City of Villa Hills, Kentucky v. Kentucky Retirement Systems ( 2021 )

RENDERED: AUGUST 26, 2021
TO BE PUBLISHED
Supreme Court of Kentucky
2019-SC-0434-DG
CITY OF VILLA HILLS, KENTUCKY APPELLANT
ON REVIEW FROM COURT OF APPEALS
V. NO. 2018-CA-809
FRANKLIN CIRCUIT COURT NO. 17-CI-00706
KENTUCKY RETIREMENT SYSTEMS APPELLEE
OPINION OF THE COURT BY CHIEF JUSTICE MINTON
AFFIRMING
We accepted discretionary review to consider the application of Kentucky
Revised Statute (KRS) 61.598, sometimes referred to as the pension-spiking
statute. Kentucky Retirement Systems assessed over $200,000 in actuarial
costs to against the City of Villa Hills following the retirement of one of its
employees. The Retirement Systems found that increases in that employee’s
compensation over the five years preceding his retirement that was “not the
direct result of a bona fide promotion or career advancement” and so shifted
the added actuarial cost of the retiree’s pension benefits to the City.
The City raises four primary objections to the assessment on appeal: (1)
the Retirement Systems applied KRS 61.598 in an improperly retroactive
manner to compensation paid to the employee before the effective date of the
statute; (2) the burden of proof was improperly placed on the City to prove the
existence of a bona fide promotion related to the pay raise; (3) the courts below
erroneously concluded the assessment was supported by substantial evidence
that the employee did not experience a bona fide promotion; and (4) that KRS
61.598 is unconstitutional for being arbitrary, overbroad, an ex post facto law,
and a law violating the Contracts Clause.
The Court of Appeals resolved all the City’s issues in favor of the
Retirement Systems, and we affirm that decision.
FACTUAL BACKGROUND
Joseph Schutzman was a police officer for the Villa Hills Police
Department when he retired on January 31, 2014. Years before, in addition to
his police work, Schutzman was an experienced building and code inspector
operating under the business name Schutzman Inspection Services. He
originally ran this side-business in his free time off-duty. The City was a client
of his on a contractual basis.
On November 29, 2010, the mayor of Villa Hills expanded the city’s police
department to bring in-house the formerly outsourced responsibility of building
inspection, code enforcement, and zoning administration. Because of his
experience, this inspector role was in some way or another assigned to and
fulfilled solely by Schutzman, who would perform these additional functions
while continuing under the same rank and title he already held within the
police department.1 On the same day in November 2010, the City of Villa Hill's
1For brevity, we will refer to the role of building inspector, code enforcer, etc. as
“inspection,” “inspection services,” or the like. Schutzman’s inspection duties
2
city council reviewed and adopted Civil Service Rules for Villa Hills by
ordinance and conducted the first reading of pay scales by ordinance. The very
next day, the mayor sent an email to the city administrative clerk approving an
increase in Schutzman’s base pay of $28.35/hour to $38.35/hour. With his
overtime-pay rate at the typical 1.5 times base-pay rate, he would earn
approximately $57.25/hour while working overtime. Before December 2010,
Schutzman had never reported overtime, but he began doing so when he
undertook the police department’s new inspection functions. He reported his
police overtime and his inspection overtime separately.
His gross compensation in the last six fiscal years of employment was as
follows:
Fiscal Year Gross Compensation Increase Over the
Prior Fiscal Year
2008–2009 $61,277.04 n/a
2009–2010 $60, 026.40 0%
2010–2011 $115,252.23 92%
2011–2012 $164,681.55 48.89%
2012–2013 $111,119.20 0%
2013–2014 (until Jan. 31) $27,918.80 0%
In FY 2010–2011 Schutzman’s compensation attributable to his inspection
included “building inspection, reviewing, approving, and denying zoning and building
permits, inspecting properties under the building code, investigating code violations
and complaints, issuing citations for violations, attending and testifying at hearings,
conducting follow-up inspections, answering calls from contractors and citizens,
reviewing building plans, and inspecting buildings during and after construction.”
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duties was $48,586.87, and in FY 2011–2012 that amount was $91,675.48.
Separate from the added inspection duties, the pay directly attributable to his
police work would have been $66,665.67 in FY 2010–2011 and $73,006.07 in
FY 2011–2012. His compensation attributable to overtime in FY 2010-2011
was $39,728.59, and $78,809.25 in FY 2011-2012. The changes in gross
compensation between these years constitute the “spikes” in question.
In the meantime, the General Assembly sought to address a practice
called “pension spiking”—the practice of increasing the pay of an employee in
the years immediately leading up to retirement with the effect of increasing the
employee’s pension benefits in retirement. To limit this practice, the General
Assembly passed KRS 61.598, which went into effect on July 1, 2013.
On January 31, 2014, Shutzman retired from the police department. On
June 23, 2014, the Retirement Systems assessed $210,893.82 against the City
for the increased actuarial costs resulting from Schutzman’s compensation
increases in FYs 2010–2011 and 2011–2012.
Responding to the assessment, the City filed with the Retirement System
a Form 6481 Request for Post-Determination of Bona Fide Promotion or Career
Advancement. The Retirement Systems examined the circumstances described
by the City, and in its post-determination concluded that the City was
responsible for the assessed actuarial costs because the pay increase was not
the result of a bona fide promotion or career advancement.
The City requested an administrative hearing to challenge the liability.
The Hearing Officer issued an order on March 17, 2015, initially assigning the
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burden of proof to the Retirement Systems to prove the alleged spike was not a
result of a bona fide promotion. Then, on the Retirement Systems's motion,
the Hearing Officer placed the burden of proof on the City instead, requiring it
to prove by a preponderance of evidence that the alleged spike was a result of a
bona fide promotion. A hearing was held on December 7, 2015, and on March
14, 2017, the Hearing Officer issued a recommended order finding the
Retirement Systems’s assessment proper under KRS 61.598. The City filed
exceptions. The Retirement Systems’s Board of Trustees adopted the
recommended order as its final order with minor modifications.
The City then petitioned for judicial review of the final order. The
Franklin Circuit Court reviewed motions and heard oral argument. On
May 15, 2018, the court issued an opinion and order in which it held
Retirement Systems properly applied KRS 61.598 retroactively, that the burden
of proof was properly assigned to the City, and that substantial evidence
supported the Systems’s spike determination. The City appealed. The Court of
Appeals affirmed the circuit court on the same bases.
At every stage of litigation and appeal thus far, the Retirement Systems
has prevailed. The City sought discretionary review from this Court, which we
granted.
ANALYSIS
To begin with an overview of the applicable law, KRS 61.598 affects the
amount of a retiree’s monthly benefits and how the costs of such benefits are
allocated between the Retirement Systems and a participant employer, like the
5
City. KRS 61.598 involves a statutory concept called “creditable
compensation.” KRS 61.510(13)(a), in pertinent part, defines "creditable
compensation” as:
“[A]ll salary, wages, tips to the extent the tips are reported for
income tax purposes, and fees, including payments for
compensatory time, paid to the employee as a result of services
performed for the employer or for time during which the member is
on paid leave, which are includable on the member's federal form
W-2 wage and tax statement under the heading “wages, tips, other
compensation”. . . .
Put simply, creditable compensation refers to an employee's gross income and
compensation in a given fiscal year. To calculate an employee’s monthly
retirement benefit and allocate any related actuarial costs between the
participant employers and the Retirement Systems, the Retirement Systems
must look to the last five fiscal years of the retiree’s employment and identify
increases in creditable compensation exceeding 10% between any of the five
fiscal years. Then, depending on the timing of earnings and the date of the
employee’s retirement, the actuarial costs of an identified increase over 10% in
any one or more of the five fiscal years must be assessed against the employer
if the increase is not justified by a “bona fide promotion or career
advancement” or otherwise excepted by statute. Implicit is that, generally, the
Retirement Systems will bear the actuarial costs of a compensation increase up
to 10% in a given year.
KRS 61.598(2) defines the class of retiring employees for which the
Retirement Systems must limit the retiree’s pension benefits based on
compensation increases in the last five years of his employment that are not a
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result of a bona fide promotion or career advancement. The legislature selected
January 1, 2018, as the subsection’s effective date, meaning that only those
retiring after this date would be subject to caps on creditable compensation
increases exceeding 10% between any of the last five years of employment.
Thus, KRS 61.598(2) concerns the amount of the retiree’s monthly benefits. It
does not directly concern the payment of actuarial costs related to those benefit
payments.
Accordingly, KRS 61.598(3) applies that very same 10% limit only to that
creditable compensation earned by a retiree after July 1, 2017. Significantly,
subsection (3) was added by amendment in 2017 to read:
In order to ensure the prospective application of the limitations on
increases in creditable compensation contained in subsection (2) of this
section, only the creditable compensation earned by the retiring employee
on or after July 1, 2017, shall be subject to reduction under subsection (2)
of this section. Creditable compensation earned by the retiring employee
prior to July 1, 2017, shall not be subject to reduction under subsection
(2) of this section.
The emphasized “creditable compensation . . . reduction under subsection (2)”
refers to that reduction “used to calculate the retiring employee’s monthly
retirement allowance” under subsection (2).2 Thus, subsection (3) also simply
concerns the calculation of an employee’s retirement benefits, evidently
amended to provide prospective application of subsection (2) and limited to that
purpose. Significantly, this prospectively phrased subsection (3) does not
expressly refer to and thus does not concern which entity will ultimately pay
2 (emphasis added).
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the actuarial costs of compensation increases. Because Schutzman earned the
creditable compensation in question before July 1, 2017, and having retired in
January 2014, the amount of his retirement benefits is left untouched. But
again, who pays for the increased actuarial costs of his pay increase is what
remains the key substantive issue in this case, whether it is the City or the
Retirement Systems that bears the costs of Schutzman’s increased
compensation.
KRS 61.598(5)(a) concerns just that. It reads:
For employees retiring on or after January 1, 2014, but prior to July 1,
2017, 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 cost
shall be determined by the retirement systems.
Significantly, the 2017 amendment to KRS 61.589 merely added the language
“but prior to July 1, 2017,” emphasized above, to the already existing
unemphasized portion of subsection (5)(a). Using the same 10%-increase
measure, the General Assembly determined that when a pay increase is not the
result of a bona fide promotion or career advancement, the last participating
employer is assessed the increased actuarial costs resulting from any
compensation increases of 10% or more if that employee retired “on or after
January 1, 2014, but prior to July 1, 2017. . . .” It also provides that the
Retirement Systems will determine what that cost is. Again for clarity,
subsections KRS 61.598(2) and (3) determine whether increases over 10% will
be enjoyed by a retiree in calculating his monthly benefits, while by contrast,
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subsection (5) simply allocates the cost of those increases depending on the
date of an employee’s retirement.
In this case, Schutzman retired on January 31, 2014, just inside the
temporal window of applicability of subsection (5). Under the plain language of
this statute, the increased actuarial costs identified and determined by the
Retirement Systems are to be borne by the City unless it can demonstrate
Schutzman’s compensation change was justified by a bona fide promotion or
career advancement (“bona fide promotion,” hereafter in short).
KRS 61.598(1) provides that a “bona fide promotion or career
advancement” is:
[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.
There are two basic ways to find a “bona fide promotion,” either (a) in a
promotion or professional advancement in substantially the same line of work
as the last four years of employment, or (b) a change in employment position
based on training, skills, education, or expertise that imposes a significant
change in job duties and responsibilities clearly justifying the pay increase.
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A. The Retirement Systems properly applied KRS 61.598.
We engage in deferential review of an administrative agency’s decision to
deny a benefit to a party carrying the burden of proof or persuasion.3 Where
the burden of proof was properly assigned and the administrative agency found
that burden was not sustained, this Court will accept the agency’s finding
unless the evidence is so overwhelmingly in the burdened party's favor that the
Court cannot accept the finding.4 Where the statute is properly applied and
the finding below was supported by substantial evidence, we will affirm.
In this case, KRS 61.598 was properly applied retroactively, the burden of
proof was properly placed on the City, and the City simply failed to rebut the
Retirement Systems’s determination that Schutzman did not receive a bona
fide promotion. The Retirement System’s determination was supported by
substantial evidence, and the record evidence does not compel a contrary
determination. We affirm the Court of Appeals on all issues.
1. KRS 61.598 applies to creditable compensation paid to an
employee before the July 1, 2013, effective date.
The City argues that the retroactive application of KRS 61.598 is improper
as a matter of statutory interpretation and application, that the legislature did
not intend for the statute to apply retroactively. The City also makes
constitutional objections to this retroactive application, which we will settle
shortly. We first conclude that KRS 61.598 directs the Retirement Systems to
3 Ky. Ret. Sys. v. Ashcraft, 559 S.W.3d 812, 819–20 (Ky. 2018) (citing and
adopting the standard in McManus v. Ky. Ret. Sys., 124 S.W.3d 454, 458
(Ky. App. 2003)).
4 Id.10
apply the statute retroactively in some circumstances, that is, to calculate
creditable compensation and assess costs for compensation paid before the
statute took effect on July 1, 2013. We review de novo issues of statutory
interpretation and application, and in doing so our duty is to effect the intent of
the legislature.5 We affirm the Court of Appeals’ holding that retroactive
application was proper as a matter of statutory interpretation and application.
“A retrospective law is one which creates and imposes a new duty in
respect to transactions or considerations already past.”6 For our purposes, the
terms “retroactive” and “retrospective” refer to that part of KRS 61.598 that
directs the Retirement Systems to look back over the preceding five years of
creditable compensation paid, even that which was already paid to an employee
before its effective date in 2013, in calculating possible assessments against
the employer for increased actuarial costs.
As previously explained, there are separate provisions under KRS 61.598
for calculating the employee’s retirement benefits, governed under subsections
(2) and (3), and for calculating possible assessments against employers, under
subsection (5). All three subsections were amended in 2017, effective the same
year. We may presume at the start that with these amendments the General
Assembly considered the statute’s contents carefully, inserted clarifying
5 Commonwealth v. Plowman, 86 S.W.3d 47,____ (Ky. 2002).
6 Peach v. 21 Brands Distillery, 580 S.W.2d 235, 236 (Ky. App. 1979).
11
language as it saw fit, and purposely left certain language substantively
undisturbed.7
The City attempts to capitalize on newly amended language under
subsection (3), “In order to ensure the prospective application of the limitations
on increases in creditable compensation contained in subsection (2). . .,”
apparently to argue that the General Assembly intended the entire statute to
apply only prospectively. But the language just quoted only applies specifically
to subsection (2).
Subsection (5)(a) separately concerns assessments to employers and did
not have similar language added “in order to ensure prospective application.”
Rather, the following emphasized language was inserted into (5)(a), with the
rest of the subsection otherwise left substantively untouched: “For employees
retiring on or after January 1, 2014 but prior to July 1, 2017,” increased
actuarial costs shall be assessed to the last employer under the situations
described. The language is unequivocal. As the Court of Appeals noted, it
could not be clearer that for purposes of assessments against employers, the
legislature intended this five-year look back, even to reach compensation paid
before the 2013 effective date of the statute.
The City also points to a provision allowing employers to seek
predeterminations of agency treatment before increasing an employee’s
compensation. We can dismiss this concern as being without merit, as seeking
7 Util. Mgmt. Grp., LLC v. Pike Cnty. Fiscal Ct., 531 S.W.3d 3, 9 (Ky. 2017).
12
a predetermination is but an option for an employer by statute, with no
meaningful due-process concerns, addressed shortly, between a
predetermination and post-determination of agency action. This advisory
option does not mandate the statute’s application in any particular temporal
direction as the City argues.
The City is correct that we adhere to a strong general presumption
against retroactive application of statutes absent a clear expression of such
intent within the statute, especially where new rights and duties are made to
arise from actions already past.8 But this legislative intent requires no magic
words, it need only “manifest [the General Assembly’s] desire that a statute
apply retroactively.”9
The five-year lookback pertaining to assessments against employers,
effective in some form since its original enactment in 2013, demonstrates the
intent of the General Assembly to apply the statute retroactively. The lookback
is inherently and clearly retrospective and, therefore, is intended to apply
accordingly. While the 2017 amendment clearly abrogated any retrospective
interpretation as to the calculation of a retiring employee’s benefits, the General
Assembly evinced a completely different intention for subsection (5)(a) by
leaving alone, thereby practically reiterating, the five-year lookback applied to
any employer of an employee retiring after January 1, 2014, only adding
“January 1, 2017” as the other end of the currently applicable time frame. If
8 Id.9 Id. (citing Baker v. Fletcher, 204 S.W.3d 589, 597 (Ky. 2006)).
13
the General Assembly intended a different application, it would have made that
so using language of the same undeniable clarity. As a matter of statutory
construction, KRS 61.598 properly applies retroactively according to its plain
language. We affirm the Court of Appeals in that regard.
2. It was proper to assign the City the burden of proving a bona fide
promotion or career advancement.
The Hearing Officer placed the burden of proof on the City to
affirmatively prove Schutzman's pay increase was a result of a bona fide
promotion. The City argues that this burden was improperly placed on it, that
it should have been placed on the Retirement Systems. We disagree.
KRS 13B.090(7) reads:
“In all administrative hearings, the party proposing the agency take
action or grant a benefit has the burden to show the propriety of the
agency action or entitlement to the benefit sought. The agency has
the burden to show the propriety of a penalty imposed or the removal
of a benefit previously granted.”
The City provides several dictionary definitions to assist the Court in applying
this statute to the case at bar. Black’s Law Dictionary defines “penalty” as “a
sum of money exacted as punishment for either a wrong to the state or civil
wrong (as distinguished from compensation for an injured party’s loss).”10 A
“civil penalty” is defined further as “a monetary assessment for a violation of a
statute or regulation.”11 And “statutory penalty” is defined as one that imposes
10 Black’s Law Dictionary 1247 (9thed.) (emphasis added by City).
11 Id. (emphasis added by City).
14
“automatic liability on a wrongdoer for violation of a statute’s terms without
reference to the actual damages suffered.”12
These definitions only go to show the Retirement Systems’s assessment
is not a penalty. As the City’s own definitions show, a penalty generally
involves a forbidden act, like exceeding the speed limit on a public highway,
hunting without a license required by law, or failing to conform to a building
code, acts amounting to violations of law for which fines or citations might be
assessed.
It is not alleged that the City has committed any sort of infraction or
breach, nor any violation of KRS 61.598 or derivative regulation. The statute is
simply a mechanism of shifting the costs of an employment decision to the
employer under predetermined formulae. Like a tax, it is not assessed to
punish unlawful behavior or wrongdoing, though it perhaps disincentivizes
certain actions. Increasing an employee’s pay is not forbidden, disallowed, or
otherwise unlawful, nor is it deemed wrong. The assessment is simply the
price the General Assembly placed on employer-participants in a state pension
system who bear a primary responsibility of financially supporting the system.
Nor is the City being deprived of a benefit previously granted by the
Retirement Systems. The City was never guaranteed the right to engage in
employment actions that place a greater burden on the pension system without
paying a part of that cost. In reality, it is the City that is seeking to obtain a
12 Id. (emphasis added by City).
15
benefit from the Retirement Systems and other participants, namely that
others would pay for the increased actuarial costs of an employee paid
enormous amounts of overtime with no corresponding net gain in the services
rendered by the employee to the City. To avoid the costs of that employment
decision at others’ expense would amount to an affirmative benefit to the City-
employer. But even dubiously conceptualized as a benefit, it was never granted
or guaranteed to the City.
Finally, assigning the burden of proof to the City makes practical sense.
The City is in the best position to gather evidence pertaining to an employee or
a purported promotion. Under the express language of KRS 13B.090(7), the
burden of proof was properly assigned.13
3. The evidence does not compel a finding that the employee
experienced a bona fide promotion.
After the Hearing Officer properly assigned the burden of proof and made
a post-determination in favor of the Retirement Systems, the Board found the
City had not carried its burden of proving a bona fide promotion by a
preponderance of the evidence. Whether there was a bona fide promotion is a
factual matter found under circumstances generally defined by statute and
13 Cf. City of Louisville, Div. of Fire v. Fire Serv. Managers Ass’n ex rel. Kaelin,
212 S.W.3d 89 (Ky. 2006) (concerning an employment-status matter, holding the
burden of proof was properly placed on the employer fire-department to prove a
district chief was an employee and thus entitled to time-and-a-half overtime pay);
Special Fund v. Francis, 708 S.W.2d 641, 643 (Ky. 1986) (where a claimant sought
disability benefits from the Retirement Systems, held burden of proof was properly
assigned to the claimant to prove his disability did not preexist membership in the
system or reemployment).
16
refined by regulations.14 We defer to the Hearing Officer’s findings adverse to
the party bearing the burden of proof.15 So long as the application of the
statute was proper as a matter of law, we will only reverse the agency's finding
if the evidence of record so overwhelmingly favored the City that it compels a
contrary conclusion.16 “Evidence that would have supported but not compelled
a different decision is an inadequate basis for reversal on appeal.”17
The City argues the absence of substantial evidence to support the
Retirement Systems’s determination the pay increase was not a result of a
bona fide promotion. It asserts the Retirement Systems based this
determination solely on two facts: first, that Schutzman’s formal rank and title
within the police department did not change in 2010 despite his additional
responsibilities within the police department; and, second, that he was already
doing practically the same inspection work for the City before the purported
promotion. The City also claims the Retirement Systems improperly refused to
consider as evidence of a bona fide promotion the gross pay increase
attributable largely to overtime hours. The City avers all of this was improper
“cherry-picking” of the facts on the Hearing Officer’s part. We hear but
ultimately reject each of these contentions. The evidence does not compel the
14 See KRS 61.598(1).
15 Ky. Ret. Sys. v. Ashcraft, at 817–18 (citing Ky. Ret. Sys. v. Brown, 336 S.W.3d
8, 14 (Ky. 2011)); Ky. Ret. Sys. v. Wimberly, 495 S.W.3d 141 (Ky. 2016)).
16 See Wilkerson v. Kimball Int’l, Inc., 585 S.W.3d 231, 236 (Ky. 2019).
17 Gaines Gentry Thoroughbreds/Fayette Farms v. Mandujano, 366 S.W.3d 456,
461 (Ky. 2012).
17
conclusion that Schutzman enjoyed a bona fide promotion. We, therefore,
affirm the Court of Appeals in all respects on this issue.
The City is correct that the first two facts may not always be per se
dispositive of the “bona fide promotion” determination, because promotions
and career advancements might take on various forms and manifestations; and
the circumstances of each case should be examined, as was done here. Still,
even the City must concede that they are factors to consider, and it must
understand that there is more to this evidence than meets the eye in light of
the other evidence of record. That is, for whatever reason, City officials decided
to merge those services Schutzman was already doing off-duty as an
independent contractor with his existing duties as a full-time detective while
increasing his hourly pay by 35%, not even considering his overtime rate was
double his original hourly rate. In this context, the two factors substantially
prove there was no “bona fide promotion” of Schutzman.
First, we must reject the City’s implied premise that Schutzman’s
inspector role was in the same line of work as his police work. The inspector
role is only tangentially related to the traditional law-enforcement functions
Schutzman fulfilled in his role as a police officer. To suppose the inspection
role is substantially in the “same line of work” under KRS 61.598(1)(a) is a
stretch, perhaps as much as it would be to say that a police officer and a
prosecuting attorney, both tasked with law enforcement in some broad sense,
are in the same line of work. The code-inspecting, investigation, and citation-
writing aspects of Schutzman’s inspection role bear a vague similarity to his
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general law-enforcement role as a police officer, which involves patrolling,
investigation, and citation issuance of a different sort. But the inspection role
is not what we would call “law enforcement” in the same policing sense.
Placing the code-inspector role in the police department strikes us as an odd
fit, however justified, especially considering this was a special position for
which Schutzman was deemed “uniquely qualified” within the police
department, according to witness testimony at the administrative hearing.
Under the circumstances we regard the two roles as different lines of work for
purposes of determining whether a purported promotion or career
advancement is “bona fide.”
The City relies more on the second form of “bona fide promotion,"
characterizing the merger of Schutzman’s roles as a municipal employee as a
more general change in employment position based on training and skill
imposing a significant change in job duties clearly justifying the increased
compensation. The Retirement Systems must have found Schutzman’s lack of
formal promotion and the pre-existence of his inspector services as a
contractor for the City significant because Schutzman’s purportedly augmented
role for the department would reasonably appear to be merely a formal change.
The only significant difference between Schutzman’s work pre-2010 and post-
2010 was the extent and mode of compensation and the benefits he earned
from his work for the City in both roles. In a strictly legal sense, before 2010
he was both a city employee as a police officer and an independent contractor
working for the city as a code inspector. The only change was that he became
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an employee in performing both services under the same official umbrella of his
peculiarly assigned police-department duties, since he was no longer an
independent contractor for the City. His actual service to the City did not
fundamentally change. The change of his employment relationship with the
City does not compel the finding that the change in position was “bona fide”
under KRS 61.598.
Further, the City asserts the Retirement Systems and the lower tribunals
interpreted the definition of “bona fide promotion” improperly to exclude
overtime pay from consideration in that determination. More directly, this is
an objection to the Retirement Systems’s regulation, 105 KAR 1:140, Section
7(6), which excludes overtime pay, by definition, from consideration. As
applied to this case, the City objects to this lack of consideration, given
Schutzman’s enormous increase in gross overtime compensation. We find the
City’s objection lacking.
The statute does not require consideration of overtime pay in determining
the existence or authenticity of a promotion. Overtime pay generally is not in
and of itself evidence, certainly not conclusive evidence, of a bona fide
promotion. Overtime compensation is, just as the term describes,
compensation for fulfilling essentially the same job duties in a given role but in
a number of hours exceeding, “over,” the standard expected time working a job
in a given period, typically about 40 hours a week. The employee working
overtime may, as here, get paid more per hour, often “time and a half,” or 1.5
times the employee’s wage. But this extra compensation is based on the
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quantity of work done in a given week, not for a greater type or quality of work.
As a general matter, we read “bona fide promotion or career advancement” to
pertain to a change in type, quality, or tier of an employee’s responsibility, not
a change in the quantity of work performed.
The reviewing circuit court aptly concluded that common sense must not
be a stranger in a court of law. Overtime may be excluded from consideration
by the Retirement Systems in these determinations because overtime pay is not
in any practical sense qualitatively attributable to bona fide job promotions.
Further, the Retirement Systems is at liberty to weigh the probative value of
such evidence and find it lacking, as overtime will tend to be, and consider it
little if any contributing factor to an employer-favorable determination.18 We
affirm the Court of Appeals’ holding that the factfinder did not err in
disregarding the extent of Schutzman’s overtime pay.
At this point, we have no need to inquire deeply into the City officials’
decision to arrange Schutzman’s official job duties to incur additional
retirement benefits and compensation for essentially the same work in an
ostensibly new or altered position tailored specifically to Schutzman. We need
only accept as supported by substantial evidence under a highly deferential
standard that, in substance, Schutzman’s pay increase from both overtime and
increased retirement benefits was not a result of a bona fide promotion or
18 Ky. State Racing Comm’n v. Fuller, 481 S.W.2d 298, 308 (Ky. 1972) (“For it
must be borne in mind that it is the exclusive province of the administrative trier of
fact to pass upon the credibility of witnesses, and the weight of the evidence.”).
21
career advancement, that, although his official job duties as a city employee of
the local police department were augmented in the most diaphanous sense, it
was not on account of a true promotion.
So in summary response to the City’s arguments concerning the
sufficiency of evidence, Schutzman’s lack of change of formal title and the
congruence of his job responsibilities were not totally dispositive per se, at least
not alone. The Retirement Systems’s conclusion was reasonable and aimed
properly at substance over form, and we are inclined and obligated under the
applicable standard of review to accept its substantially evident conclusion that
there was no bona fide promotion justifying a 92% increase in FY 2010–2011
and then a 42.5% increase from that increase the very next fiscal year. The
City cannot seriously contend that a near-net-triple increase in Schutzman’s
compensation from $60,026.40 to $164,681.55 in two years is “clearly
justified” by a formal role change. What the City did in Schutzman’s case is its
prerogative, but it must bear part of the cost to the extent required by statute.
B. KRS 61.598 is not arbitrary, capricious, or overbroad in violation of
Section 2 of the Kentucky Constitution, either in principle or in
application.
The City asserts KRS 61.598 is unconstitutional as arbitrary and
overbroad, and that it has been interpreted and applied by the tribunals below
in violation of its due-process rights. The Retirement Systems argues Section 2
of the Kentucky Constitution does not even apply to the City as a government
entity, that it is not a “freeman” entitled to security in life, liberty, and property.
The Retirement Systems further argues that even if Section 2 did apply to
22
protect the City, no violation occurred because the City was afforded adequate
procedural due-process in the administrative and judicial systems, and that it
made its decision according to statutory mandate.
KRS 13B.150(2)(a) requires a court to reverse and remand a case if the
final order is “[i]n violation of constitutional or statutory provisions[.]” Section
2 of the Kentucky Constitution reads: “Absolute and arbitrary power over the
lives, liberty and property of freemen exists nowhere in a republic, not even in
the largest majority.” We have held that Section 2 applies to protect non-
persons, such as corporations.19 As to whether this provision applies to the
City as a municipality, we are similarly satisfied that it enjoys certain Section 2
rights against arbitrary deprivation of property or economic interests. But
when the courts review an allegedly arbitrary administrative action affecting an
economic or property right, the Court simply ensures an alleged deprivation of
non-fundamental economic or business rights has a rational basis in
furtherance of a legitimate government interest,20 that the affected party was
afforded adequate procedural due process, and that the decision was informed
by substantial evidence of record.21
19 Elk Horn Coal Corp. v. Cheyenne Res., Inc., 163 S.W.3d 408, 411 (Ky. 2005),
overruled on other grounds by Calloway Cnty. Sheriff’s Dept. v. Woodall, 607 S.W.3d
557 (Ky. 2020).
20 Stephens v. State Farm Mut. Auto. Ins. Co., 894 S.W.2d 624, 627 (Ky. 1995).
21 Kaelin v. City of Louisville, 643 S.W.2d 590, 591 (Ky. 1982).
23
1. The General Assembly’s passage and the Retirement System’s
implementation of KRS 61.598 were supported by a rational
basis.
The General Assembly unquestionably has the authority to establish and
pass legislation concerning the administration of retirement pensions for state
employees, absent limited exceptions inapplicable in this case. The General
Assembly established the Retirement Systems to administer the programs and
delegated authority to the Retirement Systems to pass and implement
regulations consistent with statute. We have already established that the
Systems properly applied the statute as written in this case and that its
regulation was consistent with KRS 61.598. The City’s qualms are
fundamentally directed at the statute, arguing the assessment was arbitrarily
applied to the City. It argues the arbitrariness is compounded by what it
regards as the previous payment of these actuarial costs via its regular
employer contributions and because it made these payments to Schutzman
before the bill that became KRS 61.598 even reached the floor of the General
Assembly.
In light of alleged historic mismanagement of the general pension fund,
funds that were to be held in trust to the employee-members, the General
Assembly found it necessary to place upper-limits on pay increases given to
member-employees retiring between January 1, 2014, and July 1, 2017. The
General Assembly shifted certain costs of such pay increases away from the
general retirement funds, contributed to and paid out of by various government
employers and employees, and placed those costs on the employers, who have
24
greater direct discretion over employee compensation. This cost-shifting was
meant to alleviate the financial distress the pension system was under. Thus,
KRS 61.598 is meant to be a bloat-limiting balancing measure.
KRS 61.598 is written to serve that purpose, and it authorizes the
Retirement Systems to pass regulations and take certain prescribed actions to
assess increased actuarial costs attributable to employee compensation
increases. By concentrating part of some larger actuarial costs on the
participant-employers, the General Assembly shifted the costs to employers.
This statute affects all employers similarly and only under the specified
circumstances, and it is reasonably designed to rehabilitate and preserve the
Commonwealth’s pension system. KRS 61.598 still permits a 10% increase
allowance before the Retirement Systems inquires into pension costs at all, and
beyond that, an assessment can still be avoided by demonstrating a bona fide
promotion. Pension costs are determined by actuarial formulae, which we have
no reason to think are being applied arbitrarily, assuming they are premised on
factors one would predict such as the life expectancy of participants, the age of
the work force, and anticipated contribution needs. Neither the rationale nor
the implementation of this statute is arbitrary, random, or speculative, as the
City suggests. There is a thread of logic running through this statute
supporting a legitimate interest properly under the government’s domain. It is
not arbitrary, much less capriciously aimed at the City.
The City may object to either the generals or particulars of how the
General Assembly addressed the problems in the pension system, and it may
25
argue it is surprised and finds unfair the amount of money it has been
assessed to meet that end. But KRS 61.598 is not arbitrary on its face or as
applied.
2. The City was afforded adequate procedural due process.
The other aspect of arbitrariness is the procedural due process afforded to
the claimant. The City asserts the Retirement Systems’s decision was reached
without considering evidence of a bona fide promotion, only “by reference to
mathematical tables.” It has argued that the assessment was made contrary to
statutory mandate, that the Retirement Systems improperly assessed the costs
of pay increases before it made a factual determination as to changes in
Schutzman’s official duties, a change that the City asserts amounts to a bona
fide promotion. The City thus considers itself deprived of the opportunity
properly to challenge the assessment.
Here, there is no doubt the City was afforded and has enjoyed adequate
procedural due process. The requisite procedural elements are notice, a
hearing, the taking and weighing of evidence, a finding of fact based upon an
evaluation of the evidence, and conclusions supported by substantial
evidence.22 The City was first allowed to object to the initial notice of
assessment by filing a Form 6481 to initiate reconsideration by the agency,
then it was able to appeal the unfavorable determination to the Board of
Trustees of the Retirement Systems for review, and it has since been afforded
22 Kaelin, 643 S.W.2d 590, 591 (Ky. 1982).
26
three levels of judicial review. The City was given ample opportunity to put on
evidence that Schutzman’s 92% and 48.89% raises across two years were the
result of a bona fide promotion, yet no tribunal has been convinced. We have
already addressed how there was substantial evidence supporting the finding
unfavorable to the City. The City was afforded adequate procedural due
process.
3. The statute is not overbroad.
The City merely asserts that KRS 61.598 is overbroad, offering little in the
way of explanation. A statute is overbroad when, “in an effort to control
impermissible conduct, the statute also prohibits conduct which is
constitutionally permissible.”23 “Where conduct and not merely speech is
involved, the overbreadth effect of a statute must not only be real, but
substantial as well, and judged in relation to the law's plainly legitimate
sweep.”24
The overbreadth doctrine typically applies to intervene where government
action unduly burdens or regulates constitutionally protected actions.25 The
decision to raise an employee's compensation is not constitutionally protected,
like speech, religion, or interstate travel, and we have already concluded that
KRS 61.598 reasonably “regulates” that behavior for a legitimate reason. Even
if the assessment amounts to a regulation of protected conduct, we have
23 Commonwealth v. Ashcraft, 691 S.W.2d 229, 232 (Ky. App. 1985).
24 Hendricks v. Commonwealth, 865 S.W.2d 332, 337 (Ky. 1993).
25 See Commonwealth v. Kash, 967 S.W.2d 37, 42 (Ky. App. 1997); Ashcraft,
691 S.W.2d at 232.
27
already found this conduct is not prohibited by the statute or otherwise
impinged. While no statute is perfectly limited in application, the parameters
of KRS 61.598 are reasonably tailored to the purported end. We are not
otherwise offered any sound description of how the statute unduly punishes or
burdens conduct unrelated to the sustainability of the pension fund. The
statute is not overbroad.
C. KRS 61.598 does not violate Section 19(1) of the Kentucky
Constitution prohibition against ex post facto laws or the state or
federal Contracts Clauses.
We turn now to the City’s constitutional objections to the statute’s
retroactive effect, namely that KRS 61.598 is an ex post facto law and that it
violates the federal and state Contracts Clauses. Section 19(1) of the Kentucky
Constitution reads: “No ex post facto law, nor any law impairing the obligation
of contracts, shall be enacted.”
An ex post facto law is any law, which criminalizes an act that was
innocent when done, aggravates or increases the punishment for a crime
as compared to the punishment when the crime was committed, or alters
the rules of evidence to require less or different proof in order to convict
than what was necessary when the crime was committed. . . . The key
inquiry is whether a retrospective law is punitive.26
We have already determined that the statute may apply retroactively to prior
acts, even to the City’s payment of compensation to Schutzman before 2013.
We then settled why this law is not punitive in nature because it does not
26 Buck v. Commonwealth, 308 S.W.3d 661, 664–65 (Ky. 2010) (emphasis
added) (citing Purvis v. Commonwealth, 14 S.W.3d 21, 23 (Ky. 2000), and Martin v.
Chandler, 122 S.W.3d 540, 547 (Ky. 2003)).
28
impose a punishment for committing a forbidden, unlawful, or wrongful act.
The same premises apply to this analysis.
KRS 61.598 is also not unconstitutional as an ex post facto law, because,
although the statute operates retroactively, the assessment is not a
punishment for a criminal act. Ex post facto laws apply only to criminal or
penal matters, not generally to civil or private matters.27 This assessment is a
civil assessment incurred for non-criminal actions. Again, the assessment was
to redistribute actuarial costs according to statute, not to punish the City for a
lawful employment decision.
The Contracts Clauses are not implicated either. The relationship
between the City and the Retirement Systems is one purely of statute, not
contract.28 And the relationship between the City and Schutzman, that is, the
rights and obligations owed between them, is left completely unaffected. KRS
61.598 establishes a separate financial obligation to the Retirement Systems
given the City’s participant status. The statute does not affect any employer-
employee obligations between the City and Schutzman, especially now that the
employment relationship no longer exists by virtue of Schutzman’s retirement.
We find no violation of the Contracts Clause, as no contractual relationship of
the City’s was affected.
27 Nicholson v. Jud. Ret. & Removal Comm'n, 562 S.W.2d 306, 308 (Ky. 1978);
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.”).
28 See Ky. Emps. Ret. Sys. v. Seven Cnties. Servs., Inc., 580 S.W.3d 530, 546
(Ky. 2019).
29
IV. CONCLUSION
For the reasons stated, we affirm the decision of the Court of Appeals.
Minton, C.J., Hughes, Keller, Conley, VanMeter and Lambert, JJ., sitting.
All concur. Nickell, J., not sitting.
COUNSEL FOR APPELLANT:
Mary Ann Stewart
Bryce C. Rhoades
Adams Law, PLLC
COUNSEL FOR APPELLEE:
Anne Caroline Bass
Kentucky Public Pensions Authority
30