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. 6631

May 2, 1990

RETIREMENT AND PENSIONS:

Use of interest by a municipal retirement system to provide medical, hospital, or nursing care under 1966 PA 28

WORDS AND PHRASES:

"Interest earned"'

1966 PA 28, Sec. 1, MCL 38.571; MSA 5.3377(1), authorizes a municipal retirement system to use not more than one-half of the "interest earned"' by any reserve fund in the system to contract for medical, hospital, or nursing care for persons receiving benefits under the system. The term "interest earned,"' as used in this provision, includes all investment income earned and collected, including stock dividends and capital gains.

1966 PA 28, MCL 38.571 et seq; MSA 5.3377(1) et seq, does not authorize a municipal retirement system to use any of its funds to establish a trust fund to pay for medical benefits for persons receiving the benefits of the system.

Honorable Kirk A. Profit

State Representative

The Capitol

Lansing, MI

You have asked for my opinion with respect to three questions concerning 1966 PA 28 ("Act 28"'), MCL 38.571 et seq; MSA 5.3377(1) et seq. The purpose of Act 28 is to permit municipalities to utilize interest earnings in their pension funds to contract for retiree health benefits.

Your correspondence indicates that the Charter Township of Ypsilanti Police and Firefighters Retirement Fund earned in excess of $500,000 in investment income in 1987. You further indicate that the township is proposing to utilize a portion of this investment income to establish a trust fund for the purpose of funding medical benefits for fund benefit recipients in future years, subject to a favorable opinion of the question from this department.

Your first question is whether the term "interest earned"' in Sec. 1 of Act 28, MCL 38.571; MSA 5.3377(1), refers only to payments received on fixed and variable interest investments or includes all investment income, including dividends, rent and capital gains.

Act 28 provides in its entirety as follows:

Sec. 1. 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.

Sec. 2. 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. [Emphasis added.]

OAG, 1985-1986, No 6290, p 56, 57-58, (May 1, 1985), interpreted the authority of a municipality to use interest earned in a previous fiscal year on retirement system reserves containing municipal employer contributions to fund medical care benefits for retired employees and other benefit recipients in light of the limitations of Const 1963, art 9, Sec. 24, as follows:

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."'

While the Legislature did not define the term "interest earned"' in Act 28, it was aware of the provisions of 1965 PA 314, MCL 38.1132 et seq; MSA 3.981(112) et seq, that it also enacted, Reichert v Peoples State Bank for Savings, 265 Mich 668, 672; 252 NW 484 (1934). Those provisions empowered public retirement systems to invest their funds in preferred and common stocks paying requisite dividends. Since the investments of the municipality's pension fund are wide ranging under MCL 38.1132 et seq; MSA 3.981(112) et seq, and since the municipality's ability to utilize Act 28 is conditioned on the earnings of its pension fund being in excess of theactuarially-determined amount required by Const 1963, art 9, Sec. 24, the Legislature in facilitating the provision of health care benefits to retirees and beneficiaries from excess earnings did not intend to restrict the authorization to earnings on only so-called interest-bearing instruments, but permitted utilization of earnings collected on every authorized investment of the employer's contributions to the pension fund.

In answer to your first question, it is my opinion that the term "'interest earned"' in MCL 38.571; MSA 5.3377(1), includes all investment income earned and collected, including dividends and capital gains.

Your second question may be stated as follows:

Does MCL 38.572; MSA 5.3377(2), authorize a retirement system to deposit interest earned in a given year in a trust fund established for the payment of medical benefits in succeeding years?

The sole use of any funds which may be available under Act 28 is to "contract for medical, hospital or nursing care for any person receiving benefits of the system."' MCL 38.571; MSA 5.3377(1). Act 28 makes no provision for the establishment of a trust fund to finance present or future medical benefits.

In answer to your second question, therefore, it is my opinion that MCL 38.571 et seq; MSA 5.3377(1) et seq, does not authorize a municipal retirement system to use any of the funds available under that act to establish a trust fund to pay for medical benefits for persons receiving the benefits of the system.

Your third question is whether MCL 38.572; MSA 5.3377(2) permits the use of interest to fund a medical benefits trust on a year-to-year basis, even though the medical benefits trust is intended in part to fund future medical benefits. In light of the answer to the second question, there is no need to address this question.

Frank J. Kelley

Attorney General