Arizona State University v. Arizona State Retirement System – 5/5/2015

May 11, 2015

Arizona Court of Appeals Division One holds that a state agency must follow rulemaking procedures before enforcing generally applicable policy.

This case involved an agency, the Arizona State Retirement System (“ASRS”) enforcing a policy without having followed the Administrative Procedure Act (“APA”).  ASRS collected over $1.1 million from ASU despite never having promulgated a rule through the notice-and-comment rulemaking process required by the APA.

ASRS runs a defined benefit retirement system offered to employees of state employers such as ASU.  In this case, ASU offered its employees a termination incentive program that allegedly induced some employees to retire earlier than they otherwise would have, even though all participants were already eligible for normal retirement.

If an employer’s termination incentive program causes “an actuarial unfunded liability” to the ASRS plan, then by statute ASRS may collect “the amount of the unfunded liability” from the employer.  A.R.S. § 38-749(A).  That statute is designed to make up for the burden imposed on the plan by salary spiking, but it also applies to termination incentive programs like ASU’s that do not involve salary spiking.

ASRS billed ASU over $1 million for the alleged unfunded liability of ASU’s termination incentive program.  It calculated that number using a methodology that had never gone through notice-and-comment rulemaking and had never been properly promulgated as a rule under the APA.  ASU challenged the charge on that basis.

The Court of Appeals vacated the charge because of ASRS’s failure to follow the APA.  It held that the policy ASRS used to calculate the charge qualified as a rule under the APA (A.R.S. § 41-1001(19)) because it is generally applicable and it implements, interprets, or prescribes law.  The APA applies to all agencies unless expressly exempted, and ASRS had no exemption for this action.  The court rejected ASRS’s argument that complying with the APA would cause the plan to breach its fiduciary obligations to its members; the court held that the agency could comply with the APA without breaching its fiduciary obligations.

Judge Norris authored the opinion.  Judges Downie and Howe joined. 

Disclosure: Osborn Maledon represented ASU in this appeal.