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Wade v. Arizona State Retirement System

Court of Appeals of Arizona, First Division

March 31, 2016

MARY WADE and MARLA PADDOCK, Plaintiffs/Appellants,

          Appeal from the Superior Court in Maricopa County. No. CV2013-015082. The Honorable Randall H. Warner, Judge.

         Martin & Bonnett, PLLC, Phoenix, By Susan Martin, Daniel L. Bonnett, Jennifer L. Kroll, Co-Counsel for Plaintiffs/Appellants.

         Robaina & Kresin, PLLC, Phoenix, By Thomas M. Rogers, Co-Counsel for Plaintiffs/Appellants.

         Arizona Attorney General's Office, Phoenix, By Jothi Beljan, Co-Counsel for Defendants/Appellees.

         Fennemore Craig, PC, Phoenix, By Patrick Irvine, Co-Counsel for Defendants/Appellees.

         Presiding Judge Peter B. Swann delivered the opinion of the court, in which Judge Lawrence F. Winthrop and Judge Donn Kessler joined.


         Peter B. Swann, Judge:

         [¶1] A.R.S. § 38-711(7) defines the " compensation" on which employee and employer contributions to the Arizona State Retirement System (" Retirement System" or " ASRS" ) are calculated. The Retirement System interprets that statute to exclude from " compensation" the City of Chandler's payment of contributions to an eligible deferred compensation plan, and the superior court upheld that interpretation. We disagree. We hold that § 38-711(7) defines " compensation" to include money paid by an employer to a deferred compensation plan, even if the employee could not elect to immediately receive the deferred compensation as cash-in-hand.


         [¶2] The Retirement System[1] is a defined benefit plan, as described in 26 U.S.C. § 414(j), that provides retirement benefits to eligible employees of the State of Arizona and participating political subdivisions and subdivision entities. A.R.S. § § 38-711(3), (13) & (23), -712. The City of Chandler (" the City" ) participates in the Retirement System. The City also operates an eligible deferred compensation plan, as described in 26 U.S.C. § 457(b) (" Deferred Compensation Plan" ).

         [¶3] Marla Paddock is a City employee, as was Mary Wade until she retired; both are members of the Retirement System and the Deferred Compensation Plan. Their annual written employment contracts provided that they were entitled to receive (among other things): a " [s]alary" set at an " annual base" amount; and " annual deferred compensation," expressed in some years' contracts as a dollar amount and in other years' contracts as a percentage of the " base salary." The City deposited the " annual deferred compensation" into the Deferred Compensation Plan in equal bi-weekly payments.

         [¶4] Historically, the City included the " annual deferred compensation" in its calculation of the employees' annual " compensation" to determine employer and employee contributions to the Retirement System under A.R.S. § § 38-736(A) and -737(A). In 2011, however, the City ceased this practice based on the advice of a Retirement System employee. Wade and Paddock disputed the changed calculation upon discovering it in late 2012. The City then requested a " more formal opinion" from the Retirement System, and the Retirement System responded by letter that " an employer should not report employer contributions to supplemental defined contribution plans on behalf of its contract employees as compensation for ASRS purposes."

         [¶5] Wade and Paddock served a notice of claim on the Retirement System, and then filed a special action class-action complaint against the Retirement System, its Board, and the City, seeking mandamus, declaratory and injunctive relief. The Retirement System moved to dismiss, arguing that the plaintiffs had failed to exhaust their administrative remedies. The parties also filed cross-motions for summary judgment on the issue of whether the City's payments to the Deferred Compensation Plan qualified as " compensation" under A.R.S. § 38-711(7) for purposes of Retirement System calculations.

         [¶6] The court granted the Retirement System's motion to dismiss with respect to Wade, and granted the Retirement System's motion for summary judgment with respect to Paddock. The court held that the definition of " compensation" set forth in § 38-711(7) " is ambiguous, and there are good arguments for both sides' interpretations [, b]ut ASRS's interpretation is the more plausible." The court held that " compensation" under § 38-711(7) includes " salary or wages from which an employee might make deferred compensation ...

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