COA Opinion: Wayne County’s ordinance moving inflation-protection dollars into general retirement fund violates the Public Employee Retirement System Investment Act
In Wayne County Employees Retirement System v. Charter County of Wayne, the Michigan Court of Appeals held that Wayne County’s ordinance, which re-directed funds meant to protect retirees from inflation to offset the County’s annual required contribution to the retirement system, violated the Public Employee Retirement System Investment Act (“PERSIA”), MCL 38.1132.
The ordinance, No. 2010-514, placed a $12 million limit on the balance of a reserve for the Inflation Equity Fund (“IEF”) and a $5 million limit on the distribution of monies from the IEF to eligible retirees and survivor beneficiaries, commonly referred to as the “13th check” distribution. Neither of these were ever subject to a dollar cap before. IEF is meant to protect retirees from the effects of inflation. Although 13th check is discretionary, retirees have received it without fail since the mid-1980s. The ordinance also redirected the balance of the IEF—roughly $32 million—to the defined plan assets, reducing the County’s annual required contribution to alleviate the County’s financial shortage. Finally, the ordinance imposed amortization periods and caps to be used in calculating the County’s annual required contribution to the fund.
Plaintiffs, the Wayne County Employees Retirement System and Wayne County Retirement Commission, contended the ordinance violated PERSIA by overriding the Retirement Commission’s discretion in taking such a credit and by imposing amortization periods and caps, as well as by treating trust assets as assets of the County. Plaintiffs also brought constitutional arguments against the ordinance. The trial court granted the County’s motion for summary disposition as to both the statutory and constitutional challenges. The trial court also granted Plaintiffs’ motion for summary disposition on the County’s counterclaim alleging a breach of fiduciary duty by the Retirement Commission in managing the Retirement System’s assets. The appellate court affirmed the trial court’s dismissal of the County’s fiduciary claims, but reversed as to the validity of the ordinance because it violates PERSIA.
Among other findings, the court of appeals held that the ordinance directly conflicts with and is pre-empted by PERSIA’s exclusive-benefit rule. The rule requires that a retirement system be a separate and distinct trust fund for the exclusive benefit of retirees. MCL 38.1133(6). The court observed that, for the average retiree, the 13th check of the year did not appear to be set apart from regular pension benefits. The court reasoned that “[i]nstead of honoring and protecting the IEF in connection with its designated purpose, the County Board improperly invaded the assets of the IEF to lessen its financial burden” of annual contributions to the retirement fund.