STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6583

June 1, 1989

CONSTITUTIONAL LAW:

Const 1963, art 9, Sec. 29--employer contribution to Public School Employees Retirement System is not an activity or service

Const 1963, art 9, Sec. 24--change in contribution formula to Public School Employees Retirement System

RETIREMENT AND PENSIONS:

Public School Employees Retirement System--employer contribution to fund benefits

The employer contribution by a school district to the Public School Employees Retirement System is not a cost of an activity or service required of local units of government within the meaning of Const 1963, art 9, Sec. 29.

A proposed freeze in the amount of state contribution and an increase in local school districts' contributions to the Public School Employees Retirement System, if enacted into law, would not constitute a diminishment or impairment of accrued financial benefits under Const 1963, art 9, Sec. 24.

Honorable Dan L. DeGrow

Honorable John M. Engler

State Senators

The Capitol

Lansing, Michigan

You have asked my opinion on four questions regarding the constitutionality of the Governor's recommendation to freeze the state's contribution to the Public School Employees Retirement System for fiscal year 1989-1990 at the level appropriated for fiscal year 1988-1989 in 1988 PA 298. It is not the normal practice of this office to issue opinions on pending legislation which may be changed during the legislative process. Nevertheless, due to the continuing public interest in the issues raised, the following response is provided.

The state's contribution to the Public School Employees Retirement System, which is paid out of the state school aid fund established by Const 1963, art 9, Sec. 11, is calculated on the basis of actuarial requirements, reduced by the amount contributed by school employers. Public School Employees Retirement Act of 1979, 1980 PA 300, Sec. 41; MCL 38.1341; MSA 15.893(151), and 1988 PA 298, Sec. 101. The school employers' contribution is governed by Sec. 42 of the Public School Employees Retirement Act of 1979 which reads, in pertinent part:

You explain that implementation of the proposed freeze on the state's payment would require the contribution from school employers to increase from 5% of total compensation paid covered employees to 6.224%. You also indicate that any savings realized by the state would be used to increase state funding for those school districts receiving per pupil membership funds under MCL 388.1621; MSA 15.1919(921).

Your first question may be stated as follows:

Const 1963, art 9, Sec. 29, part of the tax limitation initiative adopted by the electors in 1978 commonly known as the Headlee Amendment, states:

Const 1963, art 9, Sec. 29, does not apply to all costs incurred by units of local government to comply with state regulations, but only to those costs of an activity or service which is required by state statute or state agency rule. Durant v State Bd of Education, 424 Mich 364; 381 NW2d 662 (1985), Livingston County v Dep't of Management & Budget, 430 Mich 635; 425 NW2d 65 (1988). The cost of providing an activity or service not required by state law does not fall within the reach of Const 1963, art 9, Sec. 29, even where compliance with state law makes the provision of such activity or service more expensive. E.g., Livingston County, supra, 430 Mich at 639-648 (Const 1963, art 9, Sec. 29, does not require state financing of landfill improvements mandated by the Solid Waste Management Act where state law does not require county to own or operate landfill); OAG, 1985-1986, No 6377, p 340 (August 13, 1986); OAG, 1985-1986, No 6307, p 118 (July 25, 1985); OAG 1983-1984, No 6237, p 339 (July 31, 1984). Accordingly, whether the 5% contribution rate paid by school districts to the retirement system is a cost covered by Const 1963, art 9, Sec. 29, turns on whether it is a cost of an "activity or service" required by state law.

Pursuant to the authority provided in Const 1963, art 9, Sec. 34, to implement the Headlee Amendment, the Legislature has defined the terms "activity" and "service" as follows:

Thus, under the implementing legislation, the costs of the Public School Employees Retirement System are not costs of an "activity or service" covered by Const 1963, art 9, Sec. 29.

While such legislative interpretations are not controlling, they are presumed constitutional and are entitled to weight. See Durant v Dep't of Education, 129 Mich App 517, 522; 342 NW2d 591 (1983), aff'd in part 424 Mich 364; 381 NW2d 662 (1985), O'Reilly v Wayne County, 116 Mich App 582, 591-592; 323 NW2d 493 (1982). The courts have given effect to the Legislature's interpretation of Const 1963, art 9, Sec. 29 in, for example, Berrien County v Michigan, 136 Mich App 772, 784-785; 357 NW2d 764 (1984), and Ann Arbor v Michigan, 132 Mich App 132, 136; 347 NW2d 10 (1984). Moreover, this interpretation is consistent with judicial decisions which have treated employee compensations not as an activity or service itself, but as a cost of the provision of an activity or service.

The question you pose is similar to that raised in Saginaw Firefighters Ass'n v City of Saginaw, 137 Mich App 625; 357 NW2d 908 (1984). In that case, firefighters claimed they were owed overtime pay from the city under a newly enacted state law requiring the payment of overtime benefits to municipal firefighters. The city argued that, under Const 1963, art 9, Sec. 29, the statute was unenforceable because no appropriation had been provided by the Legislature to cover the local government's increased costs to pay overtime. The Court of Appeals rejected this argument:

This decision and rationale was cited with approval by the Michigan Supreme Court in Livingston County, supra, 430 Mich at 647-648.

Furthermore, as was the case in Saginaw Firefighters, supra, the underlying governmental activity or service to the public, here, the provision of education, is not required by state law within the meaning of Const 1963, art 9, Sec. 29. Section 29 applies not to constitutional mandates, but only to services and activities required by state statutes and state agency rules. Durant, supra, 424 Mich at 387. Thus, the Supreme Court held that "it was not the intent of the voters to include in Sec. 29 any obligations that may be imposed upon local governmental units by Const 1963, art 8, Sec. 2," which provides for free public elementary and secondary schools. Id. at 378. The court found expressly that "education is not an activity or service required by state statute or state agency rule." Id. at 388. ⁽¹⁾

A school district's 5% contribution payment to the retirement system (i.e., its cost) cannot itself constitute an "activity or service" within the meaning of Const 1963, art 9, Sec. 29, without creating a conflict between the section's first and second sentences, a result rejected by the Supreme Court. Livingston County, supra, 430 Mich at 642-645. If a cost were an "activity or service," an increase in cost would constitute "an increase in the level of any activity or service beyond that required by existing law," under the section's second sentence, requiring full state funding of the increase. The effect would be to freeze expenditures of units of local government at 1978 levels.

Yet the first sentence of Const 1963, art 9, Sec. 29, permits no such result. Rather, by tying the state's obligation to a "proportion" of costs, the section clearly contemplates rising costs to be shared by local and state governments, with local units bearing no greater share than in 1978. See Durant, supra, 424 Mich at 383-384. In short, for purposes of Const 1963, art 9, Sec. 29, a school district's covered costs are capped at the proportion of total costs of a required activity or service it bore at the time of the Headlee Amendment's adoption, and is not determined by a statutorily specified payment which may go up or down within the limits of the fixed proportion of total costs. This conclusion is inherent in the application of Const 1963, art 9, Sec. 29, in the cases cited above.

Moreover, absent state control over school personnel matters, the application of Const 1963, art 9, Sec. 29, to school employee retirement costs could seriously undermine the state's ability to ease disparities among school districts in the level of educational funding for students. Under the Governor's proposal, the $62.6 million in state savings would be appropriated to school districts to provide an increase in K-12 funding through the distribution formula contained in MCL 388.1621; MSA 15.1919(921). This would reduce the disparities in per pupil revenues between the in-formula districts that receive funds under the formula and the out-of-formula districts that do not receive per pupil membership funds because of their high property tax base. Yet without a change in the retirement funding scheme, the state aid available to assist districts with a lower property tax base would decrease since the demands on the state school aid fund for corresponding contributions to the retirement system would increase as wealthier school districts hire more employees and pay them higher wages. Interference of this nature in the Legislature's role of allocating state aid was rejected by the Supreme Court:

Also, since the savings to the state realized by the freeze on state retirement contributions will be used to increase state funding for K-12 education, the state "does not necessarily profit from increasing [the local contribution rate], and, therefore, the kind of escape hatch for the state that the Headlee Amendment was intended to head off is not created." Livingston County, supra, 430 Mich at 645. Rather, the cost of school employee compensation would be more closely under "local control and local accountability ... in keeping with the clear desire of the voters in passing the Headlee Amendment." Durant, supra, 424 Mich at 386-387.

Furthermore, excluding employee benefits from the definitions of "activity" or "service" under Const 1963, art 9, Sec. 29, is consistent with the rationale in Durant, supra, where the Supreme Court concluded that "unrestricted state aid is not funding for an 'existing activity or service required of units of Local Government by state law.' " 434 Mich at 378. Local control over education is a time-honored tradition in Michigan, and it is the local school boards, not state mandates, which determine how many school employees will be hired and what they will be paid. Id. at 385-386. If retirement costs, which are tied to total wages paid, were covered by Const 1963, art 9, Sec. 29, then

It is my opinion, in answer to your first question, that a local school district's 5% contribution rate to the Public School Employees Retirement System is not a cost of an activity or service required of units of local government by state law within the meaning of Const 1963, art 9, Sec. 29.

Your second question is:

Since the answer to question 1 is in the negative, the proposed freeze in the amount of state contribution and an increase in local school districts' contributions to the Public School Employees Retirement System, if enacted into law, would not violate Const 1963, art 9, Sec. 29.

Your third question is:

Const 1963, art 9, Sec. 24, reads:

This provision 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 which were subject to revocation at will. Advisory Opinion Re Constitutionality of 1972 PA 258, 389 Mich 659, 662-663; 209 NW2d 200 (1973), OAG, 1985-1986, No 6294, p 67 (May 13, 1985). The intention of the framers in drafting Const 1963, art 9, Sec. 24, is reflected in the minutes of the constitutional convention:

Thus, Const 1963, art 9, Sec. 24, protects the "accrued financial benefits" against impairment of contract. "Accrued financial benefits" means the right to receive a specified retirement allowance based on service performed. Kosa v State Treasurer, 408 Mich 356, 370-371; 292 NW2d 452 (1980), OAG, 1985-1986, No 6294, supra.

While the Legislature cannot diminish or impair accrued financial benefits, the Supreme Court has ruled it "may properly attach new conditions for earning financial benefits which have not yet accrued ... [so long as] the new conditions were [not] unreasonable and hence subversive of the constitutional protection." Advisory Opinion Re Constitutionality of 1972 PA 258, supra, 389 Mich at 663-664. The proposed reduction in the state's contribution, however, does not impose any new conditions for earning financial benefits. Moreover, because the proposed reduction in state contribution would be offset by increased contributions of school districts, the current service funding requirements of the second sentence of Const 1963, art 9, Sec. 24, would be met. In such a situation, where "there is no dispute that full pension payments are being or will be timely made," Kosa v State Treasurer, supra, 408 Mich at 371, the Supreme Court has held that there is no impairment of contract involved, Id. 369-373. The method of providing sufficient public funds to the public retirement systems has been left to the Legislature to determine under Const 1963, art 9, Sec. 24. Id. at 371.

It is my opinion, in answer to your third question, that a freeze in the state appropriation to the Public School Employees Retirement System in fiscal year 1989-1990 at the level funded in fiscal year 1988-1989, accompanied by an increase in school district contributions from 5% to 6.224% of aggregate compensations paid members of the system, would not diminish or impair the accrued financial benefits of the retirement system in violation of Const 1963, art 9, Sec. 24.

Your fourth question is:

Const 1963, art 4, Sec. 25, states:

This office has been informed by the Department of Management and Budget that any change in local school districts' 5% contribution rate will be effectuated by an amendment to Sec. 42 of the Public School Employees Retirement Act of 1979, MCL 38.1342; MSA 15.893(152). Changing the 5% contribution rate in that manner will, of course, satisfy the requirements of Const 1963, art 4, Sec. 25.

Frank J. Kelley

Attorney General