On December 22, 2016, the New Jersey Appellate Division in Middletown Township Board of Education v. Division of Pensions and Benefits affirmed the Board of Trustees of the Teachers’ Pension and Annuity Fund’s determination that the Middletown Township Board of Education offered an unauthorized early retirement incentive to its employees. The decision requires the Board to pay back approximately $3.8 million to the teachers’ pension fund.
In October 2007, the Middletown Township Board of Education (“Board”) approved a Sidebar Agreement with the Middletown Township Education Association (“Association”) modifying the collective bargaining agreement between the Board and the Association. The Sidebar Agreement allowed tenured teachers who retired or resigned prior to June 30, 2008 to receive $225 for each unused sick day up to $40,000. Similarly, non-certified staff members who retired or resigned before that date were eligible to receive $125 for each unused sick day up to $20,000.
Immediately after the Board approved the Sidebar Agreement, the Division of Pension Benefits (“Division”) contacted the Board requesting additional information and advised that early retirement incentives must be reviewed by the Division first. In August 2008, after numerous employees already resigned or retired pursuant to the Sidebar Agreement, the Division notified the Board that the early retirement incentive created by the Sidebar Agreement was impermissible. The Division explained that such early retirement incentives must be expressly authorized by enabling legislation, which was not the case here. The Division also requested the Board to produce a list of all employees who retired or resigned under the Sidebar Agreement so that it could calculate the acceleration cost which would then be billed to the Board.
Shortly thereafter, the Board provided the requested information. However, the Division did not contact the Board until February 2014, at which time it reiterated that the early retirement incentive was unauthorized by law. The Division further explained that even if the early retirement incentive was permitted, the employer is always responsible for the additional pension liabilities resulting from the program. Approximately 41 employees received a payout through the Sidebar Agreement. At that time, the Division calculated approximately $5.4 million in pension liabilities owed by the Board.
The Board disputed the Division’s position and appealed to the Teachers’ Pension and Annuity Fund (“TPAF”). In December 2014, the TPAF upheld the Division’s determination but reduced the amount of the pension liabilities to about $3.8 million. The TPAF also directed the Division to establish a five-year payment plan with no interest. The Board disagreed with the TPAF’s ruling and appealed to the New Jersey Appellate Division.
In affirming the TPAF’s determination, the Appellate Division found that the TPAF’s decision was a final agency decision supported by credible evidence and therefore should not be disturbed. The TPAF and Appellate Division rejected the Board’s argument that the Sidebar Agreement did not constitute an impermissible early retirement incentive. The Sidebar Agreement was actually an early retirement incentive because it created an enhanced payout to the employee in exchange for retirement or resignation. Such a program or incentive is illegal unless specifically authorized by legislation. Furthermore, by encouraging employees to retire sooner than anticipated creates a funding imbalance and “impacts the ability of the retirement system to establish reasonably accurate experience assumptions on which funding is based.”
Boards of education must be cautious when contemplating a program inducing an employee’s resignation or retirement in exchange for a payout. If even the local education association agrees to such an early retirement incentive, it could be invalidated by the Division of Pension and Benefits. For specific questions related to early retirement incentives, boards of education should consult with their board attorney.
The entirety of the Appellate Division’s decision can be found here.
