of public defenders in twenty other states.

             The Blue Ribbon Group found DPA was the lowest funded group out

of all twenty comparable state systems studied, and specifically DPA’s employees

were the lowest paid employees out of all twenty states. Lewis testified the Blue

Ribbon Group determined DPA’s employees were deserving of an increase in

                                         -4-
compensation considering the comparable education and experience of the

employees of the other states.

             The Blue Ribbon Group brought its recommendations to Governor

Paul Patton for consideration in the Commonwealth’s budget. The General

Assembly approved a budget increase (basically half of what was sought) for DPA

to fund these salary increases. As a result, all attorneys (including Rafizadeh)

employed by DPA received an increase in compensation for FY02.

             Lewis explained DPA worked with the Personnel Cabinet to properly

allocate the salary increases. The salary structure of every attorney with DPA was

permanently changed. The resulting salary increases were mostly determined by

experience. Rafizadeh was the supervising attorney for DPA’s Covington office

during FY02, and her salary increase was like other supervising attorneys.

             Lewis admitted Rafizadeh was not promoted. Lewis said Rafizadeh

also received a five percent pay increase in October of 2001, which was then

routine for state employees. Even without this standard five percent increment, the

increase resulting from the General Assembly’s specific budget provision would

have been greater than a ten percent increase.

             Payne also testified on behalf of DPA. Payne is the Human Resources

Branch Manager for DPA. Payne explained that the term “reallocation” means a

certain job position is better classified as another position. A reallocated employee

                                         -5-
receives a pay increase if the new classification is at a higher grade. Reallocations

do not require additional training and are not considered promotions. Rafizadeh

was reallocated to a higher classification and pay grade. The Personnel Cabinet

directs reallocations, and DPA has no control over them. Once a position is

reallocated, all the employees in that position are reallocated, not specific

employees.

             Following the hearing, both sides filed briefs. The Hearing Officer

issued a Recommended Order on June 12, 2018. The Recommended Order

advised the Board to affirm KPPA’s decision “that the increase in Ms. Rafizadeh’s

creditable compensation greater than 10 percent was not due to a bona fide

promotion or career advancement.” As a result, the Hearing Officer determined

DPA owed KPPA $1,805.67 in actuarial costs pursuant to KRS 61.598.

             The Board met on July 26, 2018, and issued its Final Order. The

Final Order overruled DPA’s request for oral arguments and adopted the Hearing

Officer’s Recommended Order in its entirety. The Board thus denied DPA’s

Request for Post-Determination of Bona Fide Promotion or Career Advancement,

affirming the KPPA’s determination.

             DPA then appealed the Board’s Final Order to the Franklin Circuit

Court pursuant to KRS Chapter 13B. The matter was briefed but then held in

abeyance pending the outcomes of several cases before the Kentucky Supreme

                                          -6-
Court regarding pension spiking.3 After rulings were issued in these cases, the

parties submitted supplemental briefs. On April 26, 2022, the circuit court issued

its Order ruling the administrative record contained overwhelming evidence that

the Board misapplied the law, and that the Board’s Final Order was not supported

by substantial evidence. This appeal followed.

                              STANDARD OF REVIEW

              Upon judicial review, courts defer to agency fact-finding. Roach v.

Kentucky Parole Board, 553 S.W.3d 791, 793 (Ky. 2018). A reviewing court shall

not substitute its judgment for that of an agency as to the weight of the evidence on

questions of fact. KRS 13B.150(2). In McManus v. Kentucky Retirement Systems,

124 S.W.3d 454, 458 (Ky. App. 2003), the Court stated:

              When the decision of the fact-finder is in favor of the
              party with the burden of proof or persuasion, the issue on
              appeal is whether the agency’s decision is supported by
              substantial evidence, which is defined as evidence of
              substance and consequence when taken alone or in light
              of all the evidence that is sufficient to induce conviction
              in the minds of reasonable people. Where the fact-
              finder’s decision is to deny relief to the party with the
              burden of proof or persuasion, the issue on appeal is
              whether the evidence in that party’s favor is so
              compelling that no reasonable person could have failed to
              be persuaded by it.

(Citations omitted.)

3
 Jefferson Cnty. Sheriff’s Office v. Kentucky Retirement Systems, 626 S.W.3d 554 (Ky. 2021);
City of Villa Hills v. Kentucky Retirement Systems, 628 S.W.3d 94 (Ky. 2021); and Kentucky
Retirement Systems v. Jefferson Cnty. Sheriff’s Office, 630 S.W.3d 610 (Ky. 2021).

                                             -7-
             A reviewing court may reverse and remand an agency’s order

as to determinations of fact if it finds that the agency’s order is arbitrary,

capricious, or characterized by abuse of discretion. Roach, supra, at 793. Agency

determinations of law are reviewed de novo. Id. As we will explain, the question

in this case is not about a disputed fact; it depends on undisputed facts which

govern the legal question presented. That legal question is whether the undisputed

facts constitute a career advancement as intended by KRS 61.598.

             We must first differentiate what constitutes a finding of fact compared

with a conclusion of law in the Hearing Officer’s Recommended Order. The first

twelve numbered findings of fact are not disputed, but most of the factual

circumstances and reasons for the pay raise are omitted. The remaining findings of

fact in the Recommended Order start at number thirteen. For example, “finding”

number fifteen of the Recommended Order states, “This change in creditable

compensation was not the result of a bona fide promotion or career advancement.”

             This is not purely a finding of fact. At best, it is a mixed question of

fact and law, which we still review de novo with proper deference to the factual

components found by KPPA. When the question is mixed, we have “greater

latitude” in evaluating the evidentiary support for the factual component.

Arterburn v. First Cmty. Bank, 299 S.W.3d 595, 598 (Ky. App. 2009). Ultimately,

whether Rafizadeh’s reallocation meets the definition of “bona fide promotion or

                                           -8-
career advancement” as defined in KRS 61.598 is a conclusion of law, which is to

be reviewed de novo. Kentucky Retirement Systems v. Brown, 336 S.W.3d 8, 16

(Ky. 2011).

                                       ANALYSIS

              KPPA argues the circuit court erroneously rejected the KPPA’s

decision that DPA failed to prove Rafizadeh’s greater than ten percent increase in

creditable compensation was the direct result of a “bona fide promotion or career

advancement.” The 2013 version of KRS 61.598(2)4 states, in part:

              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 2013 version of KRS 61.598(1)(a)5 defines “bona fide promotion or

career advancement” as follows:

              [A] professional advancement in substantially the same
              line of work held by the employee in the four (4) years
              immediately prior to the final five (5) fiscal years
              preceding retirement or a change in employment position
              based on the training, skills, education, or expertise of the
              employee that imposes a significant change in job duties

4
 This version of KRS 61.598 was in effect from July 1, 2013, through March 27, 2017. The
2013 version of KRS 61.598(2) is incorporated in the current version as KRS 61.598(5)(a).
5
 The definition of “bona fide promotion or career advancement” remains unchanged under the
current version of KRS 61.598(1)(a).

                                             -9-
             and responsibilities to clearly justify the increased
             compensation to the member[.]

(Emphasis added.)

             The circuit court agreed with DPA that the record compelled a

conclusion that Rafizadeh received “a professional advancement in substantially

the same line of work as the last four years of employment.” The circuit court

determined that, when Rafizadeh’s position was moved to a higher pay grade, this

constituted a professional advancement in substantially the same line of work as

the last four years of her employment. The circuit court stated, in part:

             The Court agrees that a move to a new pay grade
             classification constitutes a professional (career)
             advancement. Further, the DPA admits that Rafizadeh’s
             professional (career) advancement did not require any
             significant change in job duties and was not based on
             training, skills, education or expertise. The Court again
             agrees with the DPA that a professional (career)
             advancement does not require a showing that the change
             in employment position was based on training, skills,
             education or expertise that imposed a significant change
             in job duties clearly justifying the pay increase.

             KPPA argues the circuit court erred regarding the meaning of the

term “professional advancement.” Before determining this question, we turn to the

decisions for which the parties waited for guidance. Two of the three cases were

companions involving the Jefferson County Sheriff’s Office. First, we must

acknowledge the burden of proof is on the employer to establish a promotion or

                                         -10-
career advancement. Jefferson County Sheriff’s Office v. Kentucky Retirement

Systems, 626 S.W.3d 554, 561-62 (Ky. 2021).

             In this first case, an employee had taken sick leave for a “bona fide

illness.” Id. at 557. The timing of the employee’s return to work caused a more

than ten percent total increase in compensation in the following year. Id.

Technically, this met the wording of the statute, but the Court warned against an

“overly mechanical application” of the statute. Id. The statute “requires [KPPA]

to examine, holistically and substantively, the reasons for a change in

compensation.” Id. at 560. “We find the application of KRS 61.598 in this

circumstance erroneous as a matter of law, and that the result was arbitrary.” Id. at

558.

             The second case, rendered on the same day, provided the Court with

an opportunity to contrast circumstances within and without the intention of the

statute. Kentucky Retirement Systems v. Jefferson County Sheriff’s Office, 630

S.W.3d 610 (Ky. 2021). The Court explained the statute is called a pension

spiking statute because it was “aimed at identifying artificial increases[.]” Id. at

613.

             The Jefferson County Sheriff’s Office implemented an accounting

change for pay from “when earned” to “when paid.” Id. at 615. This led to a

barely more than ten percent (10.06%) total increase for the year after this change.

                                         -11-
Id. at 614. Like the later paid sick leave in the first case, the move of the payments

due to the accounting change appeared as an increase in pay during a specified

year, when it in fact was no increase at all. The Court held this was not within the

meaning of the statute. Id. at 617.

             The Court then analyzed an increase in pay from overtime hours.

Such increase is not the result of any qualitative change in job duties, just more of

the same work. As such, KPPA, based on certain circumstances, could decide

such an increase is not the result of a promotion or career advancement. Id. at 621.

Still, the purpose of the statute indicates “the propriety of looking at the substantial

reasons for a pay increase.” Id.

             The third case is most instructive for the circumstances of the present

case. City of Villa Hills v. Kentucky Retirement Systems, 628 S.W.3d 94 (Ky.

2021). In Villa Hills, the Court reminds us about the reason for the statute. It was

enacted in response to “alleged historic mismanagement of the general pension

fund[.]” Id. at 109. To reduce strain on pension finances, the cost of artificial

increases by employers which increased pension benefits was shifted to the

employer making the increase decision. Id.

              In Villa Hills, the employer decided to merge two positions. Id. at 99.

A police officer was separately employed by contract to do building inspections.

Id. The inspector duties were brought “in house.” Id. The officer did the same

                                          -12-
jobs after the change. Id. The Court held this was within the intention of the

pension spiking statute. Id. at 106. But in so doing, the Court again cautioned

against a mechanical application of the wording of the statute: “career

advancements might take on various forms and manifestations; and the

circumstances of each case should be examined, as was done here.” Id.

           Of particular significance for this case, Villa Hills recognized the

separate nature of a promotion and a career advancement. The Court analyzed the

definitions found in KRS 61.598, stating, in part:

                    There are two basic ways to find a “bona fide
             promotion,” either (a) in a promotion or professional
             advancement in substantially the same line of work as the
             last four years of employment, or (b) a change in
             employment position based on training, skills, education,
             or expertise that imposes a significant change in job
             duties and responsibilities clearly justifying the pay
             increase.

Id. at 102 (emphasis added). Therefore, a “bona fide promotion” under Villa Hills

can either be “a promotion or professional advancement” under part (a) of the

definition, or a significant change in job duties or responsibilities under part (b).

             Again, DPA admits Rafizadeh was not promoted. Rafizadeh also did

not receive a specific salary increase due to her training, skills, education, or

expertise, nor did she receive a significant change in job duties or responsibilities.

But the phrase “promotion or professional advancement” under part (a) of the Villa

Hills’ definition of “bona fide promotion” is disjunctive in nature – implying the

                                          -13-
two words are not synonyms. Therefore, a “bona fide promotion” can also be

achieved when an employee experiences a professional advancement in

substantially the same line of work held by the employee in the four years

immediately prior to the final five fiscal years preceding retirement. As a bona

fide promotion can be achieved through a professional advancement under part (a)

of the definition, it would not require a significant change in job duties or

responsibilities under part (b).

             As previously detailed, the General Assembly approved a budget

increase for DPA. All attorneys employed by DPA (including Rafizadeh) received

an increase in compensation. The DPA worked with the Personnel Cabinet to

properly allocate the salary increases. The salary structure of every attorney in

DPA was permanently changed. The resulting salary increases were mostly

determined by experience of those in the new classifications.

             As explained in the undisputed testimony, the term “reallocation”

means a certain job position is better classified as another position. A reallocated

employee receives a pay increase if the new classification is at a higher grade.

Rafizadeh’s position was reallocated from a lower pay grade to a higher pay grade.

The Personnel Cabinet made the reallocations, and DPA ultimately had no control

over them. Once a position is reallocated, all the employees in that position are

reallocated, not specific employees.

                                         -14-
                Taking the above into consideration, we agree with the circuit court.

Looking at the situation holistically and in these circumstances, the reallocation

and move to a new pay grade classification constituted a professional advancement

in substantially the same line of work as the last four years of employment.

                “Reallocation” is defined as the “correction of the classification of an

existing position by placement of the position into the classification that is

appropriate for the duties the employee has been and shall continue to perform.”

KRS 18A.005(29). Employees who have been reallocated are deemed to have

“advanced” to a higher pay grade. 101 KAR6 2:034 § 3(3)(a) (emphasis added).

Further, employees who advance to a higher pay grade have salary rights protected

in the event of a demotion. In the event of demotion, an employee’s salary cannot

be reduced by more than five percent per pay grade. 101 KAR 2:034 § 3(2)(a).

                Rafizadeh’s position was reallocated to a higher classification

appropriate for her duties, and she also received a commensurate pay raise. An

unexplained pay raise alone might not meet the requirements of a bona fide

promotion or career advancement as defined in Villa Hills; however, a pay raise to

correct chronic underpayment plus a reallocation to a higher classification

constitutes a career advancement under the statute in this case. This cannot

logically be categorized as “pension spiking.”

6
    Kentucky Administrative Regulations.

                                            -15-
                 We must take the legislative intent of both KRS 61.598 and the

General Assembly’s budget increase for DPA salaries into consideration.

Legislative intent is paramount when construing a statute. Martin v. Warrior Coal,

LLC, 617 S.W.3d 391, 394 (Ky. 2021). The intent of the General Assembly in

passing the pension spiking statute was to prevent the artificial inflation of salaries

right before retirement. The pension system was financially strapped. It was seen

as unfair when employers loaded up increases during the final “high five” years of

employment further taxing the funding of pensions by the state generally. When

such abuses occur, the employer should bear the cost.

                 The pay increase here was not an abuse. The term “bona fide”7

implies the raise at issue must not be based on a sham. Rafizadeh was not

singularly targeted for a raise immediately before she planned to retire with no

justification for the raise. There was no sham involved. Instead, all public

defenders were given an overdue raise and reallocation. It would be inconsistent

for Rafizadeh’s legislatively mandated pay increase to be considered pension

spiking just because she left DPA well before she retired, when these same pay

increases for persons who did not leave DPA during this timeframe could not be

subject to the pension spiking statute.

7
    Latin for “good faith.”

                                           -16-
             We also note the Personnel Cabinet has control over reclassifications.

In other words, the DPA as the employer did not grant these increases on its own

contrasted with what occurred in Villa Hills and the other recent cases. It would be

unfair for agencies to be assessed with actuarial costs for raises not solely

determined by them. Further, assessing agencies with actuarial costs may dissuade

employers from providing deserved raises. As the circuit court mentioned in its

Order, “It would be disingenuous and against the interest of hiring and retaining

state employees to deny them deserved raises because agencies are threated [sic]

with actuarial costs when pension spiking was not the intent behind the General

Assembly’s good natured action to fairly compensate state employees.”

             KPPA still insists KRS 61.598 has no intent element, and that the lack

of spiking intent in increasing Rafizadeh’s retirement is irrelevant. But as

previously mentioned, the KPPA is required to look to the substance of the reason

for a compensation increase. The reason for Rafizadeh’s pay increase was that the

General Assembly decided to increase the deserved pay leading to a

reclassification of DPA’s employees to better reflect their duties and

responsibilities. The pay increase was not intended to artificially raise Rafizadeh’s

retirement or that of anyone else.

             Each side has argued the interpretation advanced by the other would

lead to an absurd result. Mills v. Department of Correction Offender Information

                                         -17-
Services, 438 S.W.3d 328, 334 (Ky. 2014) (cited by KPPA). When statutes are

applied, they should not be applied in such a way as to lead to a result the General

Assembly could not have intended.

             This case involves an executive branch agency of the state

government. In this, it is different from Villa Hills and the other recent cases.

Saddling an employer with an independent budget and its own source of revenue

(counties and cities) with the actuarial costs of an artificial pay increase is an

appropriate and intended result of KRS 61.598. When state agencies are involved,

we are simply arguing over from which “pot” of the same revenue the actuarial

costs should be taken. To properly fund the pensions will require the General

Assembly to allocate the same amount of funds one way or the other. In these

undisputed circumstances, to take back from the chronically underfunded DPA

actuarial costs of a long-overdue and deserved adjustment to salaries would be an

absurd result not intended by the General Assembly, which directly and

purposefully funded the increase.

                                  CONCLUSION

             The circuit court did not err in reversing the Final Order of the Board.

Therefore, the Order of the Franklin Circuit Court is AFFIRMED.

             ALL CONCUR.

                                          -18-
BRIEFS FOR APPELLANT:          BRIEF FOR APPELLEE:

Katherine Rupinen              B. Scott West
Frankfort, Kentucky            Frankfort, Kentucky

BRIEF OF AMICUS CURIAE FOR
THE JUSTICE AND PUBLIC
SAFETY CABINET AND THE
CABINET FOR HEALTH AND
FAMILY SERVICES:

Peter Dooley
Leah Boggs
LeAnne Applegate
Frankfort, Kentucky

                             -19-