Opinion
NO. 2018-CA-000809-MR
07-05-2019
CITY OF VILLA HILLS, KENTUCKY APPELLANT v. KENTUCKY RETIREMENT SYSTEMS APPELLEE
BRIEFS FOR APPELLANT: Mary Ann Stewart Covington, Kentucky Bryce Rhoades Covington, Kentucky BRIEF FOR APPELLEE: Carrie Bass Frankfort, Kentucky
NOT TO BE PUBLISHED APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE PHILLIP J. SHEPHERD, JUDGE
ACTION NO. 17-CI-00706 OPINION
AFFIRMING
** ** ** ** **
BEFORE: COMBS, NICKELL, AND K. THOMPSON, JUDGES. COMBS, JUDGE: The City of Villa Hills appeals from an order of the Franklin Circuit Court that concluded that Kentucky Retirement Systems (the Systems) properly applied certain provisions of KRS 61.598. At issue is whether the City is required under the statute to bear increased actuarial costs associated with a significant increase in its employee's creditable compensation during the period that immediately preceded his retirement. After our review, we affirm.
Kentucky Revised Statutes.
Kentucky Retirement Systems is an administrative agency of the Commonwealth created by statute and administered by a board of trustees. It manages and administers the pension fund of the County Employee Retirement System (CERS). The City of Villa Hills participates in CERS and, along with other participating employers, contributes annually a sum computed with reference to an actuarial valuation.
In October 1997, Joseph Schutzman began working with the City of Villa Hills Police Department. He patrolled the City, investigated crimes, and filed reports. Until November 29, 2010, Schutzman also performed building inspections, code enforcement, and zoning duties for the City as part of his personal business, Schutzman Inspection Services, LLC.
On November 29, 2010, the mayor of Villa Hills issued an executive order transferring building inspections, code enforcement, and zoning duties to the police department. Schutzman was the only officer to perform these additional duties. Schutzman's compensation increased significantly from $60,026.40 (2009-2010) to $115,252.23 (2010-2011) and then to $164,681.55 (2011-2012). He was paid $111,317.93 during 2012-2013.
In an effort to deter "pension-spiking" schemes, the General Assembly enacted KRS 61.598 in 2013. The statute became effective on July 1, 2013. Schutzman retired from the City of Villa Hills Police Department on February 1, 2014.
Pursuant to the requirements of KRS 61.598, Kentucky Retirement Systems assessed the City $212,532.91 for the increased actuarial costs incurred as the result of the spikes in Schutzman's compensation during the fiscal years 2010-2011 and 2011-2012. The City argued that the substantial increases in Schutzman's salary were attributable to his bona fide career advancement; it challenged the Agency's demand for it to make an enhanced contribution to the pension fund based upon the increased actuarial costs of its employee's pension benefit.
Kentucky Retirement Systems was not persuaded that the shift in Schutzman's employment justified the spikes in his compensation. It stood by its position that the City should bear the additional actuarial costs associated with the increased compensation rather than spreading the costs to the other employers participating in CERS. The City requested an administrative hearing.
Following the administrative hearing, the Agency's hearing officer concluded that the substantial increase in Schutzman's compensation was not due to a bona fide promotion or career advancement as defined by the provisions of KRS 61.598 and recommended an order in favor of Kentucky Retirement Systems. Following its review, the board of trustees for the Systems adopted the recommended order.
The City sought judicial review of the administrative order in Franklin Circuit Court. Following its review, the circuit court determined that the provisions of KRS 61.598 governed the dispute, that the statute had been correctly applied by Kentucky Retirement Systems, that the Agency's decision had been based upon substantial evidence, and that the City's evidence did not compel a decision in its favor. Consequently, the court affirmed the Agency's final order. This appeal followed.
On appeal, the City presents numerous arguments. First, it contends that the circuit court erred by concluding that the provisions of KRS 61.598 are applicable to this dispute. In the alternative, it argues that the trial court erred by failing to address its contention that the provision is unconstitutional. Next, the City argues that the circuit court erred by assigning to it the burden of proof and by concluding that Schutzman's receipt of overtime pay could not serve as an indicator of his bona fide advancement in his career. Finally, the City argues that the trial court erred by concluding that the Agency's determination was supported by substantial evidence. We shall address each of these arguments.
At the time of Schutzman's retirement, KRS 61.598 provided, in relevant part, as follows:
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 City contends that the provisions of KRS 61.598 are inapplicable to this dispute because the General Assembly did not expressly declare that its provisions were to be applied retroactively. Consequently, it argues that the five-year look-back period provided for in the statute cannot encompass earnings paid in fiscal years that elapsed before the effective date of the statute. It argues that the "spiking event, not [the] retirement date, []is key" and that the failure of the legislature to address the timing of the "spiking event," indicates that it did not intend that the provision would apply retroactively. We disagree.
The provisions of KRS 446.080(3) prohibit a statute from being applied to events which occurred prior to the effective date of the statute unless the statute expressly provides for its retroactive application. Kentucky Industrial Utility Customers, Inc. v. Kentucky Utilities Company, 983 S.W.2d 493 (Ky. 1998). Accordingly, our courts have declared that there is a strong presumption that statutes operate prospectively and that retroactive application of statutes will be approved only if it is absolutely certain that the General Assembly intended such a result. Commonwealth Dept. of Agriculture v. Vinson, 30 S.W.3d 168 (Ky. 2000). This reasoning is particularly true when the legislation is substantive and not remedial -- and when new rights and new duties are created. Gould v. O'Bannon, 770 S.W.2d 220 (Ky. 1989).
In its argument, the City discounts the legislature's express language requiring the last participating employer to bear the additional actuarial costs that result from a spike in compensation involving "employees retiring on or after January 1, 2014." The language of KRS 61.598 is plain and unequivocal; its provisions apply expressly to the City in this case since the annual increase in Schutzman's creditable compensation exceeded ten percent and he retired on or after January 1, 2014. The "spiking event" which triggered the employer's enhanced financial responsibility occurred before the statute's enactment. That period of time was clearly envisioned by the statute because it explicitly refers to the final five years of employment preceding his retirement in January 2014.
The legislature included an option (KRS 61.598(4)) by which employers could test the effect of a proposed change of position by requesting a prospective determination by Kentucky Retirement Systems as to whether the change constituted a bona fide promotion. While participating employers were not afforded this option until after the date of the enactment, this scenario was contemplated by the plain language of the statute. Consequently, the circuit court did not err by concluding that the General Assembly expressly provided that the statute provided applies where an employee retires on or after January 1, 2014. It properly applied that statute to pension-spiking transactions that occurred before the statute's enactment.
Next, the City contends that the provisions of KRS 61.598 and its implementing regulations -- as applied -- violate standards of substantive due process and Section 2 of the Kentucky Constitution. It contends that requiring that the City pay for the increased actuarial costs (resulting from a pension-spiking scheme) effectively means that it will be forced to pay twice. The City claims that this surcharge is merely a device by which the Agency can "rectify years of poor investment decisions." We disagree with the City's analysis.
Section 2 of the Kentucky Constitution provides that "[a]bsolute and arbitrary power over the lives, liberty and property of freemen exists nowhere in a republic, not even in the largest majority." KY. CONST. § 2. Section 2 is intended to curb the exercise of arbitrary authority by the government by "embrac[ing] the traditional concepts of [] due process of law. . . ." Bd. of Educ. v. Jayne, 812 S.W.2d 129, 131 (Ky. 1991). Principles of substantive due process provide protection against governmental interference with certain fundamental rights that are encompassed in the terms "life," "liberty," and "property." White v. Boards- Bey, 426 S.W.3d 569, 573-74 (Ky. 2014) (citing McDonald v. City of Chicago, Ill., 561 U.S. 742, 130 S. Ct. 3020, 3090-92, 177 L. Ed. 2d 894 (2010)).
As a political subdivision of the Commonwealth, the City is not a sovereign entity. See Ysursa v. Pocatello Educ. Ass'n, 555 U.S. 353, 362-64, 129 S. Ct. 1093, 1100-01, 172 L. Ed. 2d 770 (2009) (citing Reynolds v. Sims, 377 U.S. 533, 575, 84 S. Ct. 1362, 12 L. Ed. 2d 506 (1964)). Instead, it is a subordinate entity created to carry out specified delegated government functions within its geographical limits. State political subdivisions are "merely ... department [s] of the State, and the State may withhold, grant or withdraw powers and privileges as it sees fit." Id., 555 U.S. at 362-64, 129 S. Ct. at 1100-01 (citing Trenton v. New Jersey, 262 U.S. 182, 187, 43 S.Ct. 534, 67 L.Ed. 937 (1923)).
Nevertheless, the Commonwealth's legislative action is subject to constitutional scrutiny. As the Kentucky Retirement Systems correctly observes, however, that scrutiny is limited to a determination of whether the statutory provision is rationally related to a legitimate legislative purpose. See Miller v. Johnson Controls, Inc., 296 S.W.3d 392, 397 (Ky. 2009). We are persuaded that the requirements of the statute are reasonable in light of the Commonwealth's interests both in discouraging pension-spiking schemes and in compelling individual employers to pay for the resulting added costs to government. Thus, the application of the statute does not violate constitutional principles of due process.
The City next addresses Agency's determination that Schutzman's employer (the City) bore the burden of proving that the substantial increase in his creditable compensation was due to a bona fide promotion or career advancement. The City argues that the court erred in affirming that finding by the Kentucky Retirement Systems. We disagree.
KRS 13B.090(7), the provision of administrative procedure that the City contends is relevant to this argument, provides that the "[A]gency has the burden to show the propriety of a penalty imposed or the removal of a benefit previously granted." The City claims that the Agency's additional assessment following Schutzman's retirement constitutes a "penalty" or the "removal of a benefit previously granted." However, the assessment merely requires the City to bear the additional actuarial costs associated with its decision to increase substantially its employee's creditable compensation rather than have those costs shared by other employers participating in CERS. The additional assessment is the means by which Kentucky Retirement Systems equitably apportions the inflated costs of pension benefits to participating employers.
Despite the City's characterization, Kentucky Retirement Systems did not determine that the City had "violated" the provisions of KRS 61.598. Kentucky Retirement Systems simply concluded that the assessment provision of the statute had been triggered by the City's decision to increase Schutzman's compensation substantially. The assessment is not a penalty; nor does it take away any benefit previously granted. Consequently, we find no error in the assignment to the City of the burden both of proof and of persuasion.
The City also argues that Schutzman's receipt of overtime pay was indicative of his "bona fide promotion or career advancement." It contends that it was clear error for the Agency to exclude overtime pay from its administrative determination. It also contends that the circuit court's failure to address the City's argument on this point was clearly erroneous.
KRS 61.598(1) defines "bona fide promotion or career advancement," in relevant part, 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 and responsibilities to clearly justify the increased compensation to the member[.]In its final order, the Agency found from the evidence as follows:
This change in [Schutzman's] creditable compensation was not the result of a change in Mr. Schutzman's employment position based upon his training, skills, education or expertise that imposed a significant change in job duties and responsibilities and therefore was not the result of a bona fide promotion or career advancement. Though the employer argues that Mr. Schutzman's increase in creditable compensation is due to a bona fide promotion or career advancement through
the introduction of building inspection and code enforcement responsibilities, Mr. Schutzman was never officially promoted to Assistant Chief. Despite the submission of numerous personnel policies, there is no "Assistant Chief of Police" position for the relevant time period. Even assuming that Assistant Chief of Police was a position that existed, there is no evidence that Mr. Schutzman was, in fact, appointed to that position. Similarly, there is no job description in the personnel policies for "Building and Zoning Inspector" nor any evidence that Mr. Schutzman was officially assigned that job title. Prior to enacting Executive Order 2010-01, Mr. Schutzman performed all building and zoning service for the City of Villa Hills under his private business, Schutzman Inspection Services. When Executive Order 2010-01 was enacted, Mr. Schutzman continued to perform these building and zoning services, just under the umbrella of the City of Villa Hills Police Department with a $10/hour pay raise. Given these factors, there is insufficient evidence to conclude that there was, in fact, a significant change in job duties giving rise to the increase in creditable compensation.
The Agency also observed that Schutzman's substantial increase in compensation was based, in part, upon his accumulation of overtime hours. It concluded that simply working overtime did not constitute a bona fide promotion or career advancement.
Upon its review, the circuit court reasoned as follows:
In reaching the conclusion that Mr. Schutzman's increases in creditable compensation were not due to "a bona fide promotion or career advancement," the Final Order points to [the City's] failure to provide any personnel records to substantiate that Mr. Schutzman was promoted or appointed to any position other than the detective/police officer role that he held from 1997-2014.
The "bona fide promotion or career advancement" requirement generally looks to see whether there is a change in the role an employee has been performing. Such change must be based on the "training, skills, education, or expertise" of the employee and the end result of this change must be that the employee's job duties and responsibilities are significantly altered so a to justify the increased compensation.
. . .
Subsequent to the transfer [of building inspection, code enforcement, and zoning duties to the City's police Department], the record reflects that Mr. Schutzman's duties within the Villa Hills Police Department essentially consisted of continuing in his role as a police officer as well as performing the building inspection, code enforcement, and zoning work that he had previously performed as an independent contractor.
Building inspections have nothing to do with police work, which deals exclusively with the detection, prevention, and prosecution of crime. The City has failed to demonstrate any good faith basis in policy or law for the transfer of duties from Mr. Schutzman's private company to the Police Department. The result of this transfer was an enormous increase in overtime compensation for Mr. Schutzman for services that were previously performed without payment of any overtime costs to the City. For at least one year in question, Mr. Schutzman was paid more than the Governor of Kentucky and the Chief Justice.
The only rationale that Executive Order 2010-01 provided for changing the form in which Mr. Schutzman provided the services was that "the City needs someone to perform the duties of the building inspector, code enforcement officer, zoning duties." However, given the fact that Mr. Schutzman was already performing building
inspection, code enforcement, and zoning work for the City as a private contractor, this rationale has no factual basis. A formalistic shift in the method of providing services that is unaccompanied by any reasoned substantiation for such shift cannot be sufficient to demonstrate that an employee has experienced a "significant change in job duties and responsibilities to clearly justify the increased compensation to the member." . . . This shift in [Schutzman's] duties from private contractor to public employee appears to be calculated to inflate his compensation to the personal benefit of Mr. Schutzman, and to the financial detriment of the taxpayers. This transfer of duties was approved by City officials, and it would be unfair to require other public agencies who participate in KRS to share in the costs of this unwarranted decision.
We find no error in the court's reasoning rejecting the City's consistent insistence that Schutzman's heightened compensation was attributed to bona fide promotion or career advancement. The City simply failed to meet its burden of proof on this point.
Finally, the City argues that the circuit court erred by concluding that substantial evidence existed in support of the Agency's determination that an assessment was required under the provisions of the statute. However, we find no error on this point.
An employer who disagrees with the application of the provisions of KRS 61.598 by the Kentucky Retirement Systems may appeal the decision to the Franklin Circuit Court pursuant to KRS Chapter 13B. KRS 61.645(16). KRS 13B.150(2) provides that the circuit court "shall not substitute its judgment for that of the [A]gency as to the weight of the evidence on questions of fact."
The reviewing court may reverse the Agency's final order if it finds the order is not supported by substantial evidence on the record. Id.; see also Ky. Retirement Sys. v. Brown, 336 S.W.3d 8, 13-14 (Ky. 2011) (discussing role of KERS as "finder of fact"). However, when the fact-finder denies relief to the party with the burden of proof or persuasion, the court must consider whether the evidence in that party's favor is so compelling that no reasonable person could have failed to be persuaded by it. See Ky. Retirement Sys. v. Wimberly, 495 S.W.3d 141 (Ky. 2016). "In its role as a finder of fact, an administrative agency is afforded great latitude in its evaluation of the evidence heard and the credibility of witnesses, including its findings . . . of fact." Aubrey v. Office of Attorney General, 994 S.W.2d 516, 519 (Ky. App. 1998) (citing Kentucky State Racing Commission v. Fuller, 481 S.W.2d 298, 309 (Ky. 1972)).
In this case, Kentucky Retirement Systems rejected the City's contention that Schutzman's spike in compensation came as a consequence of his bona fide promotion or career advancement, and the Franklin Circuit Court concluded that substantial evidence supported that decision. Quoting McManus v. Kentucky Retirement Systems, 124 S.W.3d 454 (Ky. App. 2003), the Franklin Circuit Court correctly observed that it could reverse the administrative decision only if the evidence in favor of the City was so compelling that no reasonable person could have failed to be persuaded by it. The court was not convinced that the City had proffered evidence so overwhelming that it compelled a decision in its favor.
After our review, we agree with the Franklin Circuit Court that substantial evidence supported the decision of Kentucky Retirement Systems. It carefully assessed the credibility of the City's assertion that Schutzman's increased compensation simply reflected the change in his employment and specifically rejected that contention. The Agency's assessment is amply supported by the lengthy record compiled by the hearing officer. We also agree that the City's proof is not so compelling that a reasonable person could fail to be persuaded by it. Consequently, there are no grounds for reversal of the administrative decision of the Kentucky Retirement Systems or the holding of the trial court.
Therefore, we affirm the order of the Franklin Circuit Court.
ALL CONCUR. BRIEFS FOR APPELLANT: Mary Ann Stewart
Covington, Kentucky Bryce Rhoades
Covington, Kentucky BRIEF FOR APPELLEE: Carrie Bass
Frankfort, Kentucky