MEMORANDUM

MEMORANDUM

I. Burden of Proof

In March 12, 2009, the PERA staff sent written notices to approximately 485 current and former City employees informing them that the City had erroneously reported certain amounts that the City had paid to them between 1997 and 2008 as being “salary” for purposes of calculating retirement contributions and benefits.[1] Those notices informed the employees that if they disagreed with PERA’s salary and benefit calculations, they could file petitions for review by filling out and submitting an enclosed form. Subsequently, 70 of the current and retired City employees who received those letter notifications filed the attached petitions for review.[2] Thereafter, the PERA Board of Trustees initiated contested case proceedings by issuing 70 notices of hearing and filing them with OAH. Five of the six issues raised by the PERA Board in the Notices of Hearing were primarily issues of law. The sixth issue—whether it was reasonable for PERA Staff to rely on salary information supplied by the City was primarily an issue of fact.

In arguing that the Petitioners have the burden of proof with respect to all disputed issues, the PERA staff relies on Minn. R. 1400.7300, subp. 5, which provides that “[t]he party proposing that certain action be taken must prove the facts at issue by a preponderance of the evidence, unless the substantive law provides a different burden or standard.” The ALJ agrees, in part, with the PERA Staff’s position on burden of proof but also disagrees, in part.

First, although the Petitioners are identified as opposing parties by the Notices of Hearing, the PERA Board’s statement of the issues to be addressed by the ALJ are more in the nature of a request for advisory opinions. In other words, although the Notices of Hearing do not frame the issue as such, the outcome that both PERA and the Petitioners wish to have settled is whether or not PERA’s recalculation of the Petitioner’s retirement benefits was correct. It is ultimately the correctness of that recalculation that the PERA Staff proposes to have confirmed. However, a state agency cannot avoid its responsibility as the proponent of substantive agency action by the way it chooses to characterize the issues in notice of hearing in a contested case. The fact that PERA chose to seek confirmation of its recalculations by inviting the Petitioners to challenge them on a standardized form and chose to do so does not make the Petitioners proponents of anything substantively at issue.[3]

As to the ultimate issue—whether PERA has correctly recalculated the Petitioners’ retirement benefits—the Petitioners do not have the obligation, or in most cases the means, to correctly recalculate their own retirement benefits. The City has a statutory duty under Minn. Stat. § 353.28, subd. 1, to provide PERA with accurate information about the amounts of compensation paid to its employees that qualify as PERA salary, and PERA has the authority to enforce that obligation. PERA alone has the actuarial expertise to recalculate benefits using correct information. Thus, at least with regard to the ultimate issue here, a more realistic approach to allocating the burden of proof is to impose the burden on the Petitioners to establish by a preponderance of the evidence that the information or estimates on which PERA relied when recalculating their retirement benefits was demonstrably incorrect. If they are able to meet that burden, the burden then shifts to PERA to again recalculate the Petitioners’ retirement benefits using more correct information or estimates.

On the other hand, Minn. R. 1400.7300, subp. 5, also provides that “[a] party asserting an affirmative defense shall have the burden of proving the existence of the defense by a preponderance of the evidence.” Here, the Petitioners are not uniquely disabled from meeting that burden in connection with their promissory and equitable estoppel defenses. Therefore, even though the PERA Board raised those issues in the first instance in the Notice of Hearing, those are generally held to be affirmative defenses. It is therefore not unreasonable to require the Petitioners bear the burden of proof and persuasion with respect to those issues.

Finally, during the hearing, PERA asserted and presented evidence that its interpretation that Minn. Stat. § 353.01, subd. 10(b)(2) excludes the City’s insurance supplement and deferred compensation from treatment as PERA salary constitutes a longstanding agency interpretation that is entitled to deference.[4] By letter dated October 21, 2010, the ALJ also invited the parties to address the related issue of whether PERA’s interpretation of that statute should be treated as an “interpretive rule” that has not been properly adopted in accordance with Chapter 14 of Minnesota Statutes. It is therefore reasonable to impose on PERA the burden of establishing that its interpretation of the statute is a longstanding agency interpretation, which would except PERA from having to formally adopt it as an interpretive rule.

II. Promissory Estoppel

(Placeholder)

III. Equitable Estoppel

(Placeholder)

IV. PERA’s Interpretation of Minn. Stat. § 353.01, subd. 10(b)(2), Is Unenforceable as an Unadopted Iinterpretive Rule

PERA argues that its interpretation that Minn. Stat. § 353.01, subd. 10(b)(2) must be given deference as a long-standing agency interpretation. However, for the reasons discussed below, the ALJ concludes that PERA’s interpretation of statute is not entitled to such deference. In fact, that interpretation represents an unadopted interpretive rule rendered unenforceable by operation of Minn. Stat. § 14.381.

A. PERA’s interpretation that Minn. Stat. § 353.01, subd. 10, excludes employer deferred compensation from PERA salary is an interpretive rule that must normally be formally adopted to be enforceable

Minnesota’s appellate courts have long held that an agency’s interpretation of its governing legislation is entitled to deference when the language of that legislation is ambiguous.[5] But that principle of deference may intersect with the statutory agency rulemaking requirements set forth in Minn. Stat. Chapter 14. Minn. Stat. § 14.02, subd. 4, defines “rule” as:

every agency statement of general applicability and future effect, including amendments, suspensions, and repeals of rules, adopted to implement or make specific the law enforced or administered by that agency or to govern its organization or procedure.

Thus, the Minnesota Supreme Court has held that:

An agency interpretation that “make[s] specific the law enforced or administered by the agency” is an interpretive rule that is valid only if promulgated in accordance with the Act.[6]

However, there is an exception to that requirement of formal rule promulgation:

Not all interpretations, however, constitute interpretive rules. If an agency's interpretation corresponds with the plain meaning of the rule it construes, the agency is not deemed to have promulgated a new rule.[7]

PERA’s interpretation that Minn. Stat. § 353.01, subd. 10(b)(2), excludes employer-paid deferred compensation contributions from treatment as PERA salary clearly attempts to make specific a law that PERA administers. Although Minn. Stat. § 353.18 requires that “[a]ll matters and administrative details not specifically provided for in this chapter shall be governed by rules issued and promulgated by the board of trustees,” the PERA Board has never formally promulgated PERA’s interpretation of Minn. Stat. § 353.01, subd. 10(b)(2) as an agency rule. Nevertheless, if PERA’s interpretation accords with the statute’s plain meaning, its interpretation is not considered to be an interpretive rule that requires formal promulgation. On the other hand, if the statute is ambiguous PERA’s interpretation must qualify as a long standing interpretation to avoid the requirement of formal promulgation. Thus, the issues here are: (1) is Minn. Stat. § 353.01, subd. 10 ambiguous as to whether employer-paid deferred compensation is excluded from PERA salary? If so, (2) does PERA’s interpretation qualify as a long standing one? For the reasons set forth below, the ALJ concludes that Minn. Stat. § 353.01, subd. 10(b)(2) is ambiguous about whether employer-paid deferred compensation is excluded from PERA salary, but that PERA’s interpretation fails to qualify as a long standing one.

B. Minn. Stat. § 353.01, subd. 10, is ambiguous about whether employer-paid deferred compensation is excluded from PERA salary

PERA’s governing legislation has defined the term “salary” for PERA’s purposes since 1933.[8] The legislature did not begin statutorily excluding certain kinds of employer payments to public employees from treatment as PERA salary until 1974. In 1993, the legislature amended and reorganized Minn. Stat. § 353.01, subd. 10(a) and (b), for the purpose of defining in paragraph (a) everything that salary included and defining in paragraph (b) everything that salary excluded.[9] “[E]mployer-paid amounts used by an employee toward the cost of insurance coverage, employer-paid fringe benefits, flexible spending accounts, cafeteria plans …” were not excluded until 1994.[10] Neither the current version of Minn. Stat. § 353.01, subd. 10, nor any other version between 1994 and 2008, when the current version was enacted, has contained an explicit exclusion of any kinds of deferred compensation payments from PERA salary. [11]

Thus, in order to arrive at an interpretation that employer-paid deferred compensation is excludable from PERA salary, one must necessarily interpret the terms “employer-paid fringe benefits, flexible spending accounts, [and] cafeteria plans” as implicitly embracing employer-paid deferred compensation. Those terms are nowhere defined in Chapter 353 or any other chapter of Minnesota Statutes, and none of the parties were able to establish a commonly understood plain meaning of those terms. The question therefore is whether or not the legislature intended “employer-paid fringe benefits, flexible spending accounts, and cafeteria plans” to include employer deferred compensation payments.

Although there does not appear to be a clear definition of what everything included in the term “fringe benefit” is, it generally appears to mean something of value to an employee in consideration of employment other than current wages or salary. Common kinds of fringe benefits are valuable to employees because they involved favorable income tax treatment. In that light, deferred compensation contributions are generally considered to be fringe benefits because payment made into them are not subject to income taxation “until they are distributed from the plan or made available to the participant or beneficiary.”[12] In other words, deferred contributions are “deferred,” and not “current,” compensation or wages. Under that analysis, both employer and employee deferred compensation contributions would be “fringe benefits.”

In 1973 the legislature amended Minn. Stat. § 353.01, subd. 10(a), to include “deductions for deferred compensation.” However, that inclusion is not germane to what is at issue here because “employer-paid fringe benefits” were not specifically excluded from PERA salary until over a decade later.[13] In other words, there was nothing in the statute that even implicitly excluded employer deferred compensation payments. In 1974, the legislature amplified the definition of salary in Minn. Stat. § 353.01, subd. 10(a), by amending it to read “before deductions for deferred compensation, supplemental retirement plans, or other voluntary salary reduction programs.”[14] Again, it was reasonable to infer in 1974 that “deductions for deferred compensation” included both employee and employer deferred compensation contributions because there was nothing in the statute arguably excluding the latter.

However, latent ambiguity was introduced into Minn. Stat. § 353.01, subd. 10, in 1994, when paragraph (b) was amended to specifically exclude “employer-paid fringe benefits.” Since deferred compensation can be reasonably characterized as a fringe benefit, the question arose for the first time whether “deductions for deferred compensation, supplemental retirement plans, or other voluntary salary reduction programs” only embraced employee deferred compensation deductions. What became ambiguous was the term “voluntary.” One interpretation is that “voluntary” refers to the payment being made. The employee’s contribution could be considered “voluntary” because in most deferred compensation plans, the employee has discretion whether to make a contribution, and if so, how much. On the other hand, the employer’s contribution could be considered “involuntary” because it is normally required by a CBA or other governing compensation plan.[15] However, another interpretation of “voluntary” is that it simply refers to the “program” as a whole. In other words, because the employer and employee deferred compensation contributions are both parts of a “voluntary program” to reduce current income taxes by deferring the taxable event into the future, both contributions are includable in PERA salary.[16]

It is, however, unnecessary to determine which interpretation of Minn. Stat. § 353.01, subd. 10, is correct in order to determine whether PERA’s policy to exclude employer contributions to deferred compensation plans from PERA salary is unenforceable as an unadopted rule. It is sufficient to establish that reasonable minds can differ on whether the legislature intended to include or exclude such payments, and that the statute is therefore ambiguous on that point.

C. PERA’s interpretation of Minn. Stat. § 353.01, subd. 10, is not a long standing interpretation

PERA’s asserts that its Executive Director has consistently interpreted Minn. Stat. § 353.01, subd. 10(b)(2), as excluding employer-paid deferred compensation as salary, and that PERA Staff has, in fact, been excluding such payments from treatment as PERA salary “dating prior to 1995.”[17] That assertion was not challenged, and the ALJ accepts it at face value, even though the testimony established that PERA accepts the salary reports of participating employers at face value and merely assumes that they correctly reflect applicable law.[18] The problem is that from 1995 until the July 31, 2007, email communication to the City, there was only one written expression of that interpretation and policy to a single participating employer—namely, an email to the City of St. Paul in 2004. Moreover, a handwritten notation on that email suggest that PERA’s interpretation of Minn. Stat. § 353.01, subd. 10(b)(2) was never even clearly and unambiguously communicated to PERA Staff.

PERA recently responded to audit finding by the Legislative Auditor that PERA has had “an extensive training program that includes online information, employer handbooks, quarterly newsletters and training sessions throughout the state.” However, between 1993 and 2008 PERA’s Reporting Manual for participating employers and periodic newsletters to employers and members described amounts excluded from treatment as PERA salary. But in every such document placed into evidence PERA merely quoted the statutory language that “[e]mployer-paid fringe benefits, flexible spending accounts, [and] cafeteria plans” were not salary subject to PERA withholding.[19] Prior to July 31, 2007, PERA never once explicitly stated in a written communication disseminated generally to participating employers or members that employer-paid deferred compensation contributions were not subject to PERA withholding or that that was PERA’s interpretation of governing legislation.[20]

Cheryl Keating, the Manager of PERA’s Account Information Management Division testified that it was her recollection that since 1992, PERA Staff had occasionally received oral inquiries from participating employers about whether employer deferred compensation payments were to be reported as PERA salary. She further testified that those employers were told that those amounts were not PERA eligible salary.[21] Yet she could only find a written record on one such inquiry, along with a written response from PERA. That was an email inquiry from the City of St. Paul in 2004 TOGETHER WITH PERA’s letter response.[22] PERA’s copy of that city’s email message provides an insight into the consistently and clarity with which PERA communicated its interpretation of Minn. Stat. § 353.01, subd. 10(b)(2) to its own staff. The staff member who received the email commented in a handwritten note to another staff member: “You have an opinion? Just seems like a standard employer deferred comp. match and not PERA-eligible to me.”[23] That notation raise an inference that PERA Staff were left to draw their own conclusions about what was excludable from PERA salary. It also gives credence to the assertion of Jackie Morris, the City’s Payroll Manager, that a PERA Staff member whom she consulted in about August 2007 agreed with her own view that the City’s deferred compensation payments should be treated as PERA salary.[24]

In short, a preponderance of the evidence established that PERA’s interpretation that Minn. Stat. § 353.01, subd. 10(b)(2) excluded employer-paid deferred compensation was almost exclusively communicated orally to participating employers and then only when specific inquiries were received. There is not even evidence that PERA ever communicated that interpretation to its own staff in written form. In Cable Communications,[25] the Minnesota Supreme Court denied long standing status of an agency interpretation of its governing legislation that the agency had never before formally asserted in a rule or in a contest case proceeding.[26] PERA’s history of communicating and applying the interpretation at issue here falls far short of that. Although not dispositive, In the Matter of the MnDOT Detroit Lakes Regional Headquarters, Construction Project Number 00TZ1791B,[27] is instructive. There, the Departments of Labor and Industry and Transportation argued that a series of informal wage classification determinations made by their investigators to establish long standing regulatory policies. In rejecting that position, the ALJ observed:[28]

[T]he Minnesota appellate courts have held that it is simply not appropriate to authoritatively determine questions as to which there is widespread social or political interest, through case-by-case adjudication.[29] The reasons are obvious. Persons interested in, or affected by, those determinations, might not have fair notice that a policy affecting their interests is being developed.[30]

* * *

The ALJ further concluded:[31]

[I]mplicit in the recognition of case-by-case adjudications as an alternative to notice and comment rulemaking, is that any incremental development of policy will involve similar formality. It simply cannot be that the occasional electronic mail message from Mr. Oelcker, or notes from a telephone consultation with Ms. Drier, has the same regulatory significance as rules promulgated by the agency following notice and comment rulemaking. As the record in this case makes clear, such writings do not contain the “principles of law or policy lawfully declared by the agency as the basis for its decisions in particular cases” and they are not maintained by either MnDOT-OCIC or DOLI so as to permit interested persons to petition for conversion of these informal writings into formal rules. A conclusion that senior labor investigators could add to the classification rules in this way does considerable violence to the scheme established by the Minnesota Legislature in Chapter 14. As the Minnesota Supreme Court has written:

The purpose of the Administrative Procedure Act is to ensure that we have a government of law and not of men. Under that act, administrative officials are not permitted to act on mere whim, nor their own impulse, however well intentioned they might be, but must follow due process in their official acts and in the promulgation of rules defining their operations.[32]

In view of the above, the ALJ concludes that PERA’s interpretation that Minn. Stat. § 353.01, subd. 10(b)(2), excludes employer-paid deferred compensation contributions does not qualify as a long standing agency interpretation of the statute that exempts PERA from formally promulgating that interpretation as an interpretive rule.

C. An agency interpretation of an ambiguous statute that is not long standing is unenforceable

In White Bear Lake Care Center, Inc. v. Minnesota Department of Public Welfare,[33] the Minnesota Supreme Court explained the consequences of failing to adopt an interpretive rule in formal rulemaking procedures:

The challenged practice is clearly within the statutory definition of a “rule”: “[E]very agency statement of general applicability and future effect, including the amendment, suspension or repeal thereof, made to implement or make specific the law enforced or administered by it or to govern its organization or procedure.” Minn.Stat. § 15.0411, subd. 3 (1980). Rules must be adopted in accordance with specific notice and comment procedures established by statute, Minn.Stat. § 15.0412 (1980), and the failure to comply with necessary procedures results in invalidity of the rule.[34] [Emphasis supplied.]

In 2001, the legislature enacted Minn. Stat. § 14.381, which approved the result in White Bear Care Center and in other appellate cases by creating a remedy to prevent agency attempts to “to enforce a policy, guideline, bulletin, criterion, manual standard, or similar pronouncement as though it were a duly adopted rule.” Subdivisions 1 and 2 provide:

Subdivision 1.Petition. (a) A person may petition the Office of Administrative Hearings seeking an order of an administrative law judge determining that an agency is enforcing or attempting to enforce a policy, guideline, bulletin, criterion, manual standard, or similar pronouncement as though it were a duly adopted rule. The petition must be supported by affidavit and must be served upon the agency. The agency shall respond in writing to the petition within ten working days. The administrative law judge may order oral argument on the petition, but only if necessary to a decision.

(b) An agency determination is not considered an unadopted rule when the agency enforces a law or rule by applying the law or rule to specific facts on a case-by-case basis.

Subd. 2.Order. The order of the administrative law judge must direct the agency to cease enforcement of the unadopted rule that is the subject of the petition. The order must be served upon the parties and the legislative coordinating commission by first class mail and must be published by the agency in the State Register. The decision of the administrative law judge may be appealed under sections 14.44 and 14.45.

In summary, the law is clear. The interpretation of Minn. Stat. § 353.01, subd. 10, that PERA has applied to the Petitioners is an interpretive rule that is invalid because it has not been promulgated in accordance with the Minn. Stat. Ch. 14.

Although Unenforceable, PERA’s Interpretation

of Minn. Stat. § 353.01, subd. 10 Is Correct

As discussed above, the outcome of the underlying dispute in this case turns on whether the legislature intended in Minn. Stat. § 353.01, subd. 10(a) to include both employee and employer deferred compensation contributions in PERA salary. Between 1973 and 1994, that subdivision necessarily included both employee and employer contributions because there was nothing in it that could reasonably be construed as excluding employer deferred compensation payments.[35] That changed in 1994 when the legislature added an explicit exclusion of “employer-paid fringe benefits.” However, one could still reasonably argue that the resultant possible exclusion of employer deferred compensation contributions from PERA salary was an untended consequence of the amendment and not the legislature’s actual intent. However, something else the legislature did in its 1994 session reduces the persuasive force of that argument.

In 1994, the legislature established a Salary Study Committee comprised of legislators and representatives from the Legislative Pension Commission and the state public pension plans.[36] That study committee included representative from the Minnesota State Retirement System (MSRS) and PERA.[37] One of the issues that the Committee addressed was whether employer matching contributions to MSRS’ deferred compensation program should be considered salary for purposes of calculating MSRS benefits.[38] Among other recommendations, the Committee’s specifically concluded that employer contributions to the MSRS deferred compensation program:

[s]hould not be included as salary. Generally, employer contributions are not considered salary, stopping deductions on employer paid deferred compensation amount would be consistent with this philosophy.[39]

The Committee then recommended that the definition of salary in MSRS’ governing legislation—Minn. Stat. § 352.01, subd. 13—be amended to state “employer contributions to a deferred compensation or tax sheltered annuity program, and amounts contributed under a benevolent vacation and sick leave donation program are not salary.”[40] The 1995 legislature accepted that recommendation and enacted that amendment to Minn. Stat. § 352.01, subd. 13. What is puzzling is that, despite PERA’s participation on the Committee, there was no recommendation for a similar amendment to Minn. Stat. § 353.01, subd. 10(b). One could view that as an oversight. However, one could also view that as an expression of legislative intent not to exclude employer-paid deferred compensation from PERA salary.[41] In fact, the City of St. Paul specifically mentioned the legislature’s failure to specifically exclude employer-paid deferred compensation in Minn. Stat. § 353.01, subd. 10(b) when it asked for PERA’s interpretation of the statute in 2004.[42]

Determining the scope of the legislature’s intent in excluding employer-paid fringe benefits from PERA salary in 1994 is difficult, and is something about which reasonable minds can differ. However, the Study Committee’s conclusion that employer deferred compensation contributions were generally “not considered salary,” and that “stopping deductions on employer paid deferred compensation amount would be consistent with [that] philosophy” indicates that the legislature failure to recommend a commensurate amendment to Minn. Stat. § 353.01, subd. 10, in 1995 was most likely an oversight, and that it intended both that subdivision and Minn. Stat. § 352.01, subd. 13, to be interpreted in the same way. Therefore, for the reasons discussed above, the ALJ agrees with PERA’s interpretation that employer deferred compensation payments fall within Minn. Stat. § 353.01, subd. 10(b)’s definition of “fringe benefit,” and that, taken as a whole, the statute excludes such payments from treatment as PERA salary.[43]

VI. PERA’s Benefit Recalculations Were Based on Inaccurate PERA Salary Information

However, even if PERA’s interpretation of Minn. Stat. § 353.01, subd. 10(b), were both correct and enforceable, the revised PERA salary information that the City provided to PERA included large amounts of current wages, which were properly treatable as PERA salary. PERA’s recalculations of the Petitioners’ retirement benefits therefore underestimated their PERA eligible salaries and were therefore inaccurate.

A. Whenever the City included its deferred compensation payments in employees’ taxable income, those payments became current wages

As discussed above, the benefit to employees inherent in many common fringe benefits is favorable income tax consequences. In fact, “deferred compensation” is a term that draws its existence from income tax consequences. Put another way, the term deferred compensation has no meaning without reference to federal and state income tax laws:

Withholding on Section 457 Plans

Amounts deferred into an eligible section 457(b) deferred compensation plan are not subject to income tax withholding until they are distributed from the plan or made available to the participant or beneficiary. * * *[44]

The evidence established that the deferred compensation plans maintained by individual City employees were established under section 457 of the Internal Revenue Code and were intended to be administered as such.[45] However, the evidence also established that on numerous occasions from 1995 to August 1, 2007, the City’s payroll system mistakenly caused the Petitioners and other City employees to pay income taxes on the City’s deferred compensation contributions at the time when those contributions were made, rather than allowing income taxation to be deferred unit the benefits were later distributed.[46] When that occurred, in both a practical and legal sense those City payments lost their character as “fringe benefits” within the meaning of Minn. Stat. § 353.01, subd. 10(b)(2) and became current “salary” or “wages” within the meaning of Minn. Stat. § 353.01, subd. 10(b)(2).

PERA takes the position that the tax treatment of the City’s deferred compensation payments is immaterial.[47] In effect, it argues that the fact that the City’s payroll system called those payments “deferred compensation” is sufficient to require their exclusion. However, excluding those payments from PERA salary for that reason exalts form over substance. There is nothing in the legislative history of Minn. Stat. § 353.01, subd. 10, indicating that the legislature was concerned about what payments by participating employers were called rather than their actual economic effects. Moreover, that position is contrary to the thrust of Minn. Stat. § 353.01, subd. 10(a)—that is, that current salary and wages in any form are to be included as PERA salary. In summary, the ALJ concludes that the City deferred compensation payments that were income taxed when made were not excludable fringe benefits and were properly reported as PERA salary, regardless of what those payments were called or how they may have been characterized.

B. The City’s insurance supplement payments are not PERA salary even though they were subject to income taxes when made

Like deferred compensation, employer-paid medical insurance is generally recognized as a “fringe benefit.” Like deferred compensation, the benefit to the employee in having employer-paid medical insurance is favorable tax treatment. Most commonly, medical insurance is a pre-tax benefit—that is, both the employer’s and the employee’s share of the medical insurance premium are never included in the employee’s taxable either at the time the premium is paid or at some future time. That is how the benefit was structured for the cost of single coverage for City employees. However, the City made no direct contribution to the additional cost of employee family coverage. An employee had the option of paying the premium for family coverage from his or her after-tax income and then deducting it from adjusted gross income to the extent allowable.[48] Under the City’s CBAs with its employees, an employee could direct a specified monthly City payment either to a deferred compensation plan or toward the cost of family medical insurance coverage.[49] The evidence established that the cost of family coverage was extremely high, and that the City insurance supplement payment would only cover a fraction of the cost. Few employees therefore elected that option.[50]

The evidence also established that between 1995 and August 1, 2007, like the City’s deferred compensation contributions, insurance supplement payments to employees were frequently included in the employees’ taxable income and taxed.[51] The question therefore is whether insurance supplement payments that were immediately subject to income tax should also be treated as current salary or wages.

Both deferred compensation and insurance supplement payments can reasonably be characterized as “fringe benefits.” Minn. Stat. § 353.01, subd. 10(b)(2), explicitly excludes “employer-paid amounts used by an employee toward the cost of insurance coverage.” On the other hand, the ALJ has concluded that that the term “employer-paid fringe benefits” in the same paragraph implicitly includes employer-paid deferred compensation. The fact that one exclusion is explicit and the other implicit should not make a difference in how the two fringe benefits should be treated if made immediately subject to income tax. Employer-paid medical insurance confers an immediate tax advantage on the employee if provided as a pre-tax benefit because it is permanently excluded from the employee’s taxable income. That is similar to the tax advantage of deferring income taxes on deferred compensation. There was no such tax benefit when the City included the insurance supplement payment in employees’ taxable income. The final question is whether the insurance supplements effectively became current “salary” or “wages” within the meaning of Minn. Stat. § 353.01, subd. 10(b) when the Petitioners and other City employees paid income taxes on them. The IRS clearly considers them to be:

Withholding on Supplemental Wages

Supplemental wages are compensation paid to an employee in addition to the employee’s regular wages. This includes such items as severance pay, awards, back pay, payments for nondeductible moving or travel expenses. Supplemental wages are subject to social security and Medicare and income tax. * * *[52]

However, the legislature has, as a matter of policy, expressly excluded certain type of supplemental wages from treatment as PERA salary. Among them are:

(b) Salary does not mean:

(1) the fees paid to district court reporters, unused annual vacation or sick leave payments, in lump-sum or periodic payments, severance payments, reimbursement of expenses, lump-sum settlements not attached to a specific earnings period, or workers' compensation payments;

(2) employer-paid amounts used by an employee toward the cost of insurance coverage … [Emphasis supplied.]

Although employer-paid deferred compensation payments are not expressly excluded supplemental wages, employer-paid insurance coverage payments are.[53] The ALJ therefore concludes that the City and PERA properly excluded City insurance supplement payments from treatment as PERA salary.

VII. If PERA’s Interpretation of Minn. Stat. § 353.01, subd. 10, Is Enforceable, It Must Recalculate City Employee Retirement Benefits Using More Accurate Salary Information

PERA bears the burden in this proceeding of establishing by a preponderance of the evidence that the recalculations of the Petitioners’ retirement benefits that PERA is proposing were an accurate, and not erroneous, recalculations. In recalculating the retirement benefits of City employees, PERA properly relied on any information that the City reported regarding past City insurance supplement payments as subtractions from previously reported PERA salary.[54] However, the information that the City supplied about past deferred compensation payments was demonstrably inaccurate because it included deferred compensation payments on which employees paid income taxes at the time the payments were made.[55] Therefore, to the extent that PERA’s interpretation of Minn. Stat. § 353.01, subd. 10(b)(2) is enforceable against some or all of the Petitioners, PERA must again recalculate their retirement benefits based on more correct salary information, which includes City payments on which City employees paid federal and state income taxes when those payments were made.

It is not the duty or obligation of the Petitioners to come forward with accurate payroll information. It is the City that has a statutory responsibility to provide accurate salary information to PERA.[56] Although it may require a lengthy audit, the City does have the ability to provide PERA with accurate information on the corrected PERA salary of its employees during the period from January 1, 2005, to September 17, 2007, and PERA should require the City to do so.[57] However, it is no longer possible for the City to provide PERA with accurate information correct PERA salary of its employees during the period from January 1, 1995, through December 31, 2004.[58]

Minn. Stat. § 353.27, subd. 11(b) provides that PERA may estimate the obligations of employers and employees based on the records that are available. However, it would be arbitrary and capricious and an abuse of statutory discretion for PERA to recalculate Petitioners’ retirement benefit based on demonstrably inaccurate information. However, some of the Petitioners retained paystubs from that period. A reasonable approach to establishing more correct PERA salary information for City employees might be for PERA should require the City to recalculate correct PERA salary information for the pay period for which paystubs are available. PERA could then apply the percentage of correct PERA salary information established by available paystubs for the period January 1, 1995, and December 31, 2004, to the corrected PERA salary for all employees and all pay periods that the City previously reported for that period.

VIII. Conclusion

The ALJ concludes that the Doctrine of Promissory Estoppel does not prevent PERA from recalculating the Petitioners’ retirement benefits or from collecting overpayments from the Petitioners, but that PERA is equitably estopped from recalculating the retirement benefits of any City employee who retired between August 1, 2007, and March 9, 2009. Moreover, the interpretation of Minn. Stat. § 353.01, subd. 10, that PERA has used in recalculating the retirement benefits of the Petitioners and other City employees is an interpretive rule that is invalid because it has not been promulgated in accordance with the Minn. Stat. Ch. 14.even if the PERA Board.

On the other hand, a preponderance of the evidence established that the City deferred compensation payments were frequently taxed as income when those payments were made. Whenever that occurred, those payments were no longer excludable fringe benefits but rather became current wages. The City therefore properly reported those payments as PERA salary in the relevant pay periods. Therefore, if the PERA Board should conclude, as a matter of law, that PERA is not prevented from recalculating the retirement benefits of City employee, PERA must nevertheless recalculate the retirement benefits of City employees again using more accurate information and estimates of PERA salary.

B.H.J

[3] See Minnesota Administrative Procedure § 10.3.1 (George A. Beck et al. eds. 2d ed. 1998).

[4] Tr. pp. 121-26; see also PERA’s Post-Hearing Memorandum dated November 23, 2010 (PERA Post-Hrg. Mem.) at pp. 13-14.

[5] In re Abbott’s Estate, 6 N.W.2d 466, 467 (Minn. 1942).

[6] Mapleton Community Home, Inc. v. Minnesota Department of Human Services, 391 N.W.2d 798, 801 (Minn. 1986).

[15] This is the way that PERA now interprets the statute. See , e.g., Memorandum of Law in Support of PERA’s Motion for Summary Disposition dated December 31, 2009, (PERA’s Summ. Disp. Mem.) at p. 15

[17] PERA Post-Hrg. Mem.) at pp. 13-14, citing Ex. 14 and Ex. 20.

[19] Finding 48; see also Findings 45, 46, 47, 49, 50, and 51.

[27] OAH No. 8-3001-17706-2, September 28, 2009.

[29] Citing, Dullard v. Minn. Dep’t of Human Servs., 529 N.W.2d 438, 445-46 (Minn. App. 1995); In the Matter of the Appeal of Donald Jongquist, 460 N.W.2d 915, 917 (Minn. App. 1990); In the Matter of the Application of Crown CoCo, 458 N.W.2d 132, 138 (Minn. App. 1990); __.

[30] Citing, In the Matter of the Application of Crown CoCo, 458 N.W.2d at 138; Hibbing Taconite, 431 N.W.2d at 894.

[32] Citing,Monk & Excelsior, Inc. v. Minn. State Board of Health, 225 N.W.2d 821, 825 (Minn. 1975); accord, Jongquist, 460 N.W.2d at 917.

[41] For example, a material difference might have been that MSRS was the sole provider of deferred compensation plans for state employees, while there were a variety of such plans available to employees of political subdivisions.

[43] As discussed above, the fact that PERA’s interpretation of an ambiguous statute may be correct does not excuse it from failing to communicate its interpretation to participating employers and members. See discussion in Part IV, supra.

[47] PERA Post-Hrg. Mem. at p. 18; Tr. p. 133.

[53] It is therefore unnecessary to decide whether the City’s deferred compensation payments are also “supplemental wages” or current salary the payment of which is being deferred.