Pendergast v. Arizona State Retirement System

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

BONNIE PENDERGAST, Plaintiff/Appellee,

v.

ARIZONA STATE RETIREMENT SYSTEM, an agency of the State of
Arizona, Defendant/Appellant.

No. 1 CA-CV 13-0244
FILED 5-1-2014

Appeal from the Superior Court in Maricopa County
No. LC2012-000596
The Honorable Crane McClennen, Judge

AFFIRMED

COUNSEL

Snell & Wilmer, LLP, Phoenix
By Joshua Grabel, Adam E. Lang, and Martha E. Gibbs
Counsel for Plaintiff/Appellee

Arizona Attorney General’s Office, Phoenix
By Jothi Beljan
Counsel for Defendant/Appellant

OPINION

Judge Lawrence F. Winthrop delivered the opinion of the Court, in which
Presiding Judge Patricia A. Orozco and Judge Kenton D. Jones joined.
 PENDERGAST v. ASRS
Opinion of the Court

W I N T H R O P, Judge:

¶1 The Arizona State Retirement System (“ASRS”) appeals the
decision of the superior court finding the 2011 legislative amendment to
the public service credit purchase program violated ASRS member Bonnie
Pendergast’s constitutional rights. We affirm because the public service
credit purchase program was a public retirement system benefit when the
voters passed Article 29, Section 1(C) of the Arizona Constitution,
Pendergast’s eligibility under the program is therefore constitutionally
protected from diminishment, and the 2011 legislative amendment
unconstitutionally diminishes her vested rights to public retirement
system benefits under the program.

FACTS AND PROCEDURAL HISTORY

I. The Parties

¶2 ASRS is a defined benefit retirement plan for public
employees. See Arizona Revised Statutes (“A.R.S.”) section 38-712 (West
2014). 1 Members of the plan include employees of the State of Arizona
and participating Arizona political subdivisions. A.R.S. § 38-711(13);
A.R.S. § 38-727(A). A member qualifies for monthly pension benefits
through ASRS upon reaching a combination of age and years of credited
service. See A.R.S. § 38-711(27)(a). For a member who joined ASRS prior
to July 1, 2011, “normal retirement” may begin upon (a) a member’s sixty-
fifth birthday, (b) a member’s sixty-second birthday and completion of at
least ten years of credited service, or (c) the first day that the sum of a
member’s age and years of credited service reaches the number eighty.
A.R.S. § 38-711(27)(a).

¶3 Bonnie Pendergast became a member of ASRS in 1984 when
she began teaching in the Mesa Public School System. In 1996, Pendergast
moved to Minnesota where she taught until 2006, when she returned to
Arizona and resumed teaching here. She has remained a member of ASRS
from 1984 until the present.

1 We cite the current Westlaw version of the applicable statutes and
constitutional provisions because no revisions material to this decision
have since occurred.

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Opinion of the Court

II. The Public Service Credit Purchase Program

¶4 The public service credit purchase program (“the Program”)
is codified at A.R.S. § 38-743. Established in 1987, the Program initially
applied to teachers and school administrators who had been teachers or
school administrators in another state. See 1987 Ariz. Sess. Laws, ch. 182,
§ 1 (1st Reg. Sess.). Under the Program, qualifying ASRS members could
purchase up to five years of credited service earned through previous out-
of-state employment by paying the actuarial present value of such
benefits. 1987 Ariz. Sess. Laws ch. 182, § 1 (1st Reg. Sess.). By purchasing
such credited service, active members could accelerate their ability to
retire with full benefits. 2

¶5 Over the next decade, the legislature expanded the Program.
Relevant to this appeal, in 1996 the legislature removed the maximum
credited service purchase limit of five years, allowing active members to
purchase an unlimited number of credits corresponding to their out-of-
state service, and changed the purchase cost from the actuarial present
value of the benefits to the present normal cost. 1996 Ariz. Sess. Laws, ch.
185, § 9 (2d Reg. Sess.).

¶6 In 2004, the legislature returned the purchase price of
credited service to the actuarial present value. 2004 Ariz. Sess. Laws, ch.
252, § 1 (2d Reg. Sess.). Five years later, the legislature limited the
Program by requiring members to earn at least five years of credited
service in ASRS before being eligible to participate in the Program. 2009
Ariz. Sess. Laws, ch. 36, § 5 (1st Reg. Sess.). Recently, and most relevant to
this appeal, the legislature reinstated the five year limit on the amount of
out-of-state service eligible for purchase under the Program. See 2011
Ariz. Sess. Laws, ch. 357, § 5 (1st Reg. Sess.).

2 “Credited service” is defined as “the number of years standing to
the [ASRS] member’s credit on the books of ASRS during which the
member made the required contributions,” A.R.S. § 38-711(9), and is used
to calculate the ASRS member’s retirement benefits, see A.R.S. § 38-757
(normal retirement); A.R.S. § 38-758 (early retirement); A.R.S. § 38-759
(late retirement); A.R.S. § 38-768 (minimum retirement benefit).

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Opinion of the Court

¶7 In its present form, the legislation enabling the Program
provides:

A. If an active member of ASRS or a member who is
receiving benefits pursuant to § 38-797.07 was previously
employed by the United States government, a state, territory,
commonwealth, overseas possession or insular area of the
United States or a political subdivision of a state, territory,
commonwealth, overseas possession or insular area of the
United States, excluding any time worked for a prison while
the member was incarcerated, the member may receive up to
sixty months of credited service for this prior employment if
the member pays into ASRS the amount prescribed in
subsection B of this section.

B. A member who elects to receive credit for service with
the United States government, a state, territory,
commonwealth, overseas possession or insular area of the
United States or a political subdivision of a state, territory,
commonwealth, overseas possession or insular area of the
United States shall pay to ASRS an amount equal to the
present value of the additional benefit that is derived from
the purchased credited service using the actuarial
assumptions that are approved by the board.

C. A member who previously was a member of another
public employee retirement system and who receives or is
eligible to receive retirement benefits from that system for
any period of employment is ineligible to receive retirement
benefits from ASRS for the same period.

D. A member shall have at least five years of credited
service in ASRS before electing to receive credit for service
pursuant to this section.

A.R.S. § 38-743.

¶8 From an ASRS member’s perspective, the advantages of
purchasing credited service through the Program are two-fold. First,
purchasing credited service enables a member to reduce the length of time
the member must work as an employee of the State before satisfying the
so-called Rule of 80 and retiring with full retirement benefits. See A.R.S.
§ 38-711 (defining “normal retirement date”); A.R.S. § 38-757(B)
(explaining calculation of “monthly life annuity” at “normal retirement”).

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Opinion of the Court

Second, purchasing credited service through the Program allows an ASRS
member to consolidate retirement benefits from previous government
employment into one account with ASRS.

III. Procedural History

¶9 In March 2012, Pendergast contacted ASRS to purchase 9.89
years of credited service related to her public employment in Minnesota.
ASRS responded that she could only purchase up to five years of credited
service through the Program under the current version of A.R.S. § 38-743.
Later that month, Pendergast appealed the decision with ASRS, but ASRS
denied her appeal. After exhausting her administrative remedies,
Pendergast filed a complaint for judicial review in superior court. After
briefing and oral argument, the superior court found ASRS’s decision to
apply A.R.S. § 38-743 as amended to Pendergast violated Pendergast’s
constitutional rights pursuant to the Arizona Constitution, Article 29,
Section 1. ASRS has appealed that determination. We have appellate
jurisdiction pursuant to the Arizona Constitution, Article 6, Section 9 and
A.R.S. § 12-2101(A)(1).

ANALYSIS

¶10 Reviewing an administrative appeal, a superior court “may
affirm, reverse, modify or vacate and remand the agency action.” A.R.S.
§ 12-910(E). “On appeal, we review de novo the superior court’s
judgment, reaching the same underlying issue as the superior court:
whether the administrative action was not supported by substantial
evidence or was illegal, arbitrary and capricious, or involved an abuse of
discretion.” Carlson v. Ariz. State Pers. Bd., 214 Ariz. 426, 430, ¶ 13, 153
P.3d 1055, 1059 (App. 2007).

I. Yeazell and Article 29, Section 1(C) of the Arizona Constitution

¶11 Beginning with Yeazell v. Copins, 98 Ariz. 109, 402 P.2d 541
(1965), Arizona courts have recognized a “contract theory of retirement
benefits.” Norton v. Ariz. Dep’t of Pub. Safety Local Ret. Bd., 150 Ariz. 303,
306, 723 P.2d 652, 655 (1986).

Under that theory, the State’s promise to pay retirement
benefits is part of its contract with the employee; by
accepting the job and continuing work, the employee has
accepted the State’s offer of retirement benefits, and the State
may not impair or abrogate that contract without offering
consideration and obtaining the consent of the employee.

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Proksa v. Ariz. State Sch. for the Deaf & the Blind, 205 Ariz. 627, 630, ¶ 16, 74
P.3d 939, 942 (2003) (citations omitted); see also Yeazell, 98 Ariz. at 115, 402
P.2d at 545 (“[T]he right to a pension becomes vested upon acceptance of
employment.”). Interpreting Yeazell, our supreme court has held “when
[an] amendment [to the contract] is beneficial to the employee . . . , it
automatically becomes part of the contract by reason of the presumption
of acceptance.” Thurston v. Judges’ Ret. Plan, 179 Ariz. 49, 51, 876 P.2d 545,
547 (1994).

¶12 In 1998, Arizona voters elevated the protections recognized
in Yeazell to the level of constitutional command with the passage of
Proposition 100. Today enshrined as Article 29, Section 1(C) of the
Arizona Constitution, that provision states: “Membership in a public
retirement system is a contractual relationship that is subject to article II,
§ 25, and public retirement system benefits shall not be diminished or
impaired.” Under Article 29, Section 1(C), “The Contract Clause applies
to the general contract provisions of a public retirement plan, while the
Pension Clause applies only to public retirement benefits. Therefore, the
Pension Clause confers additional, independent protection for public
retirement benefits separate and distinct from the protection afforded by
the Contract Clause.” Fields v. Elected Officials’ Ret. Plan, CV-13-0005-T-AP,
slip op. at ¶ 17, 2014 WL 644467, at *4 (Ariz. Feb. 20, 2014) (emphasis
added).

¶13 Given the additional protection afforded public retirement
system benefits, we first determine whether purchasing credited service
through the Program qualifies as a public retirement system benefit under
the Pension Clause. If purchasing credited service through the Program
qualifies as such a benefit, then we must determine whether the 2011
legislative amendment to the Program unconstitutionally diminishes or
impairs Pendergast’s vested benefit.

A. Pension Clause Analysis

¶14 To determine whether purchasing credited service through
the Program is a public retirement system benefit protected by Article 29,
Section 1(C), we will not utilize the parties’ equally plausible dictionary
definitions of “benefit.” See Fields, CV-13-0005-T-AP, slip op. at ¶ 21, 2014
WL 644467, at *4 (“We think the dictionary definitions do not determine
the meaning of ‘benefit’ as used in the Pension Clause.”). Nor will we rely
on our pre-Article 29 case law for guidance on this definition. See id. at ¶
19 (“Neither the Arizona Constitution nor Arizona case law defines
‘benefit.’”). Instead, to determine whether “benefit” encompasses the

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Opinion of the Court

ability to purchase credited service through the Program, we look to the
history of the Pension Clause and the statutory scheme in existence when
the voters passed Proposition 100. See id. at ¶ 21-24.

1. “Public Retirement System Benefit”

¶15 The eleven-year history of the Program prior to the 1998
passage of Proposition 100 confirms that the ability to purchase credited
service through the Program is a public retirement system benefit. The
legislature initially established the Program in 1987 for teachers and
school administrators. 1987 Ariz. Sess. Laws, ch. 182, § 1 (1st Reg. Sess.). 3
In 1994, a legislative amendment to A.R.S. § 38-743 extended eligibility for
the Program to professors and instructors at public universities and
community colleges. See 1994 Ariz. Sess. Laws, ch. 356, § 18 (2d Reg.
Sess.). 4 In 1996, the legislature further expanded the scope of the program

3 Pursuant to the original program,

A. At the time of retirement a teacher or administrator of a
school district who is an active member of the plan or system
and who previously was a member of a public employee
retirement system in another state while employed as a
teacher or school administrator and is not receiving
retirement benefits as a result of that employment may
receive up to five years of service credit for this prior
employment if the teacher or administrator pays into the
system the amount prescribed in subsection B.

B. A teacher or administrator electing to receive credit for
service outside this state shall pay to the system the amount
equal to the increase in the actuarial present value of benefits
computed at the time of retirement which results from
adding the number of years or partial years of credited
service received under subsection A.

1987 Ariz. Sess. Laws, ch. 182, § 1 (1st Reg. Sess.).

4 The 1994 legislation did not affect the five-year cap on prior public
service credit eligible for purchase or the payment at retirement based on
actuarial present value. In 1995, amendments to A.R.S. § 38-743 removed
the requirement that a member’s payment into the program be computed
at the time of retirement and added subsection C to clarify that members

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Opinion of the Court

by (a) opening the program to all active ASRS members, (b) predicating
payment for the credited service on normal cost rate rather than actuarial
present value, and (c) removing the five-year cap on prior public service
eligible for purchase. See 1996 Ariz. Sess. Laws, ch. 185, § 9 (2d Reg. Sess.).
With this statutory scheme in place, the voters approved Proposition 100
in 1998.

¶16 One aspect of this statutory scheme, however, appears to
suggest that the Program is not included among the public retirement
system benefits protected by the Pension Clause; the legislature’s use of
“may” in A.R.S. § 38-743(A) could indicate the legislature intended to
reserve for itself the power to modify the Program. See A.R.S. § 38-743(A)
(1996) (ASRS member “may receive up to five years of service credit for . . .
prior employment” if the member pays ASRS the normal cost rate of the
retirement benefits (emphasis added)). 5 “May” is not defined in the
statute. “When a word or phrase in a statute is undefined, we must give

participating in the program could not also receive retirement benefits
from the out-of-state retirement system for the same years. See 1995 Ariz.
Legis. Serv., ch. 134, § 5 (1st Reg. Sess.).

5 Although not directly raised on appeal by ASRS, the sunset clause
attached to the entire Arizona State Retirement System also suggests the
legislature has retained the power to modify or even eliminate the
Program as a part of the retirement system. See A.R.S. § 41-3016.19.
Although the absence of a sunset clause can indicate that the statute is
among the public retirement system benefits protected by Article 29,
Section 1(C), see Fields, CV-13-0005-T-AP, slip op. at ¶ 23, 2014 WL 644467,
at *5, we would disagree with any argument that the presence of a sunset
clause necessarily precludes constitutional protection of a part of the
retirement system. Nothing in the history of the Pension Clause suggests
it should be so limited. Cf. id. at ¶ 28 (“[U]nlike narrower protections
found in other states’ constitutions, the protection afforded by the Arizona
Pension Clause extends broadly and unqualifiedly to ‘public retirement
system benefits,’ not merely benefits that have ‘accrued’ or been ‘earned’
or ‘paid.’” (citations omitted)). Without deciding the effect of the sunset
clause on the other provisions of Title 38, Chapter 5, Article 2, we
conclude the existence of a sunset clause does not undermine our
conclusion that the constitutional guarantee of the Pension Clause protects
an ASRS member’s ability to purchase credited service through the
Program.

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the words their ordinary meanings . . . .” Loftus v. Ariz. State Univ. Pub.
Safety Pers. Ret. Sys. Local Bd., 227 Ariz. 216, 222-23, ¶ 27, 255 P.3d 1020,
1026-27 (App. 2011) (citing A.R.S. § 1-213). We derive a word’s ordinary
meaning by reference to a dictionary. See State v. Wise, 137 Ariz. 468, 470
n.3, 671 P.2d 909, 911 n.3 (1983). “If the language is clear and
unambiguous, there is usually no need to resort to the rules of statutory
interpretation.” Special Fund Div. v. Indus. Comm’n of Ariz., 232 Ariz. 110,
113, ¶ 12, 302 P.3d 635, 638 (App. 2013).

¶17 Black’s Law Dictionary provides two plausible definitions
for “may” in this context: (1) “[t]o be permitted to” and (2) “[t]o be a
possibility . . . Cf. can.” Black’s Law Dictionary 1062 (9th ed. 2009). The
difference in these two definitions illustrates the two actors potentially
capable of decision-making under the statute: the legislature or the
member. If the legislature intended the first definition, then the statute
granted ASRS members the ability to purchase credited service under the
Program only with the legislature’s permission, indicating the legislature
sought to reserve for itself the power to revoke that permission and
modify the Program. 6 If the legislature intended the second definition,
then the statute granted ASRS members the possibility of participating in
the Program by their own choice, indicating the Program is among the
retirement system benefits protected under Article 29, Section 1(C). Cf.
Yeazell, 98 Ariz. at 114, 402 P.2d at 544 (“That an applicant for retirement
may not earn the right to benefits because he does not perform the
condition does not mean that from the moment of entrance into the
service of [the government] as a [public employee] there is not a firm,
binding contract.”).

¶18 When the language of a statute is ambiguous, “[t]he intent of
the legislature . . . may be gathered from statutes relating to the same
subject matter—statutes in pari materia.” Frazier v. Terrill, 65 Ariz. 131,
135, 175 P.2d 438, 441 (1946). Considering other statutes in Title 38,

6 Supporting this argument, the legislature’s use of “may” in A.R.S.
§ 38-743(A) contrasts with its use of “is entitled” in the formula-based
benefit increase statute at issue in Fields. Compare A.R.S. § 38-743(A) (1996)
with A.R.S § 38-818(A) (“[E]ach retired member or survivor of a retired
member is entitled to receive a permanent increase in the base benefit
equal to the amount determined pursuant to this section” if one of two
conditions are met (emphasis added)); see also Black’s Law Dictionary 612
(9th ed. 2009) (defining “entitle” as “[t]o grant a legal right to or qualify
for.”).

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Chapter 5, we conclude in this instance the legislature intended “may” to
mean “[t]o be a possibility” or “can”; in these statutes, “may” indicates the
member is afforded the choice of exercising benefits. See, e.g., A.R.S. § 38-
757(A) (“After application on a form prescribed by the director, [an ASRS]
member may retire on reaching the member’s normal retirement date.”
(emphasis added)); A.R.S. § 38-885(A) (“A member [of the Corrections
Officer Retirement Plan] may retire if the member” satisfies certain
conditions (emphasis added)); A.R.S. § 38-805(C) (“A member [of the
Elected Officials’ Retirement Plan] . . . who has at least five years of
credited service and who ceases to hold office as an elected official may
take early retirement.” (emphasis added)). Further, applying a legislative-
permissive definition of “may” in the context of the public retirement
system would also jeopardize other basic retirement benefits integral to
the public retirement system by leading to the impermissible result that a
member’s ability to obtain retirement benefits is contingent on future
permission by the legislature rather than on the terms of the contract
accepted at employment. Cf. Proksa, 205 Ariz. at 630, ¶ 16, 74 P.3d at 942
(“[B]y accepting the job and continuing work, the employee has accepted
the State’s offer of retirement benefits, and the State may not impair or
abrogate that contract without offering consideration and obtaining the
consent of the employee.” (emphasis added) (citations omitted)). “If a
literal interpretation of statutory language leads to an absurd result, the
court has a duty to construe it, if possible, so that it is reasonable and
workable.” State Farm Auto. Ins. Co. v. Dressler, 153 Ariz. 527, 531, 738 P.2d
1134, 1138 (App. 1987) (citations omitted); see also A.R.S. § 1-211(B)
(“Statutes shall be liberally construed to effect their objects and to promote
justice.”).

¶19 Finally, construing the ambiguity in “may” in § 38-743(A)
against an ASRS member would be incongruent with the robust
contractual theory of public retirement system benefits recognized by
Yeazell and confirmed by Article 29, Section 1(C). See Fields, CV-13-0005-T-
AP, slip op. at ¶ 28, 2014 WL 644467, at *6. “[A]s with all contracts, if the
meaning of a[] . . . provision remains uncertain after consideration of the
parties’ intentions, as reflected by their language in view of surrounding
circumstances, a secondary rule of construction requires the provision to
be construed against the drafter.” MT Builders, L.L.C. v. Fisher Roofing, Inc.,
219 Ariz. 297, 302, ¶ 10, 197 P.3d 758, 763 (App. 2008) (citations omitted).
Therefore, in the context of public retirement system benefits, we conclude
the legislature intended the word “may” to grant members the possibility
of participating in the Program on their own initiative, rather than
impliedly reserving for the legislature the power to limit the terms of the
Program.

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¶20 Because the Program was among the statutorily identified
public retirement system benefits in existence in 1998, we conclude the
term “benefits” in the Pension Clause encompasses a member’s ability to
purchase credited service through the Program. 7

2. “Diminishe[s] or Impair[s]” a Benefit

¶21 Turning to the effect of the 2011 legislative amendment of
the Program, we conclude the legislation unconstitutionally diminishes an
ASRS member’s public retirement system benefits by reducing the amount
of prior public service available for purchase as credited service.8
Pursuant to Article 29, Section 1(C), “public retirement system benefits
shall not be diminished or impaired.” In this case, if the 2011 legislative
amendment had not been enacted, Pendergast could have purchased all
9.89 years of prior public service. By capping the amount of prior public
service eligible for purchase, the legislation directly diminishes
Pendergast’s ability to purchase an unlimited amount of credited service
pursuant to the version of the Program in existence when the voters
passed Proposition 100. Therefore, Pendergast is eligible to purchase 9.89
years of credited service because she was an active member of ASRS in
1998, and the 1998 version of the Program did not limit the amount of
prior public service an active ASRS member could purchase as credited
service.

B. Contract Clause Analysis

¶22 We need not conduct an analysis of the 2011 legislative
amendment under the Contract Clause of Article 29, Section 1(C) because,

7 Our conclusion is supported by Buddell v. Bd. of Trs., State Univ. Ret.
Sys. of Ill., 514 N.E.2d 184 (Ill. 1987) (holding retirement system member’s
right to purchase credited military service was constitutionally protected
retirement system benefit). See Fields, CV-13-0005-T-AP, slip op. at ¶ 28,
2014 WL 644467, at *6 (“This definition of ‘benefit’ also comports with the
use of the term in other states that have similar constitutional provisions
protecting public pension benefits.” (citing with approval Miller v. Ret. Bd.
of Policemen’s Annuity, 771 N.E.2d 431, 444 (Ill. App. Ct. 2001))).

8 We note the only change from the 1998 version to the 2011 version
of A.R.S. § 38-743 before us is the limit on the amount of prior public
service available for purchase as credited service into a member’s ASRS
account.

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as discussed above, the Pension Clause provides additional, independent
protection to the public retirement system benefit at issue in this appeal.

II. Attorneys’ Fees on Appeal

¶23 On appeal, we award Pendergast her costs and reasonable
attorneys’ fees pursuant to A.R.S. § 12-341.01(A), contingent upon
compliance with ARCAP 21, because this matter arises out of contract.

CONCLUSION

¶24 We conclude that the 2011 legislative amendment to the
public service credit purchase program unconstitutionally diminishes and
impairs the public retirement system benefits of an ASRS participant who
became a member before the legislative amendment took effect. As a
result, we affirm the trial court’s determination that Pendergast is eligible
to purchase up to 9.89 years of credited service pursuant to the public
service credit purchase program as it existed in 1998.

:MJT

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