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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. 6294 May 13, 1985 CONSTITUTIONAL LAW: Const 1963, art 9, Sec. 24--reasonableness of imposition of new mandatory contributions upon employee members of certain state retirement systems RETIREMENT AND PENSIONS: Imposition of new mandatory contributions upon employee members of State Employees' Retirement System and Public School Employees' Retirement System The imposition by the Legislature of a new condition upon current members of the State Employees' Retirement System and the Public School Employees' Retirement System in the form of mandatory employee contributions in the average amount of $1,200.00 per year without any commensurate advantage to the employee members would be unreasonable and, hence, subversive of the rights of the current employee members protected by Const 1963, art 9, Sec. 24, as interpreted in Advisory Opinion re Constitutionality of 1972 PA 258, 389 Mich 659; 209 NW2d 200 (1973). Honorable Francis R. Spaniola State Representative The Capitol Lansing, Michigan You have asked if legislative action requiring members of the State Employees' Retirement System and the Public School Employees' Retirement System to make contributions to the respective retirement system through mandatory payroll deductions would be constitutional. Your request indicates that you are concerned about legislative proposals which would require payroll deductions of 3% of annual salary during the first year of employment and 5% of annual salary for each year thereafter. Presently, neither retirement system requires contributions from employee members. The proposed legislation would not provide any additional benefits for current members of each retirement system. While I do not generally comment on the constitutionality of pending legislative proposals because the specific content of such proposals may change as they make their way through the Legislature, I believe the public interest is served if I advise you concerning the principles involved in this matter. Const 1963, art 9, Sec. 24, in pertinent part, 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.' The Michigan Supreme Court has held that Const 1963, art 9, Sec. 24 substituted a contractual right to the accrued financial benefits of pension plans of the state and its subdivisions for the common law rule that such public pension benefits were gratuitous allowances (1) which were subject to revocation at will. Advisory Opinion re Constitutionality of 1972 PA 258, 389 Mich 659; 209 NW2d 200 (1973). Because Const 1963, art 9, Sec. 24 represents a new concept and a new provision, it is appropriate to consider the circumstances surrounding its adoption and the purpose intended to be accomplished as may be gleaned from the convention debates. Advisory Opinion on Constitutionality of 1978 PA 426, 403 Mich 631, 640-641; 272 NW2d 495 (1978). A review of the convention debates shows that in adopting Const 1963, art 9, Sec. 24, the framers and the people intended to create a contractual right in public employee members to accrued financial benefits of a particular pension plan, which benefits were not be diminished or impaired after the service has been performed. As stated by Delegate VanDusen, speaking for the Committee on Finance and Taxation on Committee Proposal 40, which provided that accrued financial benefits of a public retirement system were to be a contractual obligation of the state and its political subdivision, respectively, 1 Official Record, Constitutional Convention, 1961, p 771: 'Now, it is the belief of the committee that the benefits of pension plans are in a sense deferred compensation for work performed. And with respect to work performed, it is the opinion of the committee that the public employee should have a contractual right to benefits of the pension plan, which should not be diminished by the employing unit after the service has been performed. . . .' Delegate VanDusen further addressed the purpose of Committee Proposal No. 40, stating: 'Now, this does not mean that a municipality or other public employing unit could not change the benefit structure of its pension plan so far as future employment is concerned. But what it does mean is that once an employee has performed the service in reliance upon the then prescribed level of benefits, the employee has the contractual right to receive those benefits under the terms of the statute or ordinance prescribing the plan. . . . It confers the contractual right.' Id. Further insight into the meaning and effect of Const 1963, art 9, Sec. 24 is provided by the following colloquy during the debates of the Constitutional Convention of 1961: 'Mr. Downs: The other question I have, then: if the legislative body wanted to increase the pension rights, such as lowering the age at which a person would be eligible for benefits, and so on, could an additional contractual right be bestowed, or could that apply only in the future to a new financial system? 'Mr. Van Dusen: Mr. Chairman and Mr. Downs, the more hypothetical the questions get, the tougher the answer is, as I'm sure Mr. Downs appreciates. However, what we are trying to deal with here are those financial benefits which have accrued. Once the employee, by working pursuant to an understanding that this is the benefit structure presently provided, has worked in reliance thereon, he has the contractual right to those benefits which may not be diminished or impaired. As far as his future service is concerned, he remains, as does any other employee, subject to the terms of employment prescribed by his employer. 'Chairman Martin: Mr. Downs. 'Mr. Downs: May I ask, through the Chair, another question? Then, if I understand this right, if he has the contractual right of, say, retirement at such and such a year, on a certain basis, that could not be diminished? Am I correct on that? 'Mr. Van Dusen: That is correct.' 1 Official Record, Constitutional Convention, 1961, p. 774. Thus, Const 1963, art 9, Sec. 24 protects the 'accrued financial benefits' against impairment of contract. The term 'accrued financial benefits' means the right to receive retirement allowance upon retirement based on service performed. Kosa v State Treasurer, 408 Mich 356, 370-371; 292 NW2d 452, 459-460 (1980). The Michigan Supreme Court has ruled upon a comparable question in Advisory Opinion on Constitutionality of 1972 PA 258, supra. In that case, the Act in issue increased the contributions of certain public school employees who were members of the 1945 PA 136, Chapter I Public School Employees' Retirement System to the retirement fund from 3% to 5% of their compensation, up to $4,200, or a maximum of $84.00 per year, without any corresponding increase in benefits. The increase was challenged as violative of Const 1963, art 9, Sec. 24. Finding that requiring some employees to pay an additional $84 per year in order to put them on the same contributory basis as other public school employees who were members of the retirement systems established pursuant to 1945 PA 136, the court held: 'Under this constitutional limitation the Legislature cannot diminish or impair accrued financial benefits, but we think it may properly attach new conditions for earning financial benefits which have not yet accrued. Even though compliance with the new conditions may be necessary in order to obtain the financial benefits which have accrued, we would not regard this as a diminishment or impairment of such accrued benefits unless the new conditions were unreasonable and hence subversive of the constitutional protection. 'We do not consider the increase of $84 per year in the contributions to be paid by some employees to equalize their contributions with the contributions of other employees in the retirement system to have the effect of subverting the constitutional provision.' (Emphasis added.) Advisory Opinion re Constitutionality of 1972 PA 258, supra, p 663-664, As so construed by the Court in Advisory Opinion re Constitutionality of 1972 PA 258, supra, Const 1963, art 9, Sec. 24 confers a contractual right upon a member of a public retirement system to receive accrued financial benefits from the retirement system for services performed, which may not be diminished or impaired. This constitutional provision does not, however, limit the Legislature from imposing new conditions for earning financial benefits which have not yet accrued, provided that the new conditions are reasonable and, hence, not subversive of the protection afforded by Const 1963, art 9, Sec. 24. An increase in contributions of $84.00 per year in order to equalize contributions with other members of the retirement systems established by 1945 PA 136 was, the court held, a reasonable new condition not subversive of Const 1963, art 9, Sec. 24. OAG, 1977-1978, No 5188, p 116 (May 5, 1977), cited Advisory Opinion re Constitutionality of 1972 PA 258, supra, and concluded that a member of the State Employees' Retirement System who had met the age and service requirements may not be denied a retirement allowance because he was discharged from state service upon a conviction of a misdemeanor involving state property, in the absence of legislation imposing a condition of faithful performance for receipt of the retirement allowance. The opinion expressly reserved the question whether 'faithful performance' may be imposed as a new condition in light of Advisory Opinion re Constitutionality of 1972 PA 258, supra. This office has been informed by the Department of Civil Service that, as of June 30, 1984, the average salary of full-time classified employees of the State of Michigan is $24,053.76. If the proposed legislation were enacted requiring a current member of the State Employees' Retirement System employed more than one year to contribute 5% of annual compensation to the retirement system, that requirement would, on the average, amount to approximately $1,200.00 per year without any increase in retirement benefits. The average annual salary of a public school teacher for the 1982-1983 school year was $25,726.00. Bulletin 1014, State Department of Education, Michigan K-12, Public School Districts Ranked by Selected Financial Date, 1982-1983. If the proposed legislation were enacted requiring a public school teacher member of the Public School Employees' Retirement System, employed more than one year, to contribute 5% of annual salary, it would mean a contribution of approximately the sume of $1,200.00 into the system without any increase in retirement benefits. This sum is substantially larger than the $84.00 per year increase in contribution for purposes of equalization of contributions approved as reasonable by the court in Advisory Opinion on Constitutionality of 1972 PA 258, supra. Examination of judicial decisions from other states is instructive. In Allen v City of Long Beach, 45 Cal 2d 128; 287 P2d 765 (1955), the city amended its charter to increase the amount of certain employees' contributions to the city retirement system from 2% to 10% of their salary. The city made no claim that the increase in employee contributions was necessary to preserve or protect the integrity of the pension system, but, rather, that the increase was enacted in order to alleviate differences in pension costs and benefits to two groups of employees so as to somewhat equalize the compensation provided for employees rendering like services. Although these purposes may be beneficial to the city, the Supreme Court of California held, modifications in vested pension rights prior to retirement must be reasonable--any alterations are required to bear material relation to the theory of the pension system and its successful operation. Increases in contributions without a commensurate advantage to the employees was held to be unreasonable as a material reduction of the vested contractual rights of the employees. A Kansas statute requiring an increase in employee contributions from 3% to 7% of monthly salaries to a public retirement system, without a correlative increase in employee benefits, was held to be an unreasonable change or modification and an impairment of contractual rights. Singer v City of Topeka, 227 Kan 356; 607 P2d 467 (1980). The Massachusetts Supreme Judicial Court, in Opinion of the Justices, 364 Mass 847; 303 NE2d 320, 330 (1973), citing Allen v City of Long Beach, supra, held that legislation which would materially increase present members' contributions to a retirement plan, contractual in nature, without any corresponding increase in pension benefits or any other adjustment carrying advantages to the members, was presumptively invalid. The court concluded that, absent a showing of a situation of financial stress sufficiently serious to call into play the state's reserved police powers to alter or abrogate contractual rights, an increase of 2% in the rate of employee contributions to the funding of the retirement system was unconstitutional as impairing the rights of contract. Similarly, in Marvel v Dannemann, 490 F Supp 170, 176 (Del, 1980), a number of state judges brought suit challenging an amendment to the Delaware Judicial Pension Plan, the net effect of which increased plaintiffs' annual contributions to the pension plan from $500 to $2,000 per year so that the state would bear less cost of the pension benefits. Calling the change in judicial contributions to the pension plan from 1.1% to 4.3% a 'very substantial one,' and not finding any inability on the part of the pension system to meet its obligations to retired members in the past or in the future, the court held that the statutory increase in contributions was unreasonable and in abrogation of protected contractual rights. Marvel v Dannemann, supra, 176-177. Unlike the $84.00 per year increase in contributions adopted for the purpose of equalizing contributions found to be reasonable in Advisory Opinion re Constitutionality of 1972 PA 258, supra, an increase in contributions for members of the State Employees' Retirement System and the Public School Employees' Retirement System in the approximate amount of $1,200.00 per year without any provision for a commensurate advantage for such members, such as an increase in benefits, represents a substantial change. The imposition of such a new condition would be unreasonable, Allen v City of Long Beach, supra; Singer v Topeka, supra; Marvel v Dannemann, supra, and would be subversive of the rights protected by Const 1963, art 9, Sec. 24, Advisory Opinion re Constitutionality of 1972 PA 258, supra. It is my opinion, therefore, that the imposition by the Legislature of a new condition upon current members of the State Employees' Retirement System and the Public School Employees' Retirement System in the form of mandatory employee contributions in the average amount of $1,200.00 per year without any commensurate advantage to the employee members would be unreasonable and, hence, subversive of the rights of the present employee members protected by Const 1963, art 9, Sec. 24, as interpreted in Advisory Opinion re Constitutionality of 1972 PA 258, supra. Frank J. Kelley Attorney General (1)
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