One of the problems with the underfunded New Hampshire Retirement System (NHRS) is the large severance packages paid at the end of employees’ careers to boost the pension benefit without the actuarially-required contributions being made to NHRS to fund that benefit. An employee’s annual retirement allowance is based on the three highest years of “earnable compensation,” which generally includes the full base rate of compensation paid plus various other sorts of compensation such as overtime, special detail, holiday, vacation and sick pay. RSA 100-A:1, XVII. When NHRS actuarial calculations do not anticipate such large severance packages and enhanced pension benefits, shortfalls result. As the Legislature continues to grapple with the problem in the 2009 session, the Supreme Court issued two opinions in April dealing with whether certain payments to Group I members, teachers, were “earnable compensation.”
In the Farmington case, collective bargaining agreements provided that a teacher who has reached age 50 may “elect to have his/her fringe benefits counted as if they were salary. The member is responsible for reimbursing the district for the district’s share of the increased social security tax, state retirement, and the like, on these additional monies. The member must retain membership in the health care plan and the dental plan for the school year.” The plaintiff teachers elected this option during their last three years of employment, making the required reimbursement payments for the health insurance premium and other expenses to the school district bi-weekly or in an annual lump sum.
When NHRS staff learned of the practice, the staff issued a notice that the payments did not qualify as “earnable compensation.” The teachers appealed the ruling to the Board, whose hearing examiner made the following finding: “After the election of the [Collective Bargaining Agreement (CBA) option], a member’s salary appeared to increase because the number on the face of the paycheck and on the W2 went up. However, that money was never paid to the member in the sense that the member could keep it and spend it however he or she pleased. All of the apparent pay increase had to be returned to the Farmington School District.” The Board upheld the staff, and the plaintiffs appealed to the Supreme Court by means of a petition for writ of certiorari. They claimed that the payments ought to be included in the broad definition of “earnable compensation,” because it includes “other compensation paid to the member by the employer.”
The Court upheld the Board: “We believe … that ‘compensation’ under the statute does not include payment of the cash equivalent of a fringe benefit that must then be returned to the employer. … Thus, the teachers did not receive any additional salary but, rather, simply had their fringe benefits counted as if they were salary, to enhance their retirement pensions.”
The Concord case involved a 1991 statutory amendment that capped the amount of “earnable compensation” but exempted from the cap severance pay if “all or part of such severance pay was based on accrued holiday, vacation or sick time or credits earned on account of service rendered before the effective date of this act.…” Laws 1991, Chapter 313:7. Under their CBA with the Concord School District, the plaintiffs received a “Separation Benefit” consisting of a cash payment for certain unused sick leave and an “Early Retirement Benefit” that included a single retirement cash payment according to the retiree’s age. The early retirement cash payment was ostensibly linked to pre-1991 accrued sick leave by certain language in the CBA: “To the extent the retiree has accumulated sick leave [prior to June 30, 1991] in excess of the amount paid in accordance with the [CBA] separation benefit, said sick leave shall be paid to the retiree at the retiree’s present per diem and shall be applied to reduce by a maximum of up to fifty percent (50%) the retirement cash benefit set out herein.”
For about ten years NHRS accepted the School District’s representations that retiring teachers’ Early Retirement Benefits included payments for pre-1991 sick days and thus were exempt from the statutory cap on earnable compensation. In 2003, however, administrative staff denied the plaintiffs’ claims. On appeal to the Board, the hearing examiner reported to the Board: “In 2003, the retirement system received a document from Concord that … laid out how the school district was paying the benefit for an individual. … As a result of this document, it became clear … that regardless of how many sick days an individual may have, they still received th[e same amount of early retirement incentive]. … Contrary to certifications from … [the school district], the member received a lump sum that was based on age and the amount of the early retirement incentive spelled out in the Master Agreement.” The Board affirmed the staff decision.
In their petition to the Supreme Court the plaintiffs claimed that the “early retirement benefit” was, in fact, “based on unused, pre-1991 sick time.” In upholding the Board, the Court focused on the key document referred to by the hearing examiner: “[A] document included within one petitioner’s NHRS submission was prominently labeled, in bold print, ‘INTERNAL DOCUMENT – NOT FOR USE WITH NHRS!’” The document explained how the individual payout was calculated and made it clear that the retiree’s early retirement benefit remained the same regardless of the amount of her unused, pre-1991 sick time. Further investigation revealed to NHRS that age was the only variable in the early retirement benefit calculation.” The Court also rejected plaintiffs’ constitutional and collateral estoppel claims that the NHRS should be prevented from changing its erroneous practice of exempting the “early retirement benefit” from the cap on earnable compensation.