RENDERED: JUNE 17, 2021 TO BE PUBLISHED
Supreme Court of Kentucky 2019-SC-0476-T (2019-CA-1156)
KENTUCKY RETIREMENT SYSTEMS APPELLANT
ON APPEAL FROM FRANKLIN CIRCUIT COURT V. HONORABLE PHILLIP J. SHEPHERD, JUDGE NOS. 17-CI-01307 & 17-CI-01308
JEFFERSON COUNTY SHERIFF’S OFFICE APPELLEE
OPINION OF THE COURT BY CHIEF JUSTICE MINTON
AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
We accepted transfer from the Court of Appeals of this administrative
appeal brought by the Kentucky Retirement Systems from the decision of the
Franklin Circuit Court in two consolidated cases arising out of the Jefferson
County Sheriff’s Office. These cases concern application of Kentucky Revised
Statute (KRS) KRS 61.598, which is commonly known as the pension-spiking
statute aimed at identifying artificial increases in creditable compensation to
public pension-member employees occurring in the last five years preceding
retirement with the effect of increasing the employee's retirement benefits.
The alleged spikes in both cases are partly due to a change in JCSO’s
accounting method and partly due to the employees’ accrual of overtime hours,
causing their gross compensation in at least one fiscal year to be greater than
the year before. In neither case did the employees experience a bona fide promotion or career advancement, so the Retirement Systems assessed JCSO
for payment the increased actuarial costs attributable to the alleged pension
spikes. JCSO disputes the assessments for several reasons.
We agree with JCSO that the Retirement Systems improperly applied
KRS 61.598 to the pay spikes to the extent the changes in compensation were
caused by an isolated transition in JCSO’s new accounting method because
that incident does not amount to an “increase” in compensation within the
meaning of the controlling statute. But the Retirement Systems properly
assessed the increased actuarial costs to the extent it was caused by regular
overtime work and was not the result of a bona fide promotion or career
advancement. We also find erroneous in different aspects the circuit court’s
reversal of the Retirement Systems’s original assignment of the burden of
proving a bona fide promotion and its interpretation of the statute.
Accordingly, we affirm in part, reverse in part, and remand to the Retirement
Systems to recalculate the assessments consistent with this opinion.
FACTUAL BACKGROUND
JCSO is a participating employer in the County Employees Retirement
System, which is part of the broader agency administering the public pensions
under the umbrella of Kentucky Retirement Systems. JCSO employed
Raymond Kaelin and Gus Harmon, Jr., full time, and each of them was a
member of the Retirement Systems when he retired. Upon their retirements,
the Retirement Systems reviewed the gross compensation of their last five years
of services at JCSO and identified changes in gross compensation that the
2 Retirement Systems flagged as increases in creditable compensation exceeding
10%, and assessed the increased actuarial costs to JCSO. The cases were
consolidated for purposes of judicial review, but each case presents slightly
different facts.
A. Gus Harmon, Jr.
Gus Harmon retired from JCSO in January 2015. The Retirement
Systems reviewed the last five years of Harmon’s gross compensation, which
were as follows:
Fiscal Year Gross Annual Percentage Difference (identified later by first number) Compensation from FY Prior 2009-2010 (FY09) $44,028.03 n/a 2010-2011 (FY10) $42,917.30 -2.53% 2011-2012 (FY11) $54,498.75 +26.99% 2012-2013 (FY12) $43,810.86 -19.61% 2013-2014 (FY13) $43,123.34 -1.57% 2014-2015 (FY14) $22,050.74 -48.87%
The Retirement Systems sent a letter to JCSO reporting that it found a
26.99% increase in Harmon’s creditable compensation in Fiscal Year 2011-
2012 (FY11) and that it would assess increased actuarial costs to JCSO if the
compensation increase was not related to a bona fide promotion or career
advancement. In response, JCSO sent a Form 6481, Employer Request for
Post-Determination of Bona Fide Promotion or Career Advancement, attaching
a “missing paycheck” and time sheets for FY11. JCSO did not attempt to offer
evidence of a bona fide promotion or career advancement. Accordingly, the
Retirement Systems immediately determined the increase was not the result of
a promotion, so it assessed the actuarial costs to JCSO.
3 JCSO appealed the determination, requesting an administrative hearing.
At the hearing, the Hearing Officer’s finding and recommended order agreed
with the Retirement Systems that JCSO offered no evidence showing the
apparent increase in creditable compensation was a result of a promotion or
career advancement. The Retirement Systems’s Board of Trustees adopted the
finding and recommendation in its Final Order, assessing actuarial costs to
JCSO. JCSO timely filed for judicial review in Franklin Circuit Court.
At least now, JCSO explains that Harmon’s greater gross compensation
earned in FY11 was the result of an accounting oversight that JCSO describes
as a “missing paycheck” and overtime hours Harmon accrued that year as the
sole JCSO employee assigned to maintain the JCSO fleet.
B. Raymond Kaelin
Raymond Kaelin retired from JCSO in May 2015. The Retirement
Systems reviewed Kaelin’s gross compensation in each of the last five years of
his employment according to KRS 61.598. Kaelin’s gross compensation in
those years was as follows:
Fiscal Year Gross Annual Percentage Difference (identified later by first number) Compensation from FY Prior 2009-2010 (FY09) $49,510.41 n/a 2010-2011 (FY10) $47,786.33 -3.48% 2011-2012 (FY11) $52,595.29 +10.06% 2012-2013 (FY12) $53,634.50 +1.94% 2013-2014 (FY13) $46,781.67 -12.78% 2014-2015 (FY14) $43,017.72 +10.35%, annualized
The Retirement Systems identified two increases in gross annual compensation
in FY11 and FY14, the latter fiscal year’s gross compensation annualized to
account for Kaelin’s mid-year retirement date in May 2015.
4 The Retirement Systems informed JCSO by letter that it identified two
increases in annual compensation that were not attributable to a bona fide
promotion or career advancement and that it would assess to JCSO the
increased actuarial costs to the extent the compensation increases exceeded
10% over the prior year. In response, JCSO filed a Form 6481 for post-
determination to which it attached a “missing paycheck” and time sheets for
FY11. It did not supply any explanatory documentation for the apparent
increase in FY14. JCSO did not, as it could not, offer any documentation
showing either of the changes in gross compensation was the result of a bona
fide promotion or career advancement. The Retirement Systems found no bona
fide promotion or career advancement, maintaining its position that the
assessment was proper.
JCSO timely sought an administrative hearing. At the hearing, JCSO
argued to the Hearing Officer that the identified change in FY11 was actually
an isolated discrepancy in gross compensation in FY10 caused by a “missing
paycheck” in FY10 that was incorrectly attributed to FY11. Still, there was no
explanation of the increase in FY14. Thus, finding no bona fide promotion or
career advancement, the Hearing Officer ruled that JCSO must pay the
assessment for actuarial costs caused by the apparent increases. The
Retirement Systems’s Board of Trustees adopted the recommended order as its
Final Order for Kaelin’s lack of a bona fide promotion or career advancement.
JCSO timely appealed Kaelin’s case to Franklin Circuit Court for judicial
review.
5 C. The “Missing Paycheck”
Both cases refer to a “missing paycheck,” and we undertake to clarify to
what that refers. According to JCSO’s personnel supervisor, who testified at
the administrative hearing, JCSO’s accounting methods for reporting employee
compensation to the Retirement Systems changed from a “when-earned” basis
to a “when-paid” basis. This caused the compensation earned under a single
paycheck to be shifted forward and attributed to the succeeding fiscal year,
seemingly decreasing the gross compensation in the preceding fiscal year by
the amount of the paycheck and consequently increasing the next fiscal year
by the same amount. So, by simply comparing the gross compensation in each
fiscal year, twice the amount of this paycheck accounts for at least a portion of
the purported compensation difference identified by the Retirement Systems in
FY11. Under the former accounting system—i.e., but for the change in JCSO’s
accounting methods—this paycheck would have been credited to the preceding
FY10 instead of FY11. The affected deputies’ job responsibilities did not
change. Their hourly pay remained nearly the same throughout this change
and really throughout the entire last five years’ employment at JCSO. In fact,
their compensation was fixed, adhering to unwaveringly a preexisting
collective-bargaining agreement. Still, this explanation did not suggest any
“bona fide promotion or career advancement” under KRS 61.598, so the
Retirement Systems considered itself constrained by the spiking statute to
issue the assessment.
6 D. Franklin Circuit Court Decision
The circuit court reversed the administrative decisions of both Harmon’s
and Kaelin’s cases and remanded for further proceedings in Kaelin’s case to
clarify and justify the calculated “annualization” of his gross income in
retirement year FY14.
The circuit court made three principal rulings pertinent to our review:
(1) that the Hearing Officer erred by assigning the burden of proof in the
administrative hearing to JCSO because the burden belonged to the Retirement
Systems as it was imposing a penalty on JCSO; (2) that as a matter of statutory
construction, KRS 61.598(5)(a) is only triggered where multiple increases are
identified in the last five years of employment, so single increases year-to-year
would not warrant an assessment; and (3) that so long as overtime
compensation is “earned in good faith for a legitimate purpose” it should be
considered as evidence of a bona fide promotion or career advancement. We
disagree with each of these conclusions.
STANDARD OF REVIEW
The Court may only overturn the decision of a public agency of the
Commonwealth if the agency acted arbitrarily or outside the scope of its
authority, if the agency applied an incorrect rule of law, or if the agency’s
decision is not supported by substantial evidence of record.1 The facts of this
case are not in dispute, so our review is limited primarily to the interpretation
1 R.R. Comm’n v. Chesapeake & Ohio Ry. Co., 490 S.W.2d 763, 766 (Ky. 1973).
7 and application of KRS 61.598 and questions of arbitrary agency action. The
application and interpretation of statutes we review de novo.2
III. ANALYSIS
The version of the operative subsection of KRS 61.598 in effect at the time
Harmon and Kaelin retired read:3
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) years of employment that are not the direct result of a bona fide promotion or career advancement.
Bona fide promotion or career advancement means:
[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) 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.
The primary questions in this appeal pertain to the proper application of the
statute to the facts. We review de novo.
A. The Hearing Officer properly assigned to the employer the burden of proving a bona fide promotion.
We first address the burden of proof issue. KRS 13B.090(7) provides that
the burden of proof shall be placed on the administrative agency when the
agency action imposes a penalty or removes a benefit previously granted. In
2 Jefferson Cnty. Bd. of Educ. v. Fell, 391 S.W.3d 713, 718 (Ky. 2012). 3 The former subsection was KRS 61.598(2), but now contains nearly the same
language, slightly amended in 2017, and situated under KRS 61.598(5)(a).
8 this case, the circuit court found the assessment was a penalty, concluding
that the burden of proof should be assigned to the Retirement Systems. And
the circuit court reasoned that because the assessments under the spiking
statute function to deter or disincentivize abusive compensation practices and
the Retirement Systems is the direct beneficiary of such cost assessments, that
it must bear the burden of proving a lack of bona fide promotion. We disagree
that these circumstances make the assessment a penalty.
The assessment of actuarial costs to the JCSO is not properly
characterized as a penalty because the assessment is not a punishment for any
wrong, breach, violation of law, or some other general infringement. Under this
statute, the assessment is more accurately characterized as a fee or
transaction cost of sorts, not a fine. This distinction is not merely semantic.
The triggering act, to increase the creditable compensation of an
employee, is not an unlawful act. No law presented to us forbids an employer
from increasing an employee’s pay. While KRS 61.598 prescribes financial
consequences of that employment decision, it is not because the legislature
regarded the pay raise itself as wrong or disallowed. The statute merely
provides that to the extent a compensation increase in the last five years of
employment exceeds 10%, the attendant actuarial costs otherwise borne by the
public pension system are to be shared to a greater degree by the employer. So
we reverse the ruling of the circuit court in this case as to who bears the
burden of proving a bona fide promotion, as it must be borne by the employer.
9 B. The Retirement Systems partially misapplied KRS 61.598.
As we explain in greater detail in a companion case issued today, to
assess increased actuarial costs under the spiking statute, the Retirement
Systems must demonstrate an actual increase in creditable compensation.4 In
that companion JCSO case, the employee deputy returned to work following a
hiatus on unpaid sick leave. The unpaid time off caused a substantial
decrease in the employee’s compensation in one fiscal year. When he returned
to work in the next fiscal year, his gross compensation returned essentially to
the same amount as it had been in the years before he took sick leave. His
hourly compensation and job duties had not changed at all. We held that the
difference in gross compensation was not an “increase” in creditable
compensation within the meaning of KRS 61.598. Under the circumstances,
we regarded as significant that no substantive change was made in the mode or
amount of the employee’s compensation.
As in this case, the Retirement Systems’s position was that the spiking
statute’s sole directive to the agency was to compare gross compensation year-
to-year and wherever a positive difference appears between any two consecutive
fiscal years not justified by a bona fide promotion, the Retirement Systems is
statutorily constrained to assess actuarial costs. The Retirement Systems also
argues here that it is not at liberty to look at any other explanations for the
compensation increases that are not characterized as promotions or career
4 Jefferson Cnty. Sheriff’s Off. v. Kentucky Ret. Sys., 2019-SC-0315-D
(Ky. June 17, 2021) (hereafter, perhaps “JCSO case” or “JCSO v. KRS”).
10 advancements. It argues that substantial evidence compels the result under
KRS 61.598 and that reviewing courts may not set aside the factual findings of
the Hearing Officer or ignore the plain language of the statute.
We do not disagree with the Retirement Systems’s statement of the
standard of judicial review of agency action. But as in the companion JCSO
case, we disagree with the Retirement Systems’s interpretation of KRS 61.598.5
We hold that the Retirement Systems must in some circumstances inquire into
the causes of differences in gross annual compensation because the statute
applies only to “increases” in creditable compensation. We regard the
Retirement Systems’s application in the present case to be an overly
mechanical application that itself ignores the plain language of the statute,
resulting in arbitrary application.
Highly analogous to the case of the JCSO employee taking unpaid sick
leave, to the extent an accounting change explains the difference in gross
compensation between fiscal years, the difference in gross compensation is not
an increase within the meaning of the statute. The superficial subtraction of a
paycheck from one year and its addition to the next year cause, under the
Retirement Systems’s interpretation, an “increase” in compensation double the
amount of the check with absolutely no other change to the deputies’ pay. This
is not an “increase” in creditable compensation, but an accident of accounting.
5 Id. (Part II.A.).
11 This absence of “increase” is further evident considering other
circumstances. As stated, nothing of substance changed with regard to the
manner and amount Harmon and Kaelin both earned their pay per unit of time
worked. In fact, actual compensation increases were limited by a controlling
collective-bargaining agreement. The JCSO was not obligated or even at liberty
under the collective-bargaining agreement to raise compensation of a deputy
more than 2% per year.
Admittedly, the difficulty of applying KRS 61.598 is that it only expressly
prescribes a comparison between two consecutive fiscal years, so the
Retirement Systems’s application up to this point is defensible under the
language of the statute. But the reference under KRS 61.598 to compensation
increases creates a substantive requirement. And to determine whether an
employee’s creditable compensation actually substantively increased, the
employer may present and the Retirement Systems must consider evidence
tending to establish whether the employer’s compensation scheme for the
subject employee actually changed between fiscal years.
As applied to this case, we acknowledge that accounting methods are
important. But to the extent compensation was simply attributed to a different
fiscal year based a change in accounting protocol, no substantive or actual
increase in the employee’s compensation can be said to have occurred. This
accounting issue—the “missing paycheck” as JCSO calls it—would appear to
explain at least part of the differences in gross compensation between FY10
and FY11. The Retirement Systems must adjust its calculation and
12 identification of compensation “increase” to exclude non-increase dollar
amounts attributable to the accounting transition.
Harmon’s purported 26.99% increase in FY11 is only partially explained
by the accounting changes. The paycheck Harmon would have earned during
the accounting change was $1,693.24. If Harmon’s $1,693.24 check is
subtracted from his gross compensation in FY11 and added to FY10 to account
for the change, the difference between the fiscal years is still a positive
difference of $8,194.97, an apparent increase of about 18.37% from year to
year. This is 8.37% greater than the 10% allowed consequence-free. No bona
fide promotion or career advancement appears to explain that 8.37%, so it
constitutes a compensation increase subject to assessment under
KRS 61.598.6
JCSO admits that much of this considerable difference, apparently
18.37% of it, is due to the accrual of Harmon’s “genuine” overtime work in
FY11. There is no real issue regarding the genuineness or good faith of
Harmon’s overtime work maintaining the department’s vehicle fleet. But for
purposes of determining assessments to employers under KRS 61.598(5)(a), as
a calculation distinct from calculating employee benefits under KRS 61.598(2),
there exists no exception for overtime pay. Increases in actuarial costs caused
6 The Court acknowledges in advance the possibility of a discrepancy between
the precise numbers used for the calculation in this opinion and those scattered through the briefs and record. We have no reason to question their accuracy, but note in anticipation that on remand, the Retirement Systems must simply verify and calculate the final assessment figures consistent with the conclusions and principles elaborated in this opinion. See KRS 61.598(5)(a).
13 by greater overtime work are subject to assessment. So the compensation
difference in Harmon’s case would constitute an “increase” as contemplated by
the statute, absent a bona fide promotion or career advancement.
In Kaelin’s case, the accounting change amounts for enough of the
difference for the statute not to apply in one year. If the $2,653.88 check to
Kaelin is subtracted from his gross compensation in FY11 and added to FY10,
the difference between the years is only $1,199.59, or about 2.5% from year to
year, less than the 10% allowed to employers without inquiry from the
Retirement Systems. So KRS 61.598 does not apply to his pay in FY11, and
the assessment was improper as to that purported “spike.” But Kaelin’s
10.35% increase in FY14 was not explained, and no bona fide promotion
justifies it. If the Retirement Systems’s calculation of that percentage was
based on an annualized ratio as we gather from the record—and we take that
to mean Kaelin’s 2015 compensation was simply prorated based on a mid-year
retirement—that calculation method is within the Retirement Systems’s
discretion to apply. The unexplained .35% over the baseline 10% is subject to
assessment, and we do not disturb that finding if that was also the Retirement
Systems’s initial calculation.
The Court is, as it was in the case of unpaid sick leave, cautious in
requiring the Retirement Systems to consider the factual context of purported
compensation increases. This adds a complexity to the Retirement Systems’s
substantive inquiry and appears to impose a greater burden on it than appears
14 in KRS 61.598 on its face. But avoiding arbitrary agency action compels this
case-by-case approach.
That brings us to the next point, which is that KRS 61.598 imposes
actuarial costs on employers where the employer’s actions incur some sort of
burden on the pension system. Yielding to the expertise and authority of the
Retirement Systems in calculating actuarial figures, we assert that the statute
implicitly targets employer actions that burden the pension system. While this
Court cannot definitively rule out the possibility that an isolated change in
accounting methods impose such a burden, we must express skepticism. We
cannot help but question how, as applied to the present cases, these isolated
slips in the accounting system make an employee’s prospective retirement
more costly to the pension system. If the current calculation method is
figuring actuarial costs where there actually are none, then the method is
arbitrary to that extent, and it would fail to further the legislature’s intent and
the statute’s plain language. It suffices to say that the Retirement Systems
may only impose assessments on participating employers where an
employment decision or circumstance actually and nonarbitrarily increases the
financial burden of the employee’s retirement on the pension system. If there
is a true “increase” in compensation over 10%, and that increase actually
incurs some sort of cost to the pension system under an actuarial formula,
assessing the cost to the employer is authorized by statute. But the directive
to shift “actuarial costs” to an employer implies the existence of actuarial costs
in the first place.
15 C. The Retirement Systems properly identified one or more pay increases over 10% according to KRS 61.598 and was not required to find multiple pay increases in the aggregate.
Again, this Court reviews issues of statutory interpretation and
application de novo, respectfully owing no deference to the rulings of the lower
court.7 In this case, the circuit court held the statute applied only to an
employer who gave multiple compensation increases in the preceding five-year
period, that only “serial increases” in the prior five years triggered KRS 61.598.
It found the use of the plural “increases,”8 in light of an amendment to another
subsection referring to “any” (singular) increases indicated a legislative intent
not to assess costs for single increases but only to address more abusive
situations involving multiple increases. By contrast, the Retirement Systems’s
position is that any individual, discrete compensation increase over 10%
between any of the last five fiscal years preceding retirement triggers the
statute. We think the plain language of the statute supports the Retirement
Systems’s interpretation.
KRS 61.598(5)(a) reads:
[T]he 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.
KRS 61.598(5)(a) concerning employer assessments must be understood
with reference to Subsection (2) concerning the calculation of employee
7 Fell, 391 S.W.3d at 718. 8 (emphasis added).
16 benefits, which directs the Retirement Systems to “identify any fiscal year in
which the creditable compensation increased at a rate of ten percent (10%) or
more annually over the immediately preceding fiscal year’s creditable
compensation.” The same over-10% compensation standard applies in both
instances, and while the assessment provision (5)(a) speaks of plural
“increases” in a general sense as a category, this does not imply a requirement
of more than one increase to trigger an assessment. With the obvious
relationship among the subsections and the care with which they appear to be
drafted, one might expect the legislature to say outright that multiple increases
are required if that were intended, that KRS 61.598(5)(a) applies where “more
than one increase is identified in any five-year period.” It did not evidently
prescribe a different calculation method, so we find no such intention implied.
Instead, the Retirement Systems is to identify the last six fiscal years
preceding retirement. Then, for each year except the earliest of the six, the
Retirement Systems is to assess whether there is an increase over 10% in the
gross creditable compensation in any year relative to the year immediately
preceding it. In theory, five such increases could occur, and any single
increase between any two applicable fiscal years exceeding 10% and not the
result of a bona fide promotion would be subject to assessment for actuarial
costs. Only after the resulting actuarial costs are determined for each discrete
increase are the costs then aggregated, if there is more than one, and the
employer is assessed that total cost.
17 Thus, as a matter of law, the circuit court erred. One or more discrete
increases over 10% could occur between any of the five years and trigger
examination and assessment from the Retirement Systems. In that way, the
Retirement Systems properly applied the statute.
D. Overtime does not have to be considered evidence of a bona fide promotion under KRS 61.598.
The circuit court in this case also held
[I]f the increase was caused by overtime that was earned in good faith for legitimate purposes (and not artificially to spike compensation for purposes of enhanced retirement benefits), such an increase may constitute “significant change in job duties” that would satisfy the requirements of the statute to justify the increase without penalizing the employer.
The circuit court then required that evidence of overtime compensation be
admitted and considered as evidence of a bona fide promotion or career
advancement.
We disagree with the circuit court. The question is whether the
Retirement Systems has the authority, statutorily and, therefore,
constitutionally, not to regard an employee’s overtime as evidence of a bona
fide promotion where the overtime contributes to a spike in compensation. We
hold the Retirement Systems was not required by the statute to consider
overtime hours favorably to the employer, or at all. While the Court does not
totally rule out the hypothetical case where overtime might be taken as
evidence of a bona fide promotion, the statute does not require its
consideration as such. The nature of overtime compensation will almost
always cause it fail to show a qualitative change in employment to which the
18 term “bona fide promotions and career advancements” appears to refer. As a
general matter, overtime is paid solely for the quantity of work done, while a
change in job duties or position sufficient to constitute a bona fide promotion
or career advancement is much more a qualitative change in job duties and
responsibilities. A promotion does not generally just involve more shifts doing
the same work, but different work itself.
We read the statute to direct the Retirement Systems to look to the
substance of the reason for a compensation increase, but we hold that it may
disregard overtime pay as evidence of bona fide promotions or career
advancements. The Hearing Officer is entrusted with coming to a reasonable
determination of facts based upon substantial evidence, having discretion in
the manner and methods by which the Hearing Officer assesses the value and
weight of evidence. And, as a matter of statutory construction, the General
Assembly addressed overtime work as it contributes to other calculations, like
employee retirement benefits under Subsection (2). It did not make a similar
exception with regard to actuarial assessments to employers. The regulations
excluding overtime pay are therefore consistent with the authorizing statute.
Further, although overtime may hypothetically constitute evidence in
conjunction with other circumstances, its evidentiary value does not turn on
the good faith authenticity of the overtime assignment as JCSO argues. To its
credit, the circuit court’s reference to “good faith” and “legitimate” purposes for
the overtime accrued indicates the circuit court understood the propriety of
looking at the substantial reasons for a pay increase. And it was justified in its
19 conclusion that Harmon’s overtime stands in stark contrast to clearly excessive
and abusive overtime compensation practices in other cases. But when the
question is whether the courts should reverse an agency determination on a
factual matter because the agency did not consider or value circumstances that
are generally nonprobative, the court must decline to reverse.
Accordingly, we reverse the circuit court on this issue and affirm the
finding and position of the Retirement Systems that overtime compensation is
not to be considered evidence of a bona fide promotion or career advancement.
E. JCSO’s constitutional claims are without merit.
JCSO asserts various reasons why KRS 61.598 violates the federal and
state constitutions. We address and reject each of them.
First, JCSO argues KRS 61.598 is arbitrary and overbroad, that it causes
absurd results. We have largely addressed the basis of this argument by
correcting the Retirement Systems’s application of the statute to conform to
legislative intent via statutory mandate. But even as a more general matter,
the statute is not arbitrary, as it is a legislative economic regulation that is
subject only to a rational-basis review. This statute is rationally related to a
legitimate government interest, because it reasonably shifts costs to employers
for larger unjustified compensation increases, with the purpose of preserving
and stabilizing the public pension system that thousands of state employees
rely upon. It is the legislature’s prerogative to regulate the pension systems
within its domain and to direct agency action in this way.
20 JCSO contends that the Retirement Systems’s application of KRS 61.598
demonstrates the statute is overbroad because it would tend to assess costs to
employers who do not engage in the pension-spiking behavior with which the
legislature was primarily concerned. The statute was simply misapplied in the
first instance in the way explained above. But even if it were properly applied,
it is not overbroad. The overbreadth doctrine typically applies to
constitutionally protected realms of behavior and action, particularly those
recognized rights, especially fundamental rights, under the First Amendment
and under the state constitutional counterparts.9 This statute regulates and
interacts with an employer’s decision to increase a public employee’s
compensation, behavior which is not constitutionally protected, but is merely
constitutionally permissible. It is an economic activity subject to reasonable
intervention and regulation by the state. Employers are afforded a sufficient
degree of procedural due process under the statute itself, and this treatment is
reasonably tailored to suit a legitimate government interest. Thus, the
overbreadth doctrine does not apply.
Next, the language of KRS 61.598(5)(a) reaches back to apply where an
employee has retired after January 1, 2014, but before July 1, 2017, even
where the compensation in question was paid before the date of the statute’s
enactment in July 2013. JCSO argues this is an ex post facto law and a law
See Commonwealth v. Kash, 967 S.W.2d 37, 42 (Ky. App. 1997); 9
Commonwealth v. Ashcraft, 691 S.W.2d 229, 232 (Ky. App. 1985).
21 impinging preexisting contracts. These constitutional claims are also without
merit.
Briefly, prohibitions against ex post facto laws apply to criminal matters.
The present proceedings do not involve criminal matters.10 And no contractual
rights or obligations of the JCSO’s are affected. The relationship between the
Retirement Systems and JCSO is not a contractual one, but a statutory one.11
The relationship between JCSO and its employees is determined by a collective-
bargaining agreement from which, according to the JCSO’s own uncontradicted
witness, JCSO never deviates. In other words, there was no effect on the rights
and duties under the employment relationship.
JCSO argues the law infringes the rights of its employees to earn a living
under the Kentucky Constitution. Even assuming JCSO has standing to allege
that, this argument was not preserved, so we decline to review it.
IV. CONCLUSION
For the foregoing reasons, we affirm the trial court’s reversal in Kaelin’s
case, and remand the case to the Retirement Systems with instruction to
recalculate the assessment consistent with this opinion, an assessment which
10Nicholson v. Jud. Ret. & Removal Comm’n, 562 S.W.2d 306, 308 (Ky. 1978). See also Beazell v. Ohio, 269 U.S. 167, 169 (1925) ("It is clear that the 'ex post facto' prohibition applies only to criminal matters."); Buck v. Commonwealth, 308 S.W.3d 661, 664–65 (Ky. 2010); Henderson & N.R. Co. v. Dickerson, 56 Ky. 173, 177 (Ky. 1856) (“It is not an ex post facto law, for such laws relate exclusively to offenses against the public, and not to private wrongs and injuries.”). Ky. Emps. Ret. Sys. v. Seven Cnties. Servs., Inc., 580 S.W.3d 530, 546 11
(Ky. 2019) ("The relationship between [the Retirement Systems] and [the participating employer] is and always has been purely statutory.").
22 we conclude was proper only as to those increased actuarial costs attributable
to .35% of Kaelin’s compensation increase in Fiscal Year 2014-2015.
We reverse the trial court’s decision to reverse in Harmon’s case, as even
a single spike can trigger the statute and overtime compensation is not exempt
from assessment. In addition, we figure the actuarial costs resulting from
8.37% of the actual 18.37% increase in Harmon’s gross compensation in Fiscal
Year 2011-2012 is subject to assessment. Accordingly, the matter is remanded
to the Retirement Systems to verify these figures and to recalculate the
assessment consistent with this opinion.
Minton, CJ., Hughes, Keller, Conley, VanMeter and Lambert, JJ., sitting.
All concur. Nickell, J., not sitting.
COUNSEL FOR APPELLANT:
Jillian Hall
COUNSEL FOR APPELLEE:
David Leightty Priddy, Cutler, Naake & Meade, PLLC