INCLUSION OF TERMINAL LEAVE OR SEVERANCE PAY IN COMPUTING PENSIONS OR RETIREMENT ALLOWANCES

RETIREMENT ‑- PENSIONS ‑- SALARIES AND WAGES ‑- COMPENSATION ‑- INCLUSION OF TERMINAL LEAVE OR SEVERANCE PAY IN COMPUTING PENSIONS OR RETIREMENT ALLOWANCES

(1) In the case of a Plan I member of the Washington Public Employees' Retirement System (PERS), terminal leave or severance payments for unused sick leave or vacation leave may not be included in determining the member's "average final compensation" for the purpose of computing his or her service or disability retirement allowance to the extent that, in a given case, the payments are made for unused sick leave or vacation leave actually earned by the retiree during a period of service other than the two-year period being utilized to determine average final compensation in that case.

(2) Such a Plan I member of the Washington Public Employees' Retirement System is, however, required to make an employee's contribution to the Public Employees' Retirement Fund, under RCW 41.40.330, on the basis of the full amount of such terminal leave or severance payments.

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                                                                  March 12, 1980

Honorable Robert L. Hollister, Jr.
Director
Department of Retirement Systems
1025 E. Union
Olympia, Washington 98504                                                                                                               Cite as:  AGLO 1980 No. 11

Dear Dr. Hollister:

            By recent letter you have requested our opinion on two questions which we paraphrase as follows:

            (1) In the case of a Plan I member of the Washington Public Employees' Retirement System (PERS), may terminal leave or severance payments for unused sick leave or  [[Orig. Op. Page 2]] vacation leave be included in determining the member's "average final compensation" for the purpose of computing his or her service or disability retirement allowance to the extent that, in a given case, the payments are made for unused sick leave or vacation leave actually earned by the retiree during a period of service other than the two-year period being utilized to determine average final compensation in that case?

            (2) If question (1) is answered in the negative, is the member nevertheless required to make an employee's contribution to the Public Employees' Retirement Fund, under RCW 41.40.330, on the basis of the full amount of such terminal leave or severance payments?

            We answer question (1) in the negative and question (2) in the affirmative.

                                                                     ANALYSIS

            Question (1):

            As noted in your letter, this first question was previously considered in AGO 1976 No. 1.  There, based upon the definitions of "compensation earnable" and "average final compensation" in RCW 41.40.010(8) and 41.40.010(15), we concluded, in brief summary, as follows:

            (1) Terminal leave or severance payments for unused sick leave or vacation leave which are received by a retiring member of the Washington Public Employees' Retirement Systemdo constitute a form of "compensation earnable" within the meaning of RCW 41.40.080(8);i.e.,

            "(a) . . . salaries or wages earned during a payroll period for personal services and where the compensation is not all paid in money, maintenance compensation shall be included upon the basis of the schedules established by the member's employer: . . ."

             [[Orig. Op. Page 3]]

            (2) Therefore, such payments are properly to be considered in determining the member's "average final compensation" for the purpose of computing his or her retirement allowance, that term being defined in RCW 41.40.010(15) to mean:

            "(a) . . . the annual average of the greatest compensation earnable by a member during any consecutive two year period of service for which service credit is allowed; or if the member has less than two years of service then the annual averagecompensation earnable during the total years of service for which service credit is allowed."  (Emphasis supplied)

            (3) Consistent with this latter definition, however, the only such terminal leave or severance payments thus to be included are those reflecting sick or vacation leave actually earned but not taken during the specific two-year time period being utilized in a given case to determine the member's average final compensation.1/

             Subsequently, the use of such severance payments in the computation of PERS service retirement allowances was challenged in the state supreme court.  See,Washington Ass'n of County Officials, et al. v. Washington Public Employees' Retirement System Board, et al., 89 Wn.2d 729, 575 P.2d 230 (1978).  And, after due deliberation, the Court, in a 6-3 decision, upheld the board‑-both on the basis of the statutory definitions involved and the showing of a longstanding administrative practice.  A question has apparently since arisen, however, as to whether, by its decision, the Court nevertheless rejected AGO 1976 No. 1, supra, on the secondary issue of whether or not to include (as part of a given retiree's average  [[Orig. Op. Page 4]] final compensation) payments for unused sick leave or vacation leave not earned during the particular two-year time period used to determine the average final compensation of that retiree.

            Upon reviewing theCounty Officials case, we first note that in the majority opinion the issue is simply not discussed.  What was stated to be of basic concern, however, was the legal validity of what was referred to in the decision as the Public Employees' Retirement System's ". . . established practice of including termination payments in computing benefits of employees who receive such payments . . ."  And it is our understanding that this practice, from and after the issuance of AGO 1976 No. 1,supra, on January 12, 1976, was to so include only those termination payments reflecting leave actually earned but not taken during the measuring two-year time period.  Moreover, we also note that in upholding the challenged practice, the majority opinion specifically referred to that attorney general's opinion and characterized it as imparting to the legislature ". . . specific knowledge of the practice . . ."2/

             The problem, then, stems not from the majority opinion but from a reference in the dissenting opinion of Justice Hicks (concurred in by the remaining two members of the Court) to the majority's ". . . conclusion that an employee's pension base may include payments other than those earned as salary or wages for personal services rendered during the two-year measuring period."3/   From a further reading of the remainder of that opinion, however, what actually appeared to be troubling the dissenters was a notion that although the severance pay might physically be received during a given retiree's measuring two-year period for average final compensation purposes,

            ". . .  Termination or other additional amounts received by the employee during that 2-year period cannot be said to have been 'earnable' during that period.  If earned at all, such payments should be extended over the entire period of employment."

             [[Orig. Op. Page 5]]

            In short, the point upon which the three dissenting judges truly were in disagreement with the majority was the very practice of including any terminal leave pay in the computation of a retiree's average final compensation.  Therefore, in their opinion, the writ of mandamus‑-to bar continuation of the retirement system's "established practice"‑-should have been granted rather than being denied, as it was, by the majority ruling.  Conversely, had the true thrust of the majority opinion been to allow all terminal leave payments to be included in the computation (no matter when earned), and had the dissenters disagreed only on that count rather than the basic issue of including any terminal leave payments at all, their proposed form of relief seemingly would have been to deny the writ of mandamus‑-but with an exception as to those terminal leave increments reflecting unused leave not earned during the measuring two-year period in a given case.

            Accordingly, based upon a careful, analytical, reading of both the majority and the dissenting opinions in County Officials v. Retirement Board, supra, we conclude that AGO 1976 No. 1,supra, should not be deemed to have been rejected in any respect.  Instead, in affirming the retirement system's existing practice, we would view the Court, which was aware of and cited the opinion, as having actually affirmed that opinion as well.  We therefore now adhere to the reasoning contained therein and thus continue to answer your first question, as above paraphrased, in the negative.

            Question (2):

            Even though we thus answer your first question, however, we must answer your second question in the affirmative.  Under RCW 41.40.330, it is the "total compensation earnable" by a member of the retirement system, and not merely the compensation earned during the two-year period used to determine the members' "average final compensation," which has been stated by the legislature to be the basis for employees' contributions to the retirement fund.  Specifically, that statute reads, in material part, as follows:

            "(1) Each employee who is a member of the retirement system shall contribute five percent of his total compensation earnable:  PROVIDED, HOWEVER, That a retirement system expense fund contribution of two dollars and fifty cents per annum shall be transferred in semiannual payments of one dollar and  [[Orig. Op. Page 6]] twenty-five cents from each employee account balance in the employees' savings fund to the retirement expense fund account, as set forth in this section.  On and after July 1, 1973, each employee who is a member of the retirement system shall contribute six percent of his total compensation earnable.  The officer responsible for making up the payroll shall deduct from the compensation of each member, on each and every payroll of such member for each and every payroll period subsequent to the date on which be became a member of the retirement system the contribution as provided by this section.

            ". . ."

            And, as above indicated, both this office in AGO 1976 No. 1, supra, and the Supreme Court in County Officials v. Retirement Board, supra, held that severance payments for unused sick leave or vacation leave are a part of a PERS Plan I member's "compensation earnable."  Therefore, even though those severance payments which do not reflect unused leave earned during the two-year measuring period referred to in RCW 41.40.010(15),supra, do not constitute a factor in the computation of the member's "average final compensation," they are, like all other compensation increments earned by the member during his entire span of covered employment service, subject to an employee's contribution requirement.

            We trust that the foregoing will be of assistance to you.