Pendergast v. Arizona State Retirement System – 5/1/2014

May 19, 2014

Arizona Court of Appeals Division One Holds That (1) The Public Service Credit Purchase Program, A.R.S. § 38-743, Qualifies As A Benefit Under The Pension Clause In Arizona’s Constitution, and (2) Recent Amendment To The Program Unconstitutionally Diminishes and Impairs Vested Benefits of ASRS Member.

Plaintiff Bonnie Pendergast (“Pendergast”) has been a member of the Arizona State Retirement System (“ASRS”) since 1984 when she began teaching in the Mesa Public School System.  She taught in Arizona for over a decade, before moving to Minnesota where she taught from 1996 to 2006.  In 2006, she returned to Arizona where she again began teaching. 

In 2012, Pendergast contacted ASRS to purchase 9.89 years of credited service for her years teaching in Minnesota.   Arizona’s public service credit purchase program (the “Program”), A.R.S. § 38-743, allows qualifying ASRS members to purchase years of credited service earned through previous-out-of-state employment by paying the actuarial present value of the benefits.  The Legislature has modified the program over the years and, in 2011, reinstated a five-year limit on the amount of service eligible for purchase under the Program.   ASRS, therefore, responded to Pendergast’s request noting that she could only purchase five years of service.  Pendergast exhausted her administrative appeals and then filed a complaint for judicial review in the superior court. 

The superior court found ASRS’s decision to apply A.R.S. § 38-743 (as amended in 2011) to Pendergast violated her constitutional rights.  ASRS appealed.  

The Court of Appeals affirmed.  The Arizona Constitution provides that “Membership in a public retirement system is a contractual relationship that is subject to article II, § 25, and public retirement system benefits shall not be diminished or impaired.”  Ariz. Const. art. 29, § 1(C) (the “Pension Clause”).  This additional protection afforded public retirement benefits was enacted by Arizona voters in 1998 (Proposition 100).  The Court of Appeals found that the Program qualifies as a “benefit” under the Pension Clause and that the 2011 legislative amendment to the Program unconstitutionally diminishes and impairs Pendergast’s vested benefit.   

In finding the Program qualifies as a “benefit,” the Court looked to the statutory scheme in place in 1998 when voters approved Proposition 100.  Importantly, at that time, there was no limit on the number of years of credited service an active ASRS member could purchase for corresponding out-of-state employment.  The Court also considered whether the use of “may” in A.R.S. § 38-743(a) (ASRS members “may receive up to five years of service credit . . .”) suggests the Program was not included among the “benefits” protected by the Pension Clause.  The Court, however, concluded that “may” indicates that the ASRS member is afforded the choice of exercising the benefit.  This construction of the statutory language, the Court noted, is consistent with the “robust contractual theory of public retirement system benefits” recognized in Arizona case law and confirmed by the Pension Clause.

In finding that the 2011 legislative amendment to the Program diminishes and impairs Pendergast’s constitutional rights, the Court found that by capping the amount of eligible service the legislation directly diminished her ability to purchase an unlimited amount of credited service as she could have done under the statutory scheme in existence in 1998. 

The Court of Appeals awarded Pendergast her costs and fees pursuant to A.R.S. § 12-341.01(A) because the matter arose out of contract.   

Judge Winthrop authored the opinion, in which Judges Orozco and Jones joined.