In 1989, the City of Pawtucket, Rhode Island and the Fraternal Order of Police (FOP) added a clause to their collective bargaining agreement entitled “Armed Service and Municipal Service Credit.” The clause allowed the purchase of up to four years of activity military service for the purposes of accumulating retirement credits. The clause provided that “the cost to purchase said retirement credits shall be 10% of the employee’s first year’s annual earnings [with] the City compounded at 5% interest.”
Initially, the City determined the cost of purchasing service credit as follows: Ten percent of the police officer’s first-year base salary, plus holiday pay, would be multiplied by 105 percent; that figure then was multiplied by the number of years the officer was seeking to purchase. For example, if an officer’s first-year salary was $20,000, that figure would be multiplied by ten percent for $2,000; $2,000 then would be multiplied by 105 percent for $2,100. Under this system, if the hypothetical officer wished to purchase one year of service credit he would pay $2,100, regardless of when he actually purchased the credit.
In 2001, after some discussion within the City’s personnel department, and with the help of a college textbook, the City’s finance director and the City’s personnel director determined the method the City had been using for this calculation was wrong. They concluded that the contract actually required the following cost of service credit calculations: Ten percent of the police officer’s first-year gross earnings compounded annually at five percent for the number of years he or she had worked as a police officer for the City up until the point of purchase. That number was then divided by 12 and multiplied by the number of months of service credit the officer was seeking to purchase.
With the new system of calculation, the cost of purchasing credits increased substantially. For example, for a hypothetical police officer who had been on the force for ten years at the point of purchase: Ten percent of $20,000 would be $2,000, compounded annually at five percent for ten years for $3,258. Thus, the hypothetical police officer would be required to spend $3,258 for one year of service credit under the revised method if he waited ten years to purchase the credit, as opposed to a cost of $2,100 under the previous system.
The FOP challenged the City’s new calculation method in arbitration. When an arbitrator upheld the City’s position, the FOP convinced a trial court to overturn the Arbitrator’s award. The FOP’s victory was evanescent, however, when the Rhode Island Supreme Court reinstated the Arbitrator’s award.
The Court started with the proposition that the Arbitrator’s opinion should be upheld if it could be said to simply “draw its essence” from the collective bargaining agreement. As put by the Court, “as the Arbitrator’s award drew its essence from the contract, was passably plausible and reached a rational result,” a court is not entitled to overturn the Arbitrator’s decision. Since the FOP conceded that the City’s new understanding of “compound interest” – specifically that in the absence of a reference to frequency it is to be assumed that compounding will be done annually – is reasonable. Under the circumstances, the Court concluded that “the Arbitrator’s understanding that five percent compounded interest should be applied from the year the employee began his employment with the Police Department until the date of purchase is certainly a passably plausible” interpretation of the provision.
Pawtucket Fraternal Order of Police, Lodge #4 v. City of Pawtucket, 869 A.2d 67 (R.I. 2005).
This article appears in the May 2005 issue