By: David E. Mastagni, Partner; Isaac S. Stevens, Senior Associate; Mastagni Holstedt, APC
After eight years of litigation, the Sacramento Police Officers Association obtained over $20 million in retroactive and prospective increases in members’ pension benefits for holiday pay cashouts. SPOA President Dustin Smith secured this historic achievement through a settlement only after SPOA obtained an arbitration award repudiating the City’s accounting gimmicks as fiction used to avoid reporting holiday pay.
An agreement was reached after the SPOA prevailed in an arbitration, which disproved the City’s purported “first in, first out” accounting methods. CalPERS had relied upon the City’s FIFO misrepresentations in determining that holiday pay was not being paid as it accrued and therefore should be excluded.
Holiday pay cashouts were established in a July 1990 tentative agreement, which provided “all accrued time in excess of 112 hours in any bi-weekly pay period shall be paid to the employee.” This language was incorporated into every successive MOU, including the current contract. SPOA members would accrue 112 hours in a year, and after banking 112 hours, began receiving holiday in lieu compensation.
Under PERS Regulation 2 CCR 571, holiday pay must be included in pension benefits if the cashout is paid periodically, at least annually, and is reported in the period earned. To avoid reporting holiday cashouts as pensionable compensation, the City told PERS in August 1994 that “applying the recognized accounting principal of first in first out, (FIFO) the City is paying holiday credit hours earned in a previous calendar year first.” Based on this representation, PERS agreed that holiday pay was not pensionable compensation. SPOA was never noticed of the City’s representations or given an opportunity to object.
In February 2007, PERS reversed its position in response to a member inquiry. PERS held the plain language of the MOU indicated fresh accruals were being paid and ordered the City to correct reportings for SPOA members over the last three years. In September 2007, then-SPOA President Brent Meyer and SPOA Chief Counsel David E. Mastagni met with City and CalPERS representatives to enforce the letter ruling. For the first time in SPOA’s presence, the City asserted that holiday is paid on a FIFO basis and therefore should be excluded from pension benefits. SPOA disputed this assertion. However, in a November 2007 letter ruling, CalPERS again reversed itself based on the City’s claim. SPOA timely appealed.
SPOA filed a grievance alleging the City did not pay holiday pay on a FIFO basis, and asserting that MOU Section 13.1 prohibited such a practice. MOU Section 13.1 provides: “Holiday accumulations shall be limited to a total of one hundred and twelve (112) hours. All accrued holiday time in excess of one hundred and twelve (112) hours in any bi-weekly pay period shall be paid to the employee at his/her straight-time hourly rate.”
The City and SPOA arbitrated their dispute before Thomas Angelo. At arbitration, the parties asked the arbitrator to decide whether the City’s holiday payout practices, including the City’s claimed use of FIFO accounting, violated MOU Section 13.1.
SPOA presented fact-finding transcripts from the early 1990s showing the parties intended new holiday pay accruals to be automatically paid to each SPOA member as soon as they banked 112 holiday hours. These transcripts showed the City never claimed it used FIFO accounting to pay out holiday hours banked a year earlier. During that fact-finding, the City’s then-lead negotiator testified, “If an officer is at 112 hours presently, they don’t accrue any additional hours. They’re just being paid off biweekly in a dollar amount that is equivalent to the biweekly gain.” She further stated “after 112 hours, it automatically cashes out.”
SPOA also presented a 1996 grievance over a new payroll system that provided further confirmation holiday was not paid on a FIFO basis. SPOA filed a grievance because, although SPOA members had reached the 112 hour holiday accumulation maximum, they did not receive holiday payout. Their pay stubs reflected only the 112 hours already banked, and did not reflect the newly accrued hours in pay or leave. In response, the City explained the new payroll system did not allow the excess accruals to be included on checks for the period in which they accrued. Instead, they would pend for 2 weeks and be paid out the following check. The City’s resolution explained as follows:
“For example, SPOA members accrue 4.18 hours per pay period. If their Holiday bank of hours is 109, the pay stub will show the accrual of 3 hours and the total Holiday bank hours will be 112. The other 1.18 hour is put in Pending Pay to be paid out on the next pay check. The system is not set up to show the remaining 1.18 hours anywhere on the check.”
SPOA also presented payroll records issued immediately following a raise that confirmed new holiday accruals were paid out at the rate of pay two weeks in arrears, while the salary was paid at the new higher rate. The holiday pay on the following check was paid at the new higher rate from the raise.
Arbitrator Angelo issued his award on March 21, 2013. In his award, Angelo ruled the MOU required the City to cash out holiday leave in the pay period it was accrued. Angelo held, “the City’s FIFO argument is largely based on a fictional construct of what takes place with respect to holiday leave pay period,” and found:
The alleged use of FIFO was theoretical at best. The City had no method by which it could identify what time the holiday credit it was paying out was actually placed in the bank. It simply told PERS that the holiday credit being paid was the “oldest” one. In fact in all the correspondence between the City and the Union submitted at hearing, FIFO was never referenced when the City explained its method of paying out the holiday credit, even when the information is being given by a City accountant. The City has done no more than select an accounting methodology to receive a desired result. In other words, it does not describe the reality of how payments are made. (Award, pp. 13-14.)
Angelo also found the so-called FIFO method the City told CalPERS it was using was “inconsistent with the parties’ understanding of how Section 13.1 was intended to operate.” (Award, p. 14.) Angelo noted:
As a result, the factfinder concluded that the accrual was being paid “directly” to the employees. It was not put in a bank for some later dispersal; it did not follow some circuitous route whereby it was not released until a year later. (Award, p. 13.)
As a remedy for the City’s MOU violation, Angelo ordered the award be forwarded to PERS for its use in determining SPOA’s appeal of PERS’ ruling that the City was not required to report holiday pay. At first, PERS maintained its position that holiday pay was not pensionable and continued accepting the City’s FIFO representations. SPOA’s appeal of PERS’ decision was eventually set for hearing in the fall of 2015.
Representatives of SPOA, PERS and the City participated in a settlement conference in February, 2015. After a long day of negotiations, the parties emerged with a tentative settlement agreement. The settlement was finalized on May 27, 2015.
Under the parties’ agreement, every SPOA member who retired since 2004 will receive up to five years back pay and, more importantly, a 5.4% increase in future pension benefits. The settlement provides immediate enhancements to over 230 retirees and higher pensions for all current and future SPOA members. As a result, SPOA’s retirees and current members will receive approximately $5,000 in increased pension benefits each year into the future. Combined, the lump sum retro-payments and ongoing increase in pension benefits will surpass $20 million. This recovery represents the largest back pay award in the history of the SPOA.
About the Authors:
David E. Mastagni, partner in the Labor Department of Mastagni Holstedt, PC, focuses his practice in labor and employment law representation, including trial and appellate litigation in California and federal courts.
Isaac S. Stevens, senior associate in the Labor Department of Mastagni Holstedt, PC, where he represents labor associations and their members in complex litigation, collective bargaining, arbitration, and mandamus proceedings.