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
PUBLIC EMPLOYEE RETIREMENT SYSTEM INVESTMENT ACT:
Applicability of this act to a defined contribution public employee retirement plan established under a collective bargaining agreement between a city and a police association
The defined contribution public employee retirement plan at issue established under the collective bargaining agreement and administered by the union is subject to the Public Employee Retirement System Investment Act.
Participant-directed investments of assets in the public employee retirement plan are not subject to the investment limitations imposed by the Public Employee Retirement System Investment Act. Investments of general Trust Fund assets by the Plan Trustee are subject to the Act's investment limitations. But, to the extent that these investment limitations are overridden by conflicting provisions in the collective bargaining agreement establishing the retirement plan, then the conflicting provisions in the collective bargaining agreement are controlling.
Opinion No. 6940
May 19, 1997
Honorable Dale L. Shugars
State Senator
The Capitol
Lansing, MI 48909-7536
You have asked two related questions concerning the defined contribution retirement plan instituted as a result of collective bargaining between the Portage Police Command Officers Association, Local # 98, Fraternal Order of Police (the Association) and the City of Portage (the City).
You first ask if the defined contribution public employee retirement plan established under the collective bargaining agreement and administered by the union is subject to the Public Employee Retirement System Investment Act (the Investment Act), 1965 PA 314, MCL 38.1132 et seq; MSA 3.981(112) et seq.
In 1985, the City and the Association entered into a collective bargaining agreement, the terms of which called for, among other things, the abolishment of the then-existing city-sponsored defined benefit pension plan. In its place, the City and the Association agreed to establish a defined contribution plan (the Plan). The accrued employee contributions and the then net present value of each member's defined benefit were rolled over into the Plan. It was agreed that all future employer contributions made on behalf of each member were to be paid into the Plan. Additionally, the Association agreed to hold harmless and indemnify the City and its personnel from all claims arising from the establishment of the Plan.
The Plan Trust Fund currently consists of money representing the defined benefit rollover, subsequent employer contributions and any voluntary employee contributions. Plan �� 4.1, 4.3. Trust Fund earnings or losses are allocated proportionally to each member's account. Plan � 4.3(d). The terms of the Plan give the Plan Trustee broad discretion to invest the assets of the Trust Fund but require the Trustee to take into account the short and long-term financial needs of the Plan. Plan � 7.2. The Plan expressly states that when making investment decisions, the Trustee is not to be restricted to securities or other property authorized by the applicable law for trust instruments but rather is to give due regard to any limitations imposed by the Internal Revenue Code of 1986, 26 USC 1 et seq, and the Employee Retirement Income Security Act of 1974, 29 USC 1001 et seq. Plan � 7.2.
The Plan authorizes each Plan member to direct the Trustee to invest any portion of his or her individual account in "specific assets, specific funds or other investments permitted under the Plan." Plan � 4.8. The funds in these member- directed investment accounts are accounted for separately from the general Trust Fund and general Trust Fund earnings are not credited to these accounts. Plan � 4.8.
The Legislature amended the Investment Act in 1996 PA 485 to, among other things, add section 12b and amend section 13. Section 12b(1) and 13(2) now both refer to a defined contribution plan. Thus, it is clear that the Investment Act applies to defined contribution plans.
Your correspondence suggests that the extent of the City's involvement, or lack thereof, in the day-to-day operations of the Plan may be determinative of whether the Plan is a "system" as defined in the Investment Act. "System" is defined as "a public employee retirement system created and established by this state or any political subdivision of this state" in section 12e(5) of the Investment Act as added by 1996 PA 485. This language used to appear virtually verbatim in former section 12(k), as added by 1982 PA 55. Thus, the relevant inquiry is whether the Plan was created and established by the City.
A review of the Plan documents and the collective bargaining agreement confirms that the City was instrumental in creating the Plan. It was a signatory to the Plan document, which was negotiated between the City and the Association, and it has the authority to amend or terminate the Plan. Plan �� 8.1, 8.2. It is also clear that the City intended the Plan to replace the then-existing city-sponsored defined benefit plan. Collective Bargaining Agreement, Art. XVIII, � 5 and Appendix C. The City made a lump sum payment into the Plan, thereby establishing the corpus of the Plan. Collective Bargaining Agreement, Appendix C. Based on these facts, clearly the Plan meets the definition of a "system" as set forth in section 12e(5) of the Investment Act.
It is my opinion, therefore, in answer to your first question, that the defined contribution public employee retirement plan at issue established under the collective bargaining agreement and administered by the union is subject to the Public Employee Retirement System Investment Act.
You next ask if the assets of a public employee retirement plan are subject to the investment limitations imposed by the Public Employee Retirement System Investment Act. (For example, section 14(1) of the Investment Act limits investments in stocks to sixty-five percent of a retirement system's assets.) Since there are two aspects to the Plan--the participant-directed assets and the general fund Trust Fund assets directed by the Trustee--it is necessary to separately address each aspect.
First, concerning the participant-directed assets of the Plan, the Investment Act speaks directly to the issue. Language added to section 13(2) by 1996 PA 485 unambiguously provides, with regard to participant-directed assets, that:
The limitations on the percentage of total assets for investment provided in this act do not apply to a defined contribution plan in which a participant directs the investment of the assets in his or her individual account, and that participant is not considered an investment fiduciary under this act.
(emphasis added).
Thus, it is clear that the investment of participant-directed assets is not subject to the percentage of assets for investment limitations imposed by the Investment Act.
In contrast, the general Trust Fund assets are invested by the Plan Trustee without direction from the Plan participants. Thus, the language quoted above from section 13(2) of the Investment Act concerning participant-directed investments does not apply.
Turning to the Plan, it gives the Plan Trustee much broader latitude in making investment decisions than does the Investment Act. Specifically, � 7.2(a) of the Plan provides, with regard to the investment powers of the Trustee, as follows:
The Trustee shall invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein.
(emphasis added).
The percentage of assets limitations for investment in the Investment Act are not included in the Plan. Rather, as quoted above, the Trustee has broad discretion in making investments, including investing in stocks without any percentage of assets limitations. This raises the issue of whether the investment limitations in the Investment Act may be overridden by the collective bargaining process.
Section 15 of 1947 PA 336, the Public Employment Relations Act (PERA), MCL 423.215; MSA 17.455(15), requires public employers, including cities, to engage in collective bargaining with representatives as their employees. The Michigan Supreme Court has ruled that, when a conflict arises between a collective bargaining agreement negotiated under PERA and a local charter or state statute that affects employment relations, PERA controls as the dominant law regulating public employment relationships. In Local 1383, Int'l Ass'n of Fire Fighters, AFL-CIO v City of Warren, 411 Mich 642; 311 NW2d 702 (1981), the Supreme Court considered whether a collective bargaining agreement's provision concerning promotions, entered into under PERA, is valid and enforceable when it conflicts with a city charter and the fire and police civil service act, 1935 PA 78, MCL 38.501 et seq; MSA 5.3351 et seq. The Court held as follows:
We hold that the contract provision governing promotions entered into under PERA is valid and enforceable. We also hold that this provision sets forth the promotional system for employees in the Local 1383 bargaining unit, notwithstanding conflicting provisions in Act 78 or the Warren Charter. Accordingly, we reverse the Court of Appeals decision.
***
To decide the present case in conformity with the consistent prior determinations of this Court, PERA must be viewed as the dominant law regulating public employment relations. Although this Court has not previously had occasion to consider the conflicting requirements of the fire and police civil service act in contrast with PERA, our previous decisions compel a conclusion that the provisions of PERA control.
411 Mich at 649, 662 (emphasis added).
OAG, 1983-1984, No 6244, p 363 (August 31, 1984), concluded, based on the controlling precedents of the Michigan Supreme Court, that municipalities and their police officers or fire fighters may bargain collectively with respect to modifications in their retirement plans administered under the Municipal Employees' Retirement Act, 1945 PA 135, MCL 38.601 et seq; MSA 5.4001 et seq. That opinion ended with the following observations:
By way of epilogue, it is to be noted that the foregoing conclusions accord to public employers and their affected employees the right to, in effect, negotiate a statute out of existence as to the contracting parties through collective bargaining.
Notwithstanding my concern in this regard, the answers to your questions were constrained by the Supreme Court's consistent holdings with respect to the dominance of PERA in the public employment sphere. The continuation of such predominance is a question for legislative consideration.