Wisconsin Legislature: vol78-198

78 Op. Att'y Gen. 198, 198 (1989)

Trust Funds; Wisconsin Retirement System;

Validity of possible statutory modifications to the Fixed Retirement Trust of the Wisconsin Retirement System discussed. OAG 38-89

November 2, 1989

78 Op. Att'y Gen. 198, 198 (1989)

FRED A. RISSER,

Chairperson

Senate Organization Committee

78 Op. Att'y Gen. 198, 198 (1989)

The Committee on Senate Organization has requested my opinion on a number of questions relating to the various accounts of the Fixed Retirement Trust of the Wisconsin Retirement System (WRS).

78 Op. Att'y Gen. 198, 198 (1989)

Your first question asks:

78 Op. Att'y Gen. 198, 198 (1989)

1. Is there any constitutional or contractual rights bar which would prevent the Legislature from directing that an amount equal to the WRS unfunded liability be deducted from the Transaction Amortization Account (TAA) established under s. 40.04 (3) and credited to the employer accumulation reserve under s. 40.04 (5) to eliminate the WRS unfunded liability?

78 Op. Att'y Gen. 198, 198 (1989)

It is my opinion that such a statutory change could cause a violation of contract rights of some members of the WRS. Since the contractual rights of the various WRS participants (actives and annuitants) are not uniform, a general statement as to the rights of all participants is inappropriate in answering your questions. No specific legislation has been provided and the potential or actual monetary effect of such legislation on individual participants is not available to me.

78 Op. Att'y Gen. 198, 198-199 (1989)

The WRS unfunded actuarial liability as of the end of 1988 was $1,374,297,000.

See

Wisconsin Department of Employe Trust Funds 1985-87 Biennial Report Summary dated March 1989 at 5. This unfunded actuarial liability results primarily from legislated system benefit increases which are not paid for at the time enacted and from unfunded prior service liability of participating employers who do not pay costs of prior service on the date of initial participation.

See

Joint Survey Committee on Retirement Systems Report on 1983 Senate Bill 568 at 4 (ACTUARIAL EFFECT) and section 40.05(2)(b), Stats.

78 Op. Att'y Gen. 198, 199 (1989)

The Transaction Amortization Account (TAA) was established to record all gains, losses, premiums, discounts, forfeitures and penalties in the WRS fixed retirement trust.

See

1988 State of Wisconsin Investment Board Annual Report, 36, Note H. Section 25.17(14)(f) (as amended by 1989 Wisconsin Act 13) states regarding valuation of WRS securities invested by the Investment Board that:

78 Op. Att'y Gen. 198, 199 (1989)

[T]he amount of any... gain or loss at time of sale or other disposition, premium on call or redemption, commitment or standby fee, profit or loss on residual value, scrap value, fire or casualty award, condemnation award, adjustment in book value, or other gains or losses shall be transferred to the transaction amortization account of the fixed retirement investment trust under s. 40.04 (3).

78 Op. Att'y Gen. 198, 199 (1989)

As of March 31, 1989, the TAA had a positive balance of $2,624,978,325.61. (

See

April 20, 1989, Investment Board report on Transaction Amortization Account.)

78 Op. Att'y Gen. 198, 199 (1989)

Your question is based on hypothetical legislation which would deduct the amount of the unfunded actuarial liability from the TAA and credit that amount to the employer accumulation reserve. This would be contrary to the present statutory procedure whereby distributions from the TAA are divided among the employe accumulation reserve, employer accumulation reserve and annuity reserve. Sec. 40.04(3)(a), (4), (5) and (6), Stats. The potential effect of such hypothetical legislation on active members and annuitants of the WRS could be as follows:

78 Op. Att'y Gen. 198, 199 (1989)

a. Annuitants would not benefit from the transfer but such lessening of the TAA balance would tend to substantially lower or eliminate surplus dividends to annuitants now available under the statutes.

78 Op. Att'y Gen. 198, 200 (1989)

b. Certain active employes would sustain a potential lessening of the value of the purchase money annuity option at retirement since their employe accumulation reserve accounts would not be credited with a portion of the TAA by way of the current income account as occurs under the present statutes.

78 Op. Att'y Gen. 198, 200 (1989)

c. Active employes could sustain an increased danger of higher employe contributions because of a lessening of the transaction amortization balance to a point where unfavorable market experience would completely deplete such account and cause trust fund shortages that would have to be replaced by increased employe and employer contributions.

78 Op. Att'y Gen. 198, 200 (1989)

Additional bases for objection based on unconstitutionality can also arise from the specific legislation drafted.

78 Op. Att'y Gen. 198, 200 (1989)

Article I, section 10, clause 1 of the United States Constitution states that "[n]o state shall... pass any... law impairing the obligation of contracts...." Similarly, article I, section 12 of the Wisconsin Constitution states that "[n]o bill of attainder,

post

facto

law, nor any law impairing the obligation of contracts, shall ever be passed...." "All laws are presumed to be constitutional. In order to overcome this presumption [one attacking a statute]... must prove... [it] unconstitutional beyond a reasonable doubt."

State ex rel. Cannon v. Moran

, 111 Wis. 2d 544, 552-53, 331 N.W.2d 369 (1983).

78 Op. Att'y Gen. 198, 200 (1989)

As the court stated in

Cannon

, 111 Wis. 2d at 554, "[t]he first step in analyzing a contract clause problem is to determine whether an obligation of contract has been impaired." A contract is impaired when the rights and obligations of the parties to that contract, which arise

by virtue of that contract

, are altered by legislation.

Home Building & Loan Association v. Blaisdell

, 290 U.S. 398, 431 (1934).

78 Op. Att'y Gen. 198, 201 (1989)

Section 40.04 which controls the distribution of earnings, profits or losses of the fixed retirement investment trust provides in part (as amended by 1989 Wisconsin Act 13):

78 Op. Att'y Gen. 198, 201 (1989)

(3) A fixed retirement investment trust and a variable retirement investment trust shall be maintained within the fund under the jurisdiction and management of the investment board for the purpose of managing the investments of the retirement reserve accounts and of any other accounts of the fund as determined by the board, including the accounts of separate retirement systems.

Within the fixed retirement investment trust there shall be maintained a transaction amortization account and a current income account

, and any other accounts as are established by the board or the investment board....

78 Op. Att'y Gen. 198, 201 (1989)

(a)

All earnings, profits or losses of the fixed retirement investment trust

and the net gain or loss of the variable retirement investment trust

shall be distributed annually on December 31 to each participating account in the same ratio as each account's average daily balance within the respective trust bears to the total average daily balance of all participating accounts in that trust. For the fixed retirement investment trust the amount to be distributed shall be the then balance of the current income account plus 20% of the then balance of the transaction amortization account

....

78 Op. Att'y Gen. 198, 201 (1989)

....

78 Op. Att'y Gen. 198, 201 (1989)

(4)(a)

An employe accumulation reserve, within which a separate account shall be maintained for each participant, shall be maintained within the fund and

78 Op. Att'y Gen. 198, 201 (1989)

1. Credited with all employe contributions made under s. 40.05 (1) and all employer additional contributions made under s. 40.05 (2) (g) and all contribution accumulations reestablished under s. 40.26 or 40.63 (10).

78 Op. Att'y Gen. 198, 202 (1989)

Credited as of each December 31 with interest on the prior year's closing balance at the effective rate

on all employe required contribution accumulations in the variable annuity division,

on all employe required contributions in the fixed annuity division on December 31, 1984, on all employe required contributions in the fixed annuity division of participants who are not participating employes after December 31, 1984

, and on all employe and employer additional contribution accumulations

and with interest on the prior year's closing balance at the assumed benefit rate on all employe required contribution accumulations in the fixed annuity division for participants who are participating employes after December 31, 1984

78 Op. Att'y Gen. 198, 202 (1989)

(5)

An employer accumulation reserve

shall be maintained within the fund to which, without regard to the identity of the individual employer, shall be:

78 Op. Att'y Gen. 198, 202 (1989)

(a) Credited all employer required contributions.

78 Op. Att'y Gen. 198, 202 (1989)

(b)

Credited, as of each December 31, all fixed annuity division interest not credited to other accounts and reserves under this section

78 Op. Att'y Gen. 198, 202 (1989)

(6)

An annuity reserve

shall be maintained within the fund to which shall be transferred amounts equal to the present value as of the date of commencement of annuities granted under this chapter.

The reserve shall be increased by investment earnings at the effective rate

and shall be reduced by the aggregate amount of annuity payments and death benefits paid with respect to the annuities and by the present value at the date of termination of annuities terminated in accordance with s. 40.08 (3), 40.26 or 40.63 (9) (c).

78 Op. Att'y Gen. 198, 202 (1989)

"Effective rate" is defined at section 40.02(23)(a) in part as:

78 Op. Att'y Gen. 198, 202-203 (1989)

For the fixed annuity division, the rate,... determined by dividing the remaining fixed annuity division investment earnings for the calendar year or part of the calendar year, after making provision for any necessary reserves and after deducting prorated interest and the administrative costs of the fixed annuity division for the year, by the fixed annuity division balance at the beginning of the calendar year as adjusted for benefit payments and refunds paid during the year excluding prorated interest.

78 Op. Att'y Gen. 198, 203 (1989)

"Assumed benefit rate" as used in section 40.04(4)(a)2. is defined at section 40.02(6) as follows:

78 Op. Att'y Gen. 198, 203 (1989)

"Assumed benefit rate" means a rate of 5%. The assumed benefit rate shall be used for calculating reserve transfers at the time of retirement, making actuarial valuations of annuities in force, determining the amount of lump-sum death benefits payable from the portion of an annuity based on additional deposits and crediting interest to employe required contribution accumulations.

78 Op. Att'y Gen. 198, 203 (1989)

Fixed annuity reserve surpluses are distributed under the authority of section 40.27(2) which provides:

78 Op. Att'y Gen. 198, 203 (1989)

(2) FIXED ANNUITY RESERVE SURPLUS DISTRIBUTIONS. Surpluses in the fixed annuity reserve established under s. 40.04(6) and (7) shall be distributed by the board if the distribution will result in at least a 2% increase in the amount of annuities in force, on recommendation of the actuary, as follows:

78 Op. Att'y Gen. 198, 203 (1989)

(a) The distributions shall be expressed as percentage increases in the amount of the monthly annuity in force, including prior distributions of surpluses but not including any amount paid from funds other than the fixed annuity reserve fund, preceding the effective date of the distribution. For purposes of this subsection, annuities in force include any disability annuity suspended because the earnings limitation had been exceeded by that annuitant in that year.

78 Op. Att'y Gen. 198, 203-204 (1989)

(b) Different percentages may be applied to annuities with different effective dates as may be determined to be equitable but no other distinction may be made among the various types of annuities payable from the fixed annuity reserve.

78 Op. Att'y Gen. 198, 204 (1989)

(c) The distributions shall not be offset against any other benefit being received but shall be paid in full, nor shall any other benefit being received be reduced by the distributions. The annuity reserve surplus distributions authorized under this subsection may be revoked by the board in part or in total as to future payments upon recommendation of the actuary if a deficit occurs in the fixed annuity reserves.

78 Op. Att'y Gen. 198, 204 (1989)

Under the hypothetical legislation, the amount of the unfunded actuarial liability is deducted from the TAA and credited to the employer reserve. This conflicts with contractual rights granted under the present statutes requiring division of any TAA distribution between the employer, employe and annuity reserves. Sec. 40.04(3)(a), Stats. Rights of those annuitants who retired before the effective date of such legislation would be impaired to the extent that no portion of those TAA monies would be available to increase annuities. A secondary detrimental effect occurs in that less money would be available in the future to fund the annuity increases provided by section 40.27(2). Annuitants have a contractual right, based on service already performed, in the existing benefit improvement mechanism set forth in section 40.27(2) which would be infringed by the hypothetical legislation. Active WRS participants have similar contractual rights during employment.

78 Op. Att'y Gen. 198, 204-205 (1989)

An active or retired WRS participant has, under case law, no vested right to retirement benefits "[i]n the absence of contractual relations or a specific declaration by the legislative body creating a vested right."

State ex rel. McCarty v. Gantter

, 240 Wis. 548, 555, 4 N.W.2d 153 (1942). Whatever rights are established contractually or by statute are determined as they exist at the time of retirement.

State ex rel. Smith v. Annuity & Pension Board

, 241 Wis. 625, 629, 6 N.W.2d 676 (1942).

State Teachers' Retirement Board v. Giessel

, 12 Wis. 2d 5, 10, 106 N.W.2d 301 (1960), held that the contractual rights included the right to earnings (the teachers' retirement system was a money-purchase benefit system in 1960). No later Wisconsin case negates the concept that vested rights are set at retirement unless affected by a statute providing greater or lesser rights. Such greater rights are granted by section 40.19(1).

78 Op. Att'y Gen. 198, 205 (1989)

Section 40.19(1) provides for vesting of rights during employment by stating:

78 Op. Att'y Gen. 198, 205 (1989)

Rights exercised and benefits accrued to an employe under this chapter

for service rendered shall be due as a contractual right and shall not be abrogated by any subsequent legislative act

. The right of the state to amend or repeal, by enactment of statutory changes, all or any part of this chapter at any time, however, is reserved by the state and there shall be no right to

further accrual of benefits nor to future exercise of rights for service rendered after the effective date of any amendment or repeal deleting the statutory authorization for the benefits or rights

. This section shall not be interpreted as preventing the state from requiring forfeiture of specific rights and benefits as a condition for receiving subsequently enacted rights and benefits of equal or greater value to the participant.

78 Op. Att'y Gen. 198, 205 (1989)

One of the "benefits accrued to an employe under this chapter for service rendered," denominated as a contractual right, is the section 40.27(2) right to fixed annuity reserve surplus distributions caused by augmented TAA transfers. Similar statutory contractual guarantees are provided to participants who participated prior to specific dates.

See

sec. 40.19(2), (2m) and (3), Stats. It, therefore, appears that various WRS participants have vested rights to annuity improvement, through use of TAA monies, that would be infringed by crediting a substantial portion of those monies solely to the employer accumulation reserve to eliminate the unfunded actuarial liability. Since various degrees of impairment would exist, I now consider whether such impairments are unconstitutional.

78 Op. Att'y Gen. 198, 206 (1989)

As stated in

Cannon

, 111 Wis. 2d at 558:

78 Op. Att'y Gen. 198, 206 (1989)

The degree of impairment determines the level of scrutiny to which the legislation in question will be subjected. In

Allied Structural Steel Co. v. Spannaus

, 438 U.S. at 244-45, the court stated:

78 Op. Att'y Gen. 198, 206 (1989)

"[T]he first inquiry must be whether the state law has, in fact, operated as a substantial impairment of a contractual relationship. The severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation." (Footnotes omitted.)

78 Op. Att'y Gen. 198, 206 (1989)

In finding that an impairment was severe, the

Spannaus

court relied upon those "factors that reflect the high value the Framers placed on the protection of private contracts."

Id.

at 245. In particular, the court noted that the legislation in question nullified an express term of the contract which was bargained for and reasonably relied upon by the parties, resulting in a completely unexpected liability to the plaintiff.

78 Op. Att'y Gen. 198, 206 (1989)

The magnitude of the transfer itself indicates that the impairment is substantial. While there are no facts stated in your letter, relating to the actual potential effect on annuitants, I can roughly interpolate such effect from my opinion to Gary I. Gates, Secretary of the Department of Employe Trust Funds, relating to the pre-1974 retiree supplemental benefit payments from the annuity reserve. 76 Op. Att'y Gen. 299 (1987). Pursuant to that opinion request, I was advised that a $230 million transfer from the TAA to the employe, employer and annuity reserves would cause an approximate two percent increase in existing annuities. 76 Op. Att'y Gen. at 308. The transfer which is the subject of this question is in the amount of $1.47 billion, more than six times the amount in that opinion. The resulting potential effect on existing annuities, in the nature of more than twelve percent, appears to be a substantial impairment.

78 Op. Att'y Gen. 198, 207 (1989)

I have no actuarial studies or facts of any other nature upon which to base a determination of the degree of potential contract impairment resulting from the lessening of the value of the purchase money annuity option to active employes. Nor do I have any basis upon which to determine the likelihood of higher employe contributions as a result of the TAA transfer to pay the unfunded liability. It is clear, however, that 1989 Wisconsin Act 13 at section 18 makes employe contributions responsible for any increase in contributions required because of benefit improvements in that act. For any future contribution rate increases required by the system, not caused by 1989 Wisconsin Act 13, employe contribution increases must provide half.

See

section 40.05(2n) as created by section 18 of 1989 Wisconsin Act 13. While the magnitude of the effect on the money purchase option and employe contributions is not available to me, it appears that the effect of the impairment in these two areas could also be substantial. Since I find a substantial impairment, it is necessary to next inquire into the nature and scope of the legislation to determine if it is proscribed by the contract clause.

Cannon

, 111 Wis. 2d at 558.

78 Op. Att'y Gen. 198, 207 (1989)

As further stated in

Cannon

, 111 Wis. 2d at 559-60:

78 Op. Att'y Gen. 198, 207 (1989)

As noted earlier, the contract clause does not proscribe every impairment of contract. A state may be entitled to exercise its police power for the general welfare of the public even though a private contract is impaired.

Wipperfurth v. U-Haul Co. of Western Wis., Inc.

, 101 Wis. 2d 586, 592, 304 N.W.2d 767 (1981). "If the Contract Clause is to retain any meaning at all, however, it must be understood to impose

some

limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power."

Allied Structural Steel Co. v. Spannaus

, 438 U.S. at 242. (Emphasis in original.)

78 Op. Att'y Gen. 198, 207-208 (1989)

Home Building & Loan Assn. v. Blaisdell

, 290 U.S. at 434, the United States Supreme Court upheld a Minnesota mortgage moratorium statute which was designed to reduce the number of foreclosures during the economic depression of the 1930's. This statute impaired the contract rights of lenders. Nevertheless, the court balanced the language of the contract clause against the purpose of the statute and held that the state had authority "to safeguard the vital interests of its people" through such legislation. In reaching this conclusion, the court found five factors to be significant. In

Allied Structural Steel Co. v. Spannaus

, 438 U.S. at 242 (citations omitted), the court succinctly set forth these five factors as follows:

78 Op. Att'y Gen. 198, 208 (1989)

"First, the state legislature had declared in the Act itself that an emergency need for the protection of homeowners existed. Second, the state law was enacted to protect a basic societal interest, not a favored group. Third, the relief was appropriately tailored to the emergency that it was designed to meet. Fourth, the imposed conditions were reasonable. And, finally, the legislation was limited to the duration of the emergency."

78 Op. Att'y Gen. 198, 208 (1989)

Blaisdell

indicates that to survive the contract clause a statute which impairs contracts must have a significant and legitimate public purpose, "such as the remedying of a broad and general social or economic problem."

Energy Reserves Group, Inc. v. Kansas Power and Light Co.

, 51 U.S.L.W. 4106, 4109 (U.S. Jan. 25, 1983) (No. 81-1370);

State ex rel. Building Owners v. Adamany

, 64 Wis. 2d at 303. Since

Blaisdell

, however, the standard has been modified so that the public purpose need no longer involve an emergency or temporary situation.

Energy Reserves Group, Inc. v. Kansas Power and Light Co.

supra

at 4109.

78 Op. Att'y Gen. 198, 208-209 (1989)

State ex rel. Bldg. Owners v. Adamany

, 64 Wis. 2d 280, 300, 219 N.W.2d 274 (1974),

cited in

Cannon

, stated that legislation impairing the right of contract must show that it "is necessary for the vital interests of the people of the state." Those vital interests must be shown by the legislation itself.

State ex rel. Bldg. Owners v. Adamany

, 64 Wis. 2d at 300-01. Is the existence of the present level of WRS unfunded actuarial accrued liabilities a "general social or economic problem" that requires a remedy "necessary for the vital interests of the people of the state," which remedy involves infringement of contractual rights? Such a problem, if it exists, is not apparent.