Opinion #6290

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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)

STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6290

May 1, 1985

RETIREMENT SYSTEMS:

Municipal retirement systems--use of interest in reserve fund to provide medical care benefits to retirees

A municipality may authorize the use of interest earned in the previous fiscal year only on the retirement system reserve fund containing municipal employer contributions to fund medical care benefits for its retired employees.

Honorable Debbie Stabenow

State Representative

Capitol Building

Lansing, Michigan 48909

You have asked for my opinion on two questions regarding MCL 38.571 et seq; MSA 5.3377(1) et seq.

MCL 38.571; MSA 5.3371(1), provides:

'The board of trustees with the approval of the governing body of the city, village or township of any police and firemen or municipal employees retirement system may use not more than 1/2 of the interest earned by any reserve fund in the system to contract for medical, hospital or nursing care for any person receiving benefits of the system. 'Reserve fund' means the moneys contributed by the city, village or township.'

MCL 38.572; MSA 5.3377(2), provides:

'The amount of interest used according to the provisions of this act shall be included as interest and other earnings on the money of the retirement system in the computation of any city, village or township liability for regular interest. These supplemental benefits shall not be considered an increase in the rate of retirement allowances to be paid. They shall be on a year-to-year basis and shall not create a liability for their continuance.'

Your first question is:

'If a city for the first time, approves the use of 1/2 of the interest earned by its reserve fund for medical, etc., is the interest figure to be used that of the previous fiscal year? Or, is the interest figure to be used, for the first year of calculating, a total of all interest earned by a reserve fund since its inception? What interest figure is to be used for each of the succeeding years?'

The determination of the amount of interest earned by a retirement system's reserve fund which is available for health care requires a careful review of MCL 38.571 et seq; MSA 5.3377(1) et seq, in its totality in light of related statutes and Const 1963, art 9, Sec. 24, which regulate public pension plans and retirement systems. MCL 38.571; MSA 5.3377(1), does not specify the time period during which a municipal, police or fire pension board has the authority to 'use not more than 1/2 of the interest earned by any reserve fund in the system to contract for medical, hospital, or nursing care.'

In interpreting statutes, the courts recognize that laws are enacted by the Legislature with some knowledge of, and regard to, laws upon the same subject. People v Buckley, 302 Mich 12, 21; 4 NW2d 448 (1942). The rule in pari materia requires that two or more statutes affecting a person or subject should be read together and each given effect if such can be done without repugnancy, absurdity or unreasonableness. Rochester Community Schools Bd of Educ v State Bd of Educ 104 Mich App 569, 578-579; 305 NW2d 541 (1981); 21 Michigan Law & Practice, Statutes, Sec. 99, pp 113-118.

For many years prior to enactment of MCL 38.571 et seq; MSA 5.3377(1) et seq, in 1966, MCL 38.559; MSA 5.3375(9), which authorizes the establishment of pensions for personnel of fire and police departments of municipalities, provided and continues to provide, in part, that a municipality's contribution to its pension fund under that Act must meet certain requirements:

'[I]n no event shall the amount of such appropriation in any fiscal year be less than 10 per cent of the aggregate pays received during the said fiscal year by members of the retirement system unless by actuarial determination it is satisfactorily established that a lesser percentage is needed.'

Since the annual actuarial determination referred to above in MCL 38.559; MSA 5.3375(9), would take into consideration the amount of interest earned by the pension fund each year, and since the interest earned must be ascertainable, it follows that only the previous fiscal year's interest earnings, up to 50%, for the purposes of MCL 38.571; MSA 5.3377(1), are available to fund health care benefits. Thus, reading the two statutes together, interest calculated in annual actuarial determinations regarding pension appropriation requirements would not be available for health care benefits after the year of appropriation.

The use of interest earnings in this manner may not interfere with the requirements of Const 1963, art 9, Sec. 24. This constitutional provision was a new one in the 1963 Constitution. Public retirement benefits are recognized to be a matter of contractual obligation, and current service benefits after 1963 are to be funded during that year. Const 1963, art 9, Sec. 24, states:

'The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

'Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities.'

The Attorney General is duty bound under the Michigan Constitution to preserve the laws of this state and, to that end, to construe them, if possible, so that they conform to federal and state constitutional requirements. See, e.g., People v Neumayer, 405 Mich 341; 275 NW2d 230 (1979).

Responding to a question as to whether a county was required to pay all back-due amounts to its pension fund in addition to current amounts due, OAG, 1963-1964, No 4346, p 508 (December 1, 1964), concluded that a county was not obligated to pay into a pension system all amounts that are unfunded, but that it was obligated to pay into its pension fund such amounts as are necessary to fund financial benefits which arise on account of service rendered in that fiscal year. 'Unfunded accrued liabilities' in this context were defined by the Michigan Supreme Court in Kosa v State Treasurer, 408 Mich 356, 364, n 11; 292 NW2d 452 (1980), as follows:

"Unfunded accrued liabilities' are the estimated amounts which will be needed according to actuarial projections to fulfill presently existing pension obligations other than those funded by current service appropriations; . . ..'

OAG, 1969-1970, No 4656, p 90 (October 17, 1969), concluded that retirement funds accumulated since January 1, 1964, in public pension funds to fund financial benefits of such public retirement systems since January 1, 1964, may not be used to finance unfunded accrued liabilities based on the specific prohibition as to such use expressed in Const 1963, art 9, Sec. 24, p2. In considering what was required as to funding of current service in a fiscal year, several exchanges from the debates reported in the Official Record, Constitutional Convention 1961 and quoted in OAG, 1969-1970, No 4656, supra, p 92, demonstrate that once moneys are used to fund current service benefits of public employees, those moneys could be used for no other purpose:

'[Mr. Van Dusen:] 'In other words, in each year, when a certain number of employees are employed who can be expected at some future point to retire and draw upon the fund for the benefits which would be contractually theirs, in each year it will be incumbent, under this provision, upon the employing unit to put into the fund enough money to provide those benefits when they accrue.'

'Ibid, page 771.

'Delegate Downs, in requesting clarification of the committee proposal, stated:

". . . When the term 'accrued financial benefits' is used, as I understand from Mr. Stafseth, the purpose is to see that instead of using a pay as you go system, there would be a funded system from now on, with some plan to pick up what had not been properly funded. Now, I assume from that that if a governmental unit sets aside so much money for the funding of a pension plan, that that money could not then be used for any other purpose; . . .'

'MR. BRAKE: 'Answering the first part of your question, I think your understanding is entirely correct . . ..'

'Ibid, page 773.'

Another comment made by Mr. Van Dusen in the same exchange reinforced this point:

'This [provision] is designed to see that money that is put into a pension fund to service currently accruing benefits is used for no other purpose. Any city that has been putting it in with one hand and taking it out with the other has got to stop . . ..' 1 Official Record, Constitutional Convention 1961, p 775.

Thus, the language of Const 1963, art 9, Sec. 24, as to funding current service benefits was seen by its drafters as meaning that once such moneys were deposited for that purpose, those moneys could not be used for other purposes. This interpretation is consistent with the technical descriptions of pension funding listed in Tilove, Public Employee Pension Funds (Columbia University Press; 1976), which describe the funding of public pension plans:

'Funding is based on the actuary's projection of what the plan's experience will be--benefit payments, administrative expenses, investment yield, payrolls, and employee contributions. There is a wide choice of funding goals and a further choice of the period of years and the contribution schedule by which to achieve the desired goal.' (p 142)

'Investment earnings on pension reserves will reduce future contribution requirements.' (p 139)

'The interest assumption is a projection of the rate of earnings on the fund's assets. (Although the term 'interest assumption' is traditional, it is understood to include all investment income.) This assumption is not supposed to represent what the assets are earning currently; it is supposed to be a very long-range assumption as to what funds already invested, or now awaiting investment, or yet to be invested in future year will earn. It is, therefore, generally a conservative view of investment yield; at least, it should be.' (p 184)

In Kosa v State Treasurer, supra, at pp 373-376, where the method of actuarial valuation was legislatively changed and resulted in a potential surplus in the funding of current service benefits, it was determined that such a surplus could be used to fund certain unfunded pension liabilities. Similarly, a permissible surplus in the City of Flint Employees' Retirement System 'derived from the early deaths of some retirees and from wise investment' was judicially recognized out of which a special pension benefit could be paid. Halstead v City of Flint, 127 Mich App 148, 155-156; 338 NW2d 903 (1983).

It appears that MCL 35.572; MSA 5.3377(2), dealt with these constitutional requirements as follows:

'Regular interest' is not defined in MCL 38.572; MSA 5.3377(2). According to Webster's Third New International Dictionary 'regular' means 'steady or uniform in course, practice or occurrence . . . ORDERLY, METHODICAL . . . returning, recurring, or received at stated, fixed or uniform intervals . . .' In this context, thus, a municipality's liability for regular interest means that a municipality may use interest earned by a reserve fund out of contributions for post-1963 service benefits only to the extent that such interest for the previous fiscal year exceeds the amount of interest projected in the funding of such benefits at the time the funding was effectuated or as subsequently revised on an actuarially sound basis. If the expenditure of interest for health care benefits has exceeded that amount, the municipality shall immediately restore the amounts so expended in order to keep the municipality in compliance with the requirements of Const 1963, art 9, Sec. 24.

It should be noted that MCL 38.571; MSA 5.3377(1), was reported as House Substitute to HB 2903 by the Committee on Retirement as follows:

'When it does not result in the non-funding of the retirement system of financial benefits arising on account of service rendered in each fiscal year, the board of trustees with the approval of the governing body of the city, village or township of any police and firemen retirement system may use not more than 1/2 of the interest earned by any fund in the system to contract for medical, hospital or nursing care for retirants of the system.' [Emphasis added.] 1 HJ 287 (1966).

The underscored language was stricken on second reading. 1 HJ 464 (1966).

In answer to your first question, it is my opinion that up to one-half of the interest earned by reserve funds, as defined in MCL 38.571; MSA 5.3377(1), during the previous fiscal year of 1) a police or firemen retirement system after May 2, 1966, and 2) a municipal employees retirement fund after June 23, 1968, may be used to contract for medical, hospital, or nursing care, provided that the use of any such interest which causes a reserve fund to receive less in interest than is assumed actuarially by the municipality in its funding of post-1963 benefits shall immediately be restored by the municipality.

Your second question is:

'Sec. 1 of the aforementioned [38.571--M.S.A. 5.3377(1)] states: 'Reserve fund' means the moneys contributed by the city, village or township. Does this provision mean only that contribution of the city, in question, and not that of the contribution made by employees? Or, does the section mean the combined contribution of the city and the employees?'

By its terms, the definition of 'reserve fund' contained in the last sentence of MCL 38.571; MSA 5.3377(1), means 'the moneys contributed by the city, village or township.' This language is plain and unambiguous.

Accordingly, in answer to your second question, it is my opinion that the 'reserve fund' means the fund containing the contributions of the city, village, or township only, and does not include any other funds such as amounts contributed by employees participating in the system.

Frank J. Kelley

Attorney General

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