In a pension rights case with major implications, on August 10th, the First District Court of Appeal issued a decision for the retiree in Nowicki v. Contra Costa County Employees’ Retirement Association (Case No. A160337). In a surprising but welcome result, the Court overruled the retirement system’s attempt to reduce the retiree’s pension benefit retroactively using a statute that came into effect after the retiree’s retirement date.
Several recent decisions in pension cases have addressed what has been referred to as pension “abuse” or “spiking.” These derogatory terms have been used to describe various means by which retirees raise the value of their annual pension benefit by increasing the total amount of compensation they earn in their final year of employment. Examples include earning significant amounts in uniform or overtime allowances and cashing out unused vacation and sick leave credits. Prior to 2013, when the Public Employees’ Pension Reform Act (“PEPRA”) came into effect, CalPERS and many of the county and city retirement systems across the state allowed retirees to take various actions to increase their pension benefit. This included the Contra Costa County Employees’ Retirement Association (“CCCERA”).
The Legislature enacted PEPRA in response to news of several cases where public employees improperly increased their compensation and pensions, some of whom were criminally prosecuted. PEPRA made significant changes to what forms of compensation were considered pensionable—that is, included in the calculation of an employee’s retirement benefit. Notably here, these changes included excluding from pensionable compensation any cashed out vacation or other accrued leave credits.
Peter Nowicki became Fire Chief at the end of a long career with the Moraga-Orinda Fire District, which contracts with CCCERA to provide pensions to its eligible employees. He started with the Fire District as a Firefighter-Paramedic, advancing through the ranks to Battalion Chief. Then in 2006, the Fire District hired him as its Fire Chief under a written employment contract approved by its Board of Directors. According to the terms of his contract, Chief Nowicki was entitled to fewer benefits than he had in his prior position as a Battalion Chief. But the contract included a provision that allowed his compensation and benefits to be adjusted each year, as was normal for the Fire Chief position. He was entitled to such adjustments in 2007 and 2008, but due to the Board’s delay in completing his annual performance evaluations, the adjustments for both years came into effect in 2008. Due to personal issues unrelated to work, Chief Nowicki retired from the Fire District in January 2009. As part of the retirement process, he applied for and received a pension benefit from CCCERA, which was based on his base salary and the additional forms of pensionable compensation he received in his final year of employment.
Spurred by the enactment of PEPRA, CCCERA decided in late 2013 to conduct a review of the pensions it had granted in past years to determine whether any retiree was receiving an improperly large pension benefit. This review included Chief Nowicki’s retirement in 2009. CCCERA determined that Chief Nowicki “improperly” increased his pension benefit by negotiating the compensation adjustments he received in 2008 when he knew he would soon retire. It also determined that Chief Nowicki’s “improper” behavior included so-called “straddling,” by cashing out accrued vacation and holiday leave credits in late 2008 and early 2009 so that it was all included in his final year of employment for purposes of calculating his pension benefit. When Chief Nowicki challenged CCCERA’s determination, the retirement system’s Board of Retirement applied the new restrictions adopted in PEPRA and ruled Chief Nowicki improperly increased his pension benefit. As a result, Chief Nowicki was ordered to repay over half a million dollars to the retirement system, wiping out a substantial portion of his pension benefits both retroactively and prospectively.
Chief Nowicki appealed CCCERA’s decision to the Contra Costa County Superior Court, arguing that he had scrupulously followed the retirement system’s rules that were in place in 2009—supported by the fact that he followed CCCERA staff advice—and so did not engage in any improper behavior. But the Superior Court applied the most lenient standard of review (whether CCCERA’s decision was an “abuse of discretion”), and upheld the pension system’s decision. Around the same time that several high-profile pension cases were being decided across the state, Chief Nowicki, represented by Messing Adam & Jasmine LLP’s Steven Kaiser, appealed to the First District Court of Appeal.
The Court of Appeal ruled that Chief Nowicki had followed the rules in existence at the time of his retirement, including following the instructions he was given by CCCERA staff. His contract was a public record, he received his compensation pursuant to official actions of the Fire District’s Board of Directors, and he did nothing in violation of the law. The Court acknowledged that some of the pensionable compensation claimed by Chief Nowicki might have been excluded by PEPRA, but his retirement pre-dated PEPRA by several years and so was not improper at the time. The Court determined that, by applying PEPRA standards to Chief Nowicki in 2015, CCCERA abused its discretion.
The Court found that, by enacting PEPRA, “it simply is not plausible that the Legislature intended to empower retirement boards to target long retired county employees who had negotiated with their employer for contract terms permitted under then-existing law and county retirement association guidance, solely because those acts enabled them to increase their final compensation at the time of retirement.” Thus, although Chief Nowicki engaged in what has since come to be referred to as pension “spiking,” CCCERA could not retroactively penalize him for conduct that, at the time, was expressly allowed and in which other employees engaged. The Court reversed the ruling against Chief Nowicki and ordered the Superior Court to grant him a writ of mandate ordering CCCERA to rescind its decision reducing his pension benefit and to reinstate his benefit to its originally calculated value.
This decision sets a precedent that will help protect public employees who retired before 2013, when PEPRA came into effect. Employees who retired before 2013 and followed the rules that were in place then should not be unfairly penalized for their actions. We are proud to have contributed to this important ruling.