January 9, 2018
In two recent cases, California Courts of Appeal clarified the statute of limitations period that applies to CalSTRS’s recoupment of overpayments to retirees, and identified a triggering event that commences the limitations period. (Baxter v. California State Teachers’ Retirement System (Dec. 12, 2017) 2017 WL 6329714; Yuba City Unified School District v. California State Teachers’ Retirement System (Dec. 18, 2017) 2017 WL 6421385.) Specifically, a three-year statute of limitations period applies to the recoupment of pension overpayments under Education Code section 22008, and that period begins to run when CalSTRS has actual or inquiry notice of the overpayment.
In the Baxter case, starting in 1999, the Salinas Union High School District allowed teachers to work an extra (sixth) period assignment, and reported the compensation for this assignment as creditable compensation under the CalSTRS Defined Benefit Program. This compensation increased the retirement allowance for teachers who opted to work the sixth-period assignment.
On August 18, 2005, a district employee sent a memorandum to the Monterey County Office of Education, which alerted MCOE to the potential overpayment of retirement benefits to the teachers. In December 2008, an audit report was prepared at CalSTRS’s behest by an outside auditor, which determined the retired teachers had been overpaid for several years as a result of the sixth-period compensation. On July 30, 2010, CalSTRS sent the district a final audit report, which concluded the sixth-period assignments were not properly reported to the Defined Benefit Program and ordered the district to correct its calculations and repay CalSTRS.
The district and the affected retired teachers appealed the finding. In the meantime, CalSTRS took no action to collect the overpayments until April 2012, and did not file a charging document (a "Statement of Issues") until July 2012. An administrative hearing panel issued a decision in January 2014 in favor of CalSTRS. Although the Court of Appeal did not fully summarize the administrative decision, it appears the decision authorized CalSTRS to prevent future overpayments, and to recoup past overpayments back to 1999.
The retired teachers challenged the administrative decision in court. The trial court held that CalSTRS was time-barred from adjusting the retired teachers’ pensions, retroactively or prospectively. CalSTRS appealed, and the Sixth District Court of Appeal reversed and remanded the trial court decision.
In a lengthy opinion, the Court of Appeal held the statute of limitations "commences when the claimant has actual or inquiry notice of the incorrect payment." The court determined MCOE was an "ostensible agent" of CalSTRS, because, like most other county offices of education in California, MCOE served as an intermediary between CalSTRS and school districts. Therefore, CalSTRS had inquiry notice of the reporting errors in 2005, even though CalSTRS did not receive the information itself (i.e., have actual notice) until its 2008 audit. Accordingly, the court concluded the three-year statute of limitations applicable to CalSTRS’s recouping overpayments (per Education Code § 22008) started running on August 18, 2005, the date of the district’s memo to MCOE — "the date CalSTRS actually discovered, or in the exercise of reasonable diligence should have discovered, the incorrect payment."
The court also held CalSTRS’s "action" for purposes of Education Code section 22008 commenced when it filed the Statement of Issues on July 6, 2012. CalSTRS was therefore time-barred from collecting overpayments made more than three years prior to that date. The court agreed with CalSTRS, however, that "each monthly payment triggers a new limitations period," and concluded CalSTRS was not time-barred from collecting overpayments made on or after July 6, 2009, or from taking action to prevent future overpayments. The court did not specifically address the reporting of extra (sixth) period assignments, or rule on various equitable arguments raised by the CalSTRS members. These remaining issues may be addressed by the trial court on remand.
In the Yuba City case, CalSTRS learned in 2005 that it made overpayments to a retired employee of the Yuba City Unified School District, but waited until 2012 to conduct an audit of the district. The audit uncovered overpayments affecting 53 additional employees. CalSTRS then sought repayment from all of the affected retirees. The district and most of the affected retirees appealed, arguing the three-year statute of limitations had already run. The administrative hearing resulted in a decision favoring CalSTRS. The trial court reversed, finding the information provided to CalSTRS in 2005 constituted actual notice, which triggered the three-year statute of limitations.
The Third District Court of Appeal reversed and remanded, holding that while either actual or inquiry notice can trigger the three-year statute of limitations, the information provided to CalSTRS in 2005 did not constitute actual notice. The court remanded the matter to the trial court to determine, based on the facts, whether that information put CalSTRS on inquiry notice. The trial court must therefore determine whether the facts provided to CalSTRS in 2005 were "sufficient to put a reasonable person on inquiry notice of the overall reporting problems."
Most county offices of education operate as intermediaries between their school districts and CalSTRS. Therefore, the court’s holding applies broadly by ascribing to CalSTRS knowledge of information communicated to county offices. School districts should retain documents and other evidence of communications with county offices, particularly on matters that could be subject to audit, while county offices of education should anticipate efforts by CalSTRS to limit or account for such communications.
These decisions clarify that the three-year statute of limitations does not prevent prospective reduction of pension overpayments, but may limit the extent to which CalSTRS can recoup prior overpayments.