Wayne County Employees Retirement Sys v. Charter County of Wayne

Michigan Supreme Court
Lansing, Michigan
Syllabus
Chief Justice: Justices:
Robert P. Young, Jr. Michael F. Cavanagh
Stephen J. Markman
Mary Beth Kelly
Brian K. Zahra
Bridget M. McCormack
David F. Viviano
This syllabus constitutes no part of the opinion of the Court but has been Reporter of Decisions:
prepared by the Reporter of Decisions for the convenience of the reader. Corbin R. Davis
WAYNE COUNTY EMPLOYEES RETIREMENT SYSTEM v WAYNE CHARTER
COUNTY
Docket No. 147296. Argued October 8, 2014 (Calendar No. 8). Decided December 18, 2014.
The Wayne County Employees Retirement System and the Wayne County Retirement
Commission brought an action in the Wayne Circuit Court against Wayne Charter County and
the Wayne County Board of Commissioners, alleging that a county ordinance defendants enacted
in 2010 concerning the retirement system, Wayne County Enrolled Ordinance No. 2010-514,
violated Const 1963, art 9, § 24 and the Public Employment Retirement System Investment Act
(PERSIA), MCL 38.1132 et seq. The ordinance placed a $12 million limit on the balance of the
retirement system’s reserve for inflation equity known as the Inflation Equity Fund (IEF), which
was funded by investment earnings on pension assets. The ordinance also placed a $5 million
limit on a discretionary distribution of money from the IEF known as the “13th check,” which
had been made annually in varying amounts to eligible retirees and survivor beneficiaries to help
fight the effects of inflation. The ordinance required any amount in the IEF exceeding the $12
million cap to be debited from the IEF and credited to the assets of the defined benefit plan,
where it would be used to offset or reduce the annual required contribution (ARC) that the
county was required to make to the defined benefit plan under Const 1963, art 9, § 24. The
county filed a counterclaim alleging, among other things, that the retirement commission had
violated its fiduciary duties by mismanaging the retirement system’s assets. The court, Michael
F. Sapala, J., granted defendants’ motion for summary disposition regarding plaintiffs’
constitutional and statutory objections to the ordinance, and plaintiffs appealed. The court
granted summary disposition in favor of plaintiffs on the fiduciary-duty count of the county’s
counterclaim, and the county cross-appealed. The Court of Appeals, MURPHY, C.J., and
O’CONNELL and BECKERING, JJ., reversed, holding that the transfer of funds from the IEF and
the offset against the county’s ARC obligation violated the requirement in MCL 38.1133(6) that
the funds be for the exclusive benefit of the retirement system’s participants and their
beneficiaries and that the county had used the IEF funds in violation of the prohibited transaction
rule set forth in MCL 38.1133(6)(c). 301 Mich. App. 1. Defendants appealed.
In a unanimous opinion per curiam, the Supreme Court held:
1. The Court of Appeals correctly held that the $32 million offset against the county’s
ARC violated PERSIA for the reasons stated in the Court of Appeals opinion. The county must
satisfy its ARC obligations absent consideration of that $32 million, and the transferred funds
must be returned to the IEF. The $12 million limitation on the IEF can operate prospectively.
2. The portion of the Court of Appeals opinion concluding that the intrasystem transfer
of retirement system assets would violate PERSIA without the corresponding offset to the ARC
was vacated, as were the portions of the opinion discussing the constitutional implications of the
amended ordinance in relation to Const 1963, art 9, § 24 and the determination that the
transferred funds, once returned to the IEF, must be used only for the purposes of that fund. The
Court of Appeals’ rulings that were not challenged in the Supreme Court were left intact.
Court of Appeals decision affirmed in part and vacated in part; case remanded to the trial
court for further proceedings.
©2014 State of Michigan
Michigan Supreme Court
Lansing, Michigan
Opinion
Chief Justice: Justices:
Robert P. Young, Jr. Michael F. Cavanagh
Stephen J. Markman
Mary Beth Kelly
Brian K. Zahra
Bridget M. McCormack
David F. Viviano
FILED DECEMBER 18, 2014
STATE OF MICHIGAN
SUPREME COURT
WAYNE COUNTY EMPLOYEES
RETIREMENT SYSTEM and WAYNE
COUNTY RETIREMENT COMMISSION,
Plaintiffs/Counterdefendants-
Appellees,
v No. 147296
CHARTER COUNTY OF WAYNE,
Defendant/Counterplaintiff-
Appellant,
and
WAYNE COUNTY BOARD OF
COMMISSIONERS,
Defendant-Appellant.
BEFORE THE ENTIRE BENCH
PER CURIAM.
The Wayne County Employees Retirement System (“retirement system”) was
established in 1944 “for the purpose of providing retirement income to eligible
employees and survivor benefits.” Wayne County Charter § 6.111. Currently, the
retirement system consists of five defined benefit plans, one defined contribution plan,
and the Inflation Equity Fund (IEF). Each year, the county is required by Const 1963,
art 9, § 24, to make an “annual required contribution” (ARC). An annual actuarial
valuation determines the ARC amount. MCL 38.1140m.
The IEF was created in 1985 by county ordinance to provide a pool of money for
discretionary payments to eligible retirement system participants and beneficiaries in
addition to those payments required by the pension system, as a method to counteract the
effect of inflation. Payments from the IEF are known as the “13th check.” The IEF is
funded by investment profits earned on the assets held in the defined benefit plans and
the IEF, to the extent those profits exceed a certain rate of return.
In 2010, Wayne County faced a substantial fiscal obligation in order to satisfy its
actuarially determined ARC. In order to satisfy its ARC obligation, the county passed an
ordinance amendment, Wayne County Code of Ordinances (WCCO), §§ 141-32 and 141-
36, as amended by Wayne County Enrolled Ordinance No. 2010-514. As is relevant
here, the amended ordinance limited the IEF to a maximum balance of $12 million, and
directed that IEF funds exceeding that amount be transferred to the retirement system’s
defined benefit plans. Because the IEF balance at the time was significantly greater than
$12 million, the ordinance resulted in a transfer of $32 million from the IEF into the
defined benefit plans. The amended ordinance further permitted the county to use the
$32 million transfer from the IEF to the defined benefit plans as an offset against its ARC
obligation.
2
The retirement system challenged the 2010 ordinance amendment, claiming, inter
alia, that the transfer and corresponding ARC offset violated Const 1963, art 9, § 24, and
various provisions of the Public Employee Retirement Systems Investment Act
(PERSIA), MCL 38.1132 et seq. The county moved for summary disposition, which the
trial court granted, ruling that the IEF did not amount to an “accrued financial benefit” as
considered in Const 1963, art 9, § 24, and that the amended ordinance’s transfer and
offset did not violate PERSIA.
The Court of Appeals reversed the trial court, holding that the transfer of funds
from the IEF and offset against the county’s ARC obligation violated the requirement in
MCL 38.1133(6) that the funds be for the “exclusive benefit” of the retirement system’s
participants and their beneficiaries and that the county used the IEF funds in violation of
the “prohibited transaction rule,” MCL 38.1133(6)(c).1 Wayne Co Employees Retirement
Sys v Wayne Co, 301 Mich. App. 1; 836 NW2d 279 (2013).
1
When the complaint in this case was filed, MCL 38.1133(6) stated in relevant part:
The system shall be a separate and distinct trust fund and the assets of
the system shall be for the exclusive benefit of the participants and their
beneficiaries and of defraying reasonable expenses of investing the assets of
the system. With respect to a system, an investment fiduciary shall not cause
the system to engage in a transaction if he or she knows or should know that
the transaction is any of the following, either directly or indirectly:
* * *
(c) A transfer to, or use by or for the benefit of, the political
subdivision sponsoring the system of any assets of the system for less than
adequate consideration. . . .
PERSIA was recently amended, effective March 28, 2013. 2012 PA 347. As amended,
the relevant portions of the statute are found in MCL 38.1133(8). However, because the
3
We affirm the Court of Appeals in part. Except as noted later in this opinion, we
agree with the Court of Appeals that, in this case, the transfer of funds from the IEF to the
retirement system’s defined benefit plans, coupled with the offset against the county’s
ARC obligation, violated PERSIA for the reasons stated in the Court of Appeals opinion.
Id. at 30-46 (finding a violation of the “exclusive benefit rule” in MCL 38.1133(6)), and
id. at 46-48 (finding a violation of the “prohibited transaction rule” in
MCL 38.1133(6)(c)). Accordingly, we affirm the Court of Appeals’ holding that the $32
million that was offset against the county’s ARC violates PERSIA, and the county must
satisfy its ARC obligations absent consideration of that $32 million. Id. at 52.
However, we also vacate two aspects of the Court of Appeals opinion. First, we
vacate footnote 29 and corresponding portions of the Court of Appeals opinion in which
the panel reasoned that, because the transfer of IEF funds, even without a corresponding
offset to the county’s ARC, would violate PERSIA, the transferred funds must be
returned to the IEF account and used “for the purpose intended.” See Wayne Co
Retirement Sys, 301 Mich. App. at 51 n 29. Although the county raised the theory that the
transfer of IEF funds without an offset is valid under PERSIA in Count II of its
counterclaim, the trial court did not rule on this alternative claim because it ruled that the
county’s ordinance was “legal as written.” It was therefore unnecessary for the Court of
Appeals to rule on this issue, and since this issue received only cursory treatment by the
parties in the Court of Appeals, the preferable course would have been to remand for
current complaint was filed before the effective date of the amendments, we refer to the
preamendment version of PERSIA.
4
further proceedings on this claim. The Court of Appeals nonetheless addressed the
matter, and although we invited further development of it in this Court, the county failed
to pursue it in its brief and at oral arguments, instead taking the position that the presence
of the corresponding offset had no bearing on the validity of the transfer under PERSIA.
The county’s abandonment of the issue on appeal has rendered it unnecessary, and has
left us ill equipped to address the merits of whether the amended ordinance’s transfer
would be permissible under PERSIA without the corresponding offset. Accordingly, we
express no opinion on the issue of whether the intrasystem transfer of retirement system
assets without a corresponding offset to the plan sponsor’s ARC violates PERSIA, and
leave that question open for another day. Nonetheless, because the county has abandoned
this issue in the instant case, we leave in place the Court of Appeals’ determination that
the transferred funds must be returned to the IEF. See Mitcham v Detroit, 355 Mich. 182,
203; 94 NW2d 388 (1959) (“The appellant himself must first adequately prime the pump;
only then does the appellate well begin to flow.”); Horetski v American Sandblast Co,
340 Mich. 323, 327; 65 NW2d 702 (1954).
Thus, while we vacate footnote 29 in its entirety, to the extent that the remedy
fashioned by the Court of Appeals was based on its conclusion that the transfer even
without an offset violates PERSIA, we leave its remedy intact for purposes of this case
because, as stated above, the county abandoned its argument that the transfer without the
offset does not violate PERSIA. Accordingly, we affirm the Court of Appeals’ holding
that “the $32 million that was offset against the county’s ARC [must] be[] returned,
restored, or credited to the IEF, with the county being required to satisfy its ARC
obligations absent consideration of that $32 million.” Wayne Co Retirement Sys, 301
5
Mich. App. at 52. Additionally, we affirm the Court of Appeals’ conclusion that “the $12
million IEF limitation can operate prospectively” and that
[a] proper prospective application of the $12 million IEF limitation would
entail limiting future funding of the IEF until it dropped below $12 million,
which is exactly how WCCO, § 141-32(b)(1), operates and is presently
structured, where it provides the formula for annual funding of the IEF,
subject to the $12 million IEF balance limit. Accordingly, WCCO, § 141-
32(b)(1), remains wholly intact and WCCO, § 141-32(a)—the provision
setting forth the $12 million IEF limit—also remains in effect, but with the
caveat that the limit is inapplicable in regard to the previously existing $44
million (or $32 million excess) until those IEF assets are first reduced down
to $12 million. With respect to the $5 million dollar IEF distribution limit
found in WCCO, § 141-32(b)(2), it is already prospective in nature,
operating to limit disbursements made after the 2010 ordinance became
effective. [Id. at 52-53 (footnote omitted).][2]
Second, we vacate the portions of the Court of Appeals opinion discussing the
constitutional implications of the amended ordinance in relation to Const 1963, art 9,
§ 24. As the Court of Appeals expressly acknowledged, it is not necessary to consider
any potential constitutional implications of the amended ordinance because this case can
be decided by applying PERSIA alone. See Wayne Co Retirement Sys, 301 Mich. App. at
35 n 23. Because “questions of constitutionality are not decided where a case may be
disposed of without such a determination,” MacLean v Mich State Bd of Control for
Vocational Ed, 294 Mich. 45, 50; 292 N.W. 662 (1940) (citation omitted), the Court of
2
In keeping with our decision to leave open the question whether the mere transfer of
retirement assets without a corresponding offset to a plan sponsor’s ARC violates
PERSIA, nothing in our decision to affirm the Court of Appeals remedy in this case
should be read as necessarily allowing or precluding any municipality, including the
county, from enacting an ordinance that directs the intrasystem movement of system
assets. As stated within, we decline to determine whether, or under what conditions, such
a transfer is permissible under PERSIA.
6
Appeals’ analysis of the issue is dicta. Accordingly, we vacate as unnecessary all
portions of the Court of Appeals opinion that considered whether the IEF benefits
constitute “accrued financial benefits” for purposes of Const 1963, art 9, § 24, including
all discussion of “group” accrued benefits.
In summary, we affirm the portions of the Court of Appeals opinion holding that
the transfer of $32 million from the IEF to the retirement system’s defined benefit plans
and corresponding offset against the county’s ARC obligation in this case violated
PERSIA for the reasons stated in the Court of Appeals opinion. We likewise affirm the
Court of Appeals’ determination that the transferred funds must be returned to the IEF.
However, we vacate as beyond the scope of the instant appeal the reasoning underlying
that determination—namely, the portions of the Court of Appeals opinion concluding that
the transfer at issue would violate PERSIA without the corresponding offset against the
county’s ARC obligation, and the determination that the transferred funds, once returned
to the IEF, must be used only for the purposes of that fund going forward. The net effect
of our decision is that the issue whether the transfer without a corresponding offset
violates PERSIA remains an open one, but the remedy fashioned by the Court of Appeals
in this case is left undisturbed for purposes of this case. Finally, we vacate as
unnecessary the portions of the Court of Appeals opinion discussing the constitutional
7
implications of the amended ordinance in relation to Const 1963, art 9, § 24.3 We
remand to the trial court for proceedings and entry of judgment not inconsistent with this
opinion.
Robert P. Young, Jr.
Michael F. Cavanagh
Stephen J. Markman
Mary Beth Kelly
Brian K. Zahra
Bridget M. McCormack
David F. Viviano
3
The Court of Appeals also ruled on the validity of a number of other aspects of the
amended ordinance; these rulings have not been challenged before this Court, and thus
remain intact.
8