                          State of New York
                   Supreme Court, Appellate Division
                      Third Judicial Department
Decided and Entered: November 20, 2014                   518570
________________________________

In the Matter of JUANITA
   FELICE-ZWARYCZUK,
                    Appellant,
      v
                                            MEMORANDUM AND ORDER
NEW YORK STATE TEACHERS'
   RETIREMENT SYSTEM et al.,
                    Respondents.
________________________________


Calendar Date:   October 14, 2014

Before:   Peters, P.J., Stein, Rose, Egan Jr. and Clark, JJ.

                             __________


      Richard E. Casagrande, New York State United Teachers,
New York City (Oriana Vigliotti of counsel), for appellant.

      Eric T. Schneiderman, Attorney General, Albany (William E.
Storrs of counsel), for respondents.

                             __________


Stein, J.

      Appeal from a judgment of the Supreme Court (Connolly, J.),
entered May 3, 2013 in Albany County, which dismissed
petitioner's application, in a proceeding pursuant to CPLR
article 78, to review a determination of respondents calculating
petitioner's retirement benefit.

      Petitioner joined respondent New York State Teachers'
Retirement System as a member in 1990. She retired from her
employment as a teacher in the Longwood School District in March
2012. Petitioner's employment was governed by a collective
bargaining agreement, pursuant to which she was required to pay a
certain percentage of her health care premiums. In addition, the
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district and its teachers entered into a 2011 memorandum of
agreement (hereinafter MOA) requiring teachers participating in
the district-provided health insurance plan to contribute an
additional "one-time contribution to the premium cost of [such]
health insurance coverage" (hereinafter the premium surcharge)
during the 2011-2012 school year.1 Teachers who did not
participate in the district's health insurance plan received an
equivalent reduction in the "declination incentive" provided by
the collective bargaining agreement for nonparticipants. The MOA
stated that the premium surcharge could be paid by the teachers
with "pretax dollars" through a payroll deduction – as they were
entitled to do for their regular health insurance premium costs –
through the district's Salary Reduction Plan under Internal
Revenue Code (26 USC) § 125.

      Upon petitioner's retirement, respondents determined that
the amount of the premium surcharge deducted from her gross pay
should be excluded from the calculation of her final average
salary. Petitioner then commenced this CPLR article 78
proceeding challenging respondents' determination. Supreme Court
dismissed the petition, and petitioner now appeals.

      We agree with petitioner's assertion that respondents'
exclusion of the premium surcharge payment from the calculation
of her final average salary was irrational and arbitrary and
capricious and, therefore, we reverse. A teacher's final average
salary for purposes of determining public retirement benefits is
"the average regular compensation earned as a teacher during the
three years of actual service immediately preceding his [or her]
date of retirement" (Education Law § 501 [11] [b]). The "wages"
used in calculating the final average salary consist of "regular
compensation earned by and paid to a member by a public employer"
(21 NYCRR 5003.4 [b]). Notably, Retirement and Social Security
Law § 79 provides, as relevant here, that, "[t]o the extent
permitted by [26 USC § 125] and any regulations adopted pursuant
thereto, any salary reduction elected by an employee who is a
participant in [the Retirement System] under a cafeteria plan or


     1
        Petitioner's premium surcharge, prorated to reflect her
retirement before the end of the year, was $1,049.92.
                              -3-                518570

flexible benefit plan shall be considered part of annual
compensation for the purpose of . . . computing retirement
benefits."

      Here, respondents concluded that Retirement and Social
Security Law § 79 was inapplicable because, although the premium
surcharge was payable through a 26 USC § 125 tax savings plan, it
was not implemented to defray the cost of providing health care.
Instead, citing the MOA, respondents contend that the premium
surcharge was designed to provide the district with additional
money to preserve particular educational programs and bargaining
positions. Such determination ignores the fact that the MOA
expressly acknowledges that "the impact of reduced funding is
exacerbated by increases to required employer contributions in
employee fringe benefits" and that the premium surcharge was
negotiated in light of these financial concerns. When we look at
the substance of the transaction reflected in the MOA, it is
evident that the salary reduction was intended to – and, in fact,
did – increase the employees' contribution towards health
insurance premiums so as to reduce the burden on the district for
that school year and enable the district to pay other expenses.
Thus, in our view, the need to provide economic relief through
the premium surcharge was expressly tied to the increased cost of
providing employee benefits such as health insurance, and
respondents' determination that Retirement and Social Security
Law § 79 is inapplicable is not supported by a rational
interpretation of the MOA.2
      Notably, it also appears that respondents' determination


    2
        Nor are we persuaded by respondents' reliance upon Matter
of Licopoli v New York State Teachers' Retirement Sys. (101 AD3d
1228, 1229 [2012]). Unlike Licopoli, where one employee's salary
was increased on the eve of retirement in order to artificially
increase that employee's pensionable salary, the premium
surcharge payment imposed here was applicable to every employee
subject to the MOA and was not an increase in salary made on the
eve of petitioner's retirement; in fact, the premium surcharge
did not increase her salary at all (compare Matter of Holbert v
New York State Teachers' Retirement Sys., 43 AD3d 530, 533-535
[2007]).
                                -4-                518570

creates inconsistent results as between employees who participate
in the district's health insurance plan – who will have their
pensionable salaries reduced by the amount of the premium
surcharge – and employees who do not participate in the health
insurance plan, whose pensionable salaries will not be reduced.
Although the latter employees are subject to a reduction in the
incentive payments they receive for declining health insurance
coverage, respondents represent that such incentive payments are
not considered pensionable compensation and that their
pensionable salary is not affected by the change in their
incentive payments.3 This disparate treatment further supports
our conclusion that respondents' determination to exclude the
premium surcharge from the computation of petitioner's final
average salary was arbitrary and capricious (see generally Matter
of Van Haneghan v New York State Teachers' Retirement Sys., 6
AD3d 1019, 1022 [2004]).

        Peters, P.J., Rose, Egan Jr. and Clark, JJ., concur.




    3
        By way of hypothetical example, consider two employees
who earn the same salary – $100,000. One employee is a member of
the health insurance plan and contributes his or her percentage
of the premium; under the MOA, this employee would also be
required to pay a premium surcharge of $1,000. According to
respondents' interpretation, this employee's pensionable salary
for this year would be $99,000. The second employee does not
participate in the health insurance plan. For that employee, the
premium surcharge would be paid by a deduction from the
nonpensionable incentive that he or she would otherwise receive
for declining health insurance coverage. Thus, that employee's
pensionable salary would remain $100,000. As a result, even
though each employee is required to make the same premium
surcharge contribution, their pensionable salaries would not be
the same.
                              -5-                  518570

      ORDERED that the judgment is reversed, on the law, without
costs, petition granted, and respondents are directed to
recalculate petitioner's final average salary to include the
premium surcharge payment and to make retroactive and future
payments based on the recalculated final average salary.




                             ENTER:




                             Robert D. Mayberger
                             Clerk of the Court
