Washington Ass'n of County Officials v. Washington Public Employees' Retirement System Board

Dolliver, J.

This is an original action before this court seeking a writ of mandamus and declaratory judgment relief. It challenges both the statutory and constitutional validity of the inclusion of "termination payments" by the Washington Public Employees' Retirement System (PERS) in computing the pension benefits due its retiring members.

The Public Employees' Retirement System disburses lifetime monthly pension payments to its retired members. The amount of payment is computed upon a prescribed percentage of the employee's "average final compensation" which is defined in RCW 41.40.010(15) as "the annual average of the greatest compensation earnable by a member during any consecutive two year period of service for which service credit is allowed". The pension benefit is normally equal to 2 percent of that average for each year of service, up to a maximum of 60 percent.

Each employee contributes 6 percent of his monthly salary to the retirement system. The employer contribution is set on an actuarial basis at a rate which, together with the employee contribution, funds the expected cost of system benefits.

RCW 41.40.195 provides for a cost-of-living increase in pension payments if the cost of such increase has been met by the excess of the growth in assets of the system over that required for meeting the actuarial liabilities of the system. This increase has been granted each year since its statutory authorization.

In the month of retirement, a substantial number, but not all, employers in PERS pay to their retiring employees certain termination payments. These payments may include accumulated and unused sick and vacation leave as well as severance pay and vary employer by employer with some employers paying all of the above items. These payments are currently included in computing the total compensation earned by an employee in his 2 most highly compensated years of employment if his last 2 years are used as the base period. Since in most cases the 2 final years of employment are the highest paid consecutive 2 years, the termination payments become a part of the "average final compénsation" upon which the pension benefits are computed.

The impact of including termination payments when computing the "average final compensation" is not insignificant, amounting to an annual cost of between $5 and $6 million. In 1975, the total employee and employer rate of contributions was 13 percent of all compensation. If PERS had not included termination payments in computing benefits, the rate would have been 12.4 percent of all compensation.

The practice of PERS has been consistent. Since 1952 when a municipal corporation first made termination payments available to its employees, PERS has included such payments in its computation of "average final compensation." This practice was known to and approved by the PERS director at least as early as 1960, although the minutes of the meetings of the board of directors indicate that the first time the matter was discussed in a board meeting was October 21, 1974. No formal regulation or ruling has been promulgated by the board in regard to treatment of termination payments.

In interpreting whether the definition of "average final compensation" in RCW 41.40.010(15) includes termination payments made to some members of PERS, we first consider petitioners' argument that the definition of "final compensation" in RCW 41.40.010(16) is controlling. The complete definition of the term "average final compensation" is contained in RCW 41.40.010(15). There is no need for the term to be broken down and its constituent parts defined elsewhere. "Final compensation" is a different term which has no relationship to RCW 41.40.010(15), nor any relevance in determining the meaning of "average final compensation" or in setting pension benefits.

We next look to legislative intent. That intent is best expressed by the recent actions of the 1977 legislature in regard to the pension statutes.

The problem of inclusion of termination benefits was considered in revisions made to RCW 41.40. As to members entering PERS on or before September 30, 1977, the law was left unchanged, but for those employees entering PERS on or after October 1, 1977, termination payments are now specifically excluded. See RCW 41.40.010(8) (b); Laws of 1977, 1st Ex. Sess., ch. 295, § 16, pp. 1091, 1092. The legislature had specific knowledge of the practice of including termination payments when they made the recent changes. Attorney General Opinion, January 12, 1976. If they had intended to revise the current practice as to existing employees they would have expressly stated that desire in the form of a statutory amendment. We find no merit in petitioners' contention that "The legislature has left it to the judiciary to correct the respondents' erroneous interpretation of the prior statutory language."

In addition to what we believe is clear legislative intent to allow termination payments to be included in "average final compensation" prior to the effective date of Laws of 1977, 1st Ex. Sess., ch. 295, p. 1086, further grounds exist for our decision. For 25 years, PERS has consistently included termination payments in the computation of "average final compensation." During this period numerous expectations based upon this practice have arisen in the minds of current employee-members of the system. To now hold termination payments not includable would violate those expectations and be contrary to the position of this court first expressed in Bakenhus v. Seattle, 48 Wn.2d 695, 700, 296 P.2d 536 (1956), where we stated "The promise on which the employee relies is that which is made at the time he enters employment; and the obligation of the employer is based upon this promise."

Hessel v. New York City Employees' Retirement Sys., 33 N.Y.2d 381, 308 N.E.2d 688, 353 N.Y.S.2d 169 (1974), relied on by petitioners is not controlling. There it was held that "compensation earnable" did not include lump-sum termination payments. That case was the opposite of this case inasmuch as the New York City Employees' Retirement System did not include such payments in its computations and a member was suing to force the system to institute such a practice. Furthermore, Hessel distinguished and did not overrule a factual situation in all relevant aspects identical to this case which had been discussed in Kranker v. Levitt, 30 N.Y.2d 574, 281 N.E.2d 840, 330 N.Y.S.2d 791 (1972). In Kranker, the same New York court held members of a retirement system which included termination payments in its pension base had vested rights in the continuance of that practice, and those rights could not constitutionally be impaired.

Petitioners remind us of our decision in Ball v. Smith, 87 Wn.2d 717, 556 P.2d 936 (1976), wherein we held weight need not be given to the interpretation of any agency employee not charged by statute with such authority or responsibility. However, here we are not relying upon the construction placed upon the statute by PERS in interpreting the statute. Rather, we hold that the practice of PERS has given rise to legitimate contractual expectations upon which the employees may rely and which PERS is bound to honor.

Plaintiffs next assert the inclusion of termination payments violates constitutional requirements of equal protection. U.S. Const. amend. 14; Const. art. 1, § 12. We do not agree. While it is true petitioners whose termination payments are not included in their average final compensation receive lesser pensions, the disparity in pensions is the result of varying levels of compensation set by different employers. The retirement statutes are neutral. Variations in compensation result from the salary ordinances of the various counties, not from the pension statutes. There is no classification by RCW 41.40 resulting in the alleged constitutional infirmity.

The petition is denied.

Rosellini, Hamilton, Stafford, Brachtenbach, and Horowitz, JJ., concur.