On October 28, 2020, Judge Rebecca Holt of the Wake County Superior Court entered an order affirming a previous decision by the N.C. Office of Administrative Hearings (“OAH)”) ordering the refund of more than $350,000 in “additional contributions” paid by three separate public school systems to the Teachers & State Employees Retirement System (“T&SERS”).

These additional contributions had been assessed against the Edgecombe County Board of Education, Harnett County Board of Education, and Lenoir County Board of Education by the T&SERS under a 2014 law (S.L. 2014-88) enacted by the N.C. General Assembly to curb the practice of “pension spiking,” and which imposed a cap on certain pensions as a result.

However, in April of this year, the N.C. Supreme Court concluded that assessments under the law were invalid because they had been calculated using a multiplier that was not adopted pursuant to the rulemaking requirements of the N.C. Administrative Procedures Act (“APA”).  As a result, as the OAH concluded, and Judge Holt affirmed, the Edgecombe, Harnett, and Lenoir County boards are due a refund of the amounts they paid to the T&SERS under these invalid assessments.

A brief summary of the history of the pension cap statute and related litigation is included below.

Pension Cap Statute and the Cap Factor

In 2014, the General Assembly enacted a contribution-based benefit cap (“CBBC”) for members of the T&SERS.  The new law provided, among other things, that for retirees subject to the CCBC who were members before January 1, 2015, the retiree’s last employer would be responsible for paying an amount necessary to restore the member’s retirement allowance to its pre-cap amount.  N.C. Gen. Stat. § 135-5(a3).  The legislation requires the Board of Trustees of T&SERS to adopt a “cap factor” to calculate the CBBC. Id.

The cap factor acts as a multiplier in order to ensure, pursuant to the statute, that no more than .75% of all retirements for a given year will have their pension capped.  A smaller cap factor increases the number of retirements that will be capped, while a larger cap factor decreases the number of capped retirements.

The T&SERS Board of Trustees met in October 2014 and set a cap factor of 4.8 pursuant to the statute.  In October 2015, the Board of Trustees met again and revised the cap factor to 4.5.  However, on neither occasion did the Board of Trustees engage in rulemaking in order to adopt these cap factors.

Challenge to the Cap Factor

In 2016, the Cabarrus County Board of Education and three other school boards requested a declaratory ruling from the Division that the cap factors adopted in 2014 and 2015 were void because of the failure to follow the rulemaking procedures of the North Carolina APA, N.C. Gen. Stat., Chapter 150B, and also petitioned the T&SERS to adopt a cap factor rule.  Both requests were denied.  In response, these four boards filed petitions for judicial review in superior court, asserting that the T&SERS Board of Trustees was required to follow the rulemaking procedures of the APA in adopting the cap factor; that the Board of Trustees had failed to do so; and that the additional contribution assessments against the school boards should be declared unlawful and void.

In May 2017, Judge James E. Hardin, Jr., of the Wake County Superior Court, ruled in favor of the four school boards, and the Division appealed.  In September 2018, the Court of Appeals unanimously affirmed the trial court, holding that the cap factor is a rule as defined by G.S. § 150B-2; that the T&SERS Board of Trustees failed to follow the rulemaking procedures of the APA in setting the cap factor in 2014 and 2015; and that, therefore, the additional contribution assessments against the four school boards were void.  Cabarrus Cty. Bd. of Educ. v. Dep’t of State Treasurer, 261 N.C. App. 325, 821 S.E.2d 196 (2018).  The Supreme Court of North Carolina affirmed the Court of Appeals’ decision earlier this year.  Cabarrus Cty. Bd. of Educ. v. Dep’t of State Treasurer, 374 N.C. 3, 839 S.E.2d 814 (2020).

The Cap Factor Rule

Following Judge Hardin’s decision in 2017 regarding the cap factor, the T&SERS initiated the process for adopting a rule to set the cap factor.  In March 2018, the T&SERS adopted a rule setting the cap factor at 4.5.  That rule became effective on March 21, 2019.

Current Status of Challenges

School systems continue to challenge assessments they have received under the pension cap statute, and to seek refunds of assessments they paid under assessments deemed invalid by the North Carolina Supreme Court.  These include:

• A group of seven school boards (in addition to the three boards discussed above) who are seeking refunds of nearly $500,000 in payments made under invalid assessments;

• A group of eleven school boards who are challenging the application of the pension cap rule to retirements that occurred before the effective date of the rule, and for which the T&SERS is seeking approximately $2.8 million in “additional contributions”;

• A group of eight school boards who are challenging approximately $1.5 million in assessments for “additional contributions” received under the pension cap statute and cap factor rule.