from the Superior Court in Maricopa County The Honorable
Randall H. Warner, Judge No. CV2013-015082
of the Court of Appeals, Division One 239 Ariz. 263, 370 P.3d
132 (App. 2016)
Martin (argued), Daniel L. Bonnett, Jennifer Kroll, Martin
& Bonnett, P.L.L.C., Phoenix; and Thomas M. Rogers,
Robaina & Kresin, PLLC, Phoenix, Attorneys for Mary Wade
and Marla Paddock
Brnovich, Arizona Attorney General, Dominic Draye, Solicitor
General, Paula S. Bickett, Chief Counsel, Civil Appeals
Section, Jothi Beljan (argued), Assistant Attorney General,
Phoenix, Attorneys for Arizona State Retirement System and
Arizona State Retirement System Board
JUSTICE TIMMER authored the opinion of the Court, in which
CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and
JUSTICES BRUTINEL and BOLICK joined.
The Arizona State Retirement System ("ASRS")
operates a defined-benefit plan for employees of the state
and participating political subdivisions, including the City
of Chandler. Both employers and employees contribute to ASRS.
The contribution amounts, and the benefits paid to a retired
employee, depend on the employee's
"compensation" while employed.
The City operates a deferred-compensation plan in which it
contributes money for its employees and permits employees to
defer additional amounts. These monies are invested and held
in trust until distributed to employees, generally at age
seventy and one-half. Here, we decide whether
City-contributed payments into the deferred-compensation-plan
trust constitute "compensation" for the purpose of
calculating ASRS contributions and benefits. We hold that
such payments are "compensation" for ASRS purposes.
Employer and employee contributions to ASRS are calculated
using a formula tied to employee compensation. Employers must
contribute to ASRS based on "a percentage of
compensation of all employees" enrolled in ASRS. A.R.S.
§ 38-737(A). The contribution rate is established
annually. A.R.S. § 38-737(C). Employees, referred to as
"members, " contribute "a percentage of a
member's compensation, " via payroll deductions.
A.R.S. § 38-736(A). Upon retirement, an eligible member
receives a monthly life annuity calculated, in part, from
"[t]he member's average monthly compensation."
A.R.S. § 38-757(B)(2).
The City operates a deferred compensation plan, the "457
Plan, " which provides retirement income and other
deferred benefits to its employees in accordance with 26
U.S.C. § 457(b). The 457 Plan authorizes two
contribution methods. An employee can elect to defer some pay
from each paycheck. The City can also elect to
"credit" "any other amount" to the
employee's account. All contributions are held in trust
for the exclusive benefit of employees and their
beneficiaries. Although income taxes on the amounts are
deferred until withdrawal, an employee immediately pays
Federal Insurance Contribution Act ("FICA") taxes
on amounts contributed by both the City and the employee.
See 26 U.S.C. §§ 3101(a),
Mary Wade served as the City's attorney for about five
years until 2013, and Marla Paddock has served as the
City's clerk since 2002. Both signed yearly contracts
that entitled them to a base salary and periodic,
employer-contributed payments into the 457 Plan. For example,
Paddock's 2013 contract entitled her to an "annual
base" salary approximating $120, 000 plus "annual
deferred compensation payment in an amount equal to seven and
one-half percent (7.5%) of [Paddock's] annual base
salary, " payable in equal, bi-weekly amounts. The
City-contributed deferred ...