The Atlantic City School District must pay nearly $3 million to the state's pension fund after the board of trustees for the Teachers' Pension and Annuity Fund on Thursday denied the school district's appeal of charges that it improperly encouraged early retirements by using special financial incentives.

The TPAF board ruled that an early retirement incentive program used by the school district in 2009 was illegal and that the Atlantic City district is required to pay $2.98 million to cover the cost.

The city Board of Education previously appealed the charge, which came from the state Division of Pension and Benefits.

School board solicitor John Comegno was unavailable for comment Friday evening.

The state targeted a sick leave sell-back plan approved by the school board Jan. 26, 2009.

The program allowed teachers and other district employees to receive an "enhanced payout" for their accumulated sick time if they resigned between July and October 2009. Current contracts cap retirement payouts at $15,000 per employee, but the program elevated that threshold by establishing maximum payouts ranging from $25,410 to $90,750, depending on employment classification. The payouts would be made over a three-year period.

Twenty-seven district employees, including 23 teachers, took advantage of the program and retired.

Early retirement incentives are illegal by state law because they could overly burden the pension system.

The ruling comes at an inopportune time for the district, which saw its budget increase an additional $6 million this year to $171.8 million and was forced to confront cuts to it state aid by eliminating 35 positions.