Arizona Court of Appeals Division One holds that a public pension plan does not violate common-law or constitutional pension protections by terminating a longstanding practice that the terms of the plan never permitted in the first place.

Since 1996, a city had allowed its employees to cash out unused sick leave at retirement and had included those payments in the determination of “final average compensation” when calculating pension benefits.  In 2012, the city prospectively eliminated this practice by amending an administrative regulation.  A group of employees and unions sued, claiming that the revised regulation would unlawfully reduce their pension benefits.  The superior court agreed in part, holding that unused sick leave was non-monetary “compensation” under the city’s retirement plan and had to be included when calculating pension benefits in certain circumstances.  The city appealed.

The Court of Appeals reversed.  The Court held that unused sick leave did not constitute “compensation” or “non-monetary compensation” as those terms are defined in the pension plan terms.  The pension plan therefore did not require the city to include accrued sick leave payouts as “final average compensation” when calculating pension benefits.  And because the plan included no such requirement, the city could change its practice and therefore stop counting the payouts as pensionable compensation.

Judge Brown authored the opinion of the Court, in which Judges Cruz and Weinzweig joined.

Disclosure: Osborn Maledon attorneys were involved with this case.