Wisconsin Legislature: vol74-100

74 Op. Att'y Gen. 100, 100 (1985)

Retirement Systems; Taxation;

Taxation of certain public employe pensions may impair contracts in violation of the state and federal constitutions. OAG 21-85

June 13, 1985

74 Op. Att'y Gen. 100, 101 (1985)

Thomas Loftus

Chairperson

Assembly Committee on Organization

74 Op. Att'y Gen. 100, 101 (1985)

You have asked for my opinion regarding proposed legislation¯

which would amend section 71.03(2)(d), Stats. That subsection presently exempts certain pension payments from state income taxation. Included are:

74 Op. Att'y Gen. 100, 101 (1985)

All payments received from the employe's retirement system of the city of Milwaukee, Milwaukee county employes' retirement system, sheriff's annuity and benefit fund of Milwaukee county, police officer's annuity and benefit fund of Milwaukee, fire fighter's annuity and benefit fund of Milwaukee, or the public employe trust fund as successor to the Milwaukee public school teachers' annuity and retirement fund and to the Wisconsin state teachers retirement system, which are paid on the account of any person who was a member of the paying or predecessor system or fund as of December 31, 1963, or was retired from any of the systems or funds as of December 31, 1963.

74 Op. Att'y Gen. 100, 101 (1985)

Sec. 71.03(2)(d), Stats.

74 Op. Att'y Gen. 100, 101 (1985)

Specifically, the issue is whether the amendment of section 71.03(2)(d) would violate the "contract clause" which is found in article I, section 10, clause 1 of our federal constitution; "no state shall... pass any... law impairing the obligation of contracts...." and in article I, section 12 of our state constitution: "No bill of attainder,

ex post facto

law, nor any law impairing the obligation of contracts shall ever be passed." At the outset, it is important to realize that these constitutional provisions do not absolutely proscribe the passage of laws which impair the obligation of contracts. This principle was discussed by our supreme court in

State ex rel. Cannon v. Moran

, 111 Wis. 2d 544, 554, 331 N.W.2d 369 (1983):

74 Op. Att'y Gen. 100, 101-102 (1985)

Courts have long recognized that under the contract clause a contract includes the laws existing at the time it was made. Thus, the scope of the clause is limited to legislation which retrospectively impairs the obligations of contract.

Id.

at 429-30, [

Home Building and Loan Ass'n v. Blaisdell

, 290 U.S. 398 (1934)];

Ogden v. Saunders

, 25 U.S. (12 Wheat.) 213, 303 (1827). Furthermore, the contract clause cannot be read literally to proscribe any impairment of preexisting contracts. "[L]iteralism in the construction of the contract clause... would make it destructive of the public interest by depriving the State of its prerogative of self-protection."

W.B. Worthen Co. v. Thomas

, 292 U.S. 426, 433 (1934). Under certain circumstances the obligation of contract may be "obliged to yield to the compelling interest of the public--the exercise of the police power."

State ex rel. Building Owners v. Adamany

, 64 Wis. 2d at 292.

74 Op. Att'y Gen. 100, 102 (1985)

Cannon

, the supreme court began its analysis by determining whether or not an obligation of contract had been impaired. Before I begin a similar undertaking herein, I must first determine whether or not contracts existed between the persons and the governmental units named in section 71.03(2)(d). It is important to note that we are concerned with a closed set of persons--each of whom began his employment with his respective governmental unit on or before December 31, 1963. Any person employed after that date by any of those governmental units clearly will not be entitled to the tax exemption. This closed set is divided into two subsets--those pre-1964 employes who retired on or before March 8, 1984, and those pre-1964 employes who are still working and are members of the Wisconsin retirement system or any of the plans referred to in section 71.03(2)(d).

74 Op. Att'y Gen. 100, 102 (1985)

The Wisconsin Legislature mandated the development of a retirement system in Milwaukee County in chapter 201, Laws of 1937. Section 1 thereof provided: "In each county having a population of five hundred thousand or more a retirement system shall be established and maintained for the payment of benefits to the employes of such county and to the widows and children of such employes...." Section 11 thereof provided: "All moneys and assets of the retirement system and all benefits and allowances, and every portion thereof, both before and after payment to any beneficiary, granted under the retirement system shall be exempt from any state, county or municipal tax...."

74 Op. Att'y Gen. 100, 102 (1985)

Accordingly, Milwaukee County established a retirement system on January 1, 1938. The benefits payable thereunder were deemed payable pursuant to contract by virtue of chapter 138, Laws of 1945, effective May 15, 1945. Section (2) thereof provides in part:

74 Op. Att'y Gen. 100, 103 (1985)

The benefits of members, whether employes in service or retired as beneficiaries, and of beneficiaries of deceased members in the retirement system created by chapter 201, laws of 1937, as amended, shall be assured by benefit contracts as herein provided:

74 Op. Att'y Gen. 100, 103 (1985)

. . . each member and beneficiary having such a benefit contract shall have a vested right to such annuities and other benefits and they shall not be diminished or impaired by subsequent legislation or by any other means without his consent.

74 Op. Att'y Gen. 100, 103 (1985)

A retirement system for sheriffs of Milwaukee County was created by chapter 155, Laws of 1937, effective January 1, 1938. Coverage extended to members of the shrievalty whose rank was at least deputy sheriff or an equal classification. Chapter 487, Laws of 1955, effective August 3, 1955, amended section 59.130, as created by chapter 155, Laws of 1937, to provide an income tax exemption for annuities and benefits paid to any annuitant or beneficiary. This system was closed and limited to its August 1, 1947, membership by chapter 357, section 25, Laws of 1947.

74 Op. Att'y Gen. 100, 103 (1985)

The City of Milwaukee received a mandate from the Legislature in chapter 134, Laws of 1937, effective May 15, 1937. Section 1 thereof provided:

74 Op. Att'y Gen. 100, 103 (1985)

In all cities of the first class in this state, whether organized under general or special charter, annuity and benefit funds shall be created, established, maintained and administered (by such city) for all officers and employes of such cities, who at the time this section shall come into effect are not contributors, participants or beneficiaries in any pension fund now in operation in such city by authority of law....

74 Op. Att'y Gen. 100, 103 (1985)

Two pension funds of concern herein were then in operation in 1937: the Policemen's Annuity & Benefit Fund of Milwaukee, established by chapter 589, Laws of 1921, and the Firemen's Annuity and Benefit Fund of Milwaukee, established by chapter 423, Laws of 1923.

74 Op. Att'y Gen. 100, 104 (1985)

The provisions of chapter 134, Laws of 1937, were greatly expanded two months after passage by chapter 396, Laws of 1937, effective July 16, 1937, which set forth comprehensive details as to the administration of the retirement system.

74 Op. Att'y Gen. 100, 104 (1985)

Section 1 thereof provided:

74 Op. Att'y Gen. 100, 104 (1985)

In each city of the first class a retirement system shall be established and maintained by such city for the payment of benefits to the employes of such city and to the widows and children of such employes, except employes who are or who become contributors to, participants in, or beneficiaries of any other pension, annuity or retirement fund in operation in the state by provision of law enacted by the legislature or by any municipality of this state.

74 Op. Att'y Gen. 100, 104 (1985)

Section 11 of chapter 396, Laws of 1937, provided:

74 Op. Att'y Gen. 100, 104 (1985)

All moneys and assets of the retirement system and all benefits and allowances, and every portion thereof, both before and after payment to any beneficiary, granted under the retirement system shall be exempt from any state, county or municipal tax.

74 Op. Att'y Gen. 100, 104 (1985)

The Policemen's and Firemen's Annuity and Benefit Funds were closed to new members by sections 32 and 33, chapter 441, Laws of 1947, effective July 30, 1947. Subsequent Milwaukee police and firemen came under the retirement system created by chapter 396, Laws of 1937. The present and future annuities and benefits accruing to Milwaukee policemen on July 30, 1947 were assured contract status by section 20, chapter 439, Laws of 1947, which created new section 67 of chapter 589, Laws of 1921, subsection (b) of which provided:

74 Op. Att'y Gen. 100, 104 (1985)

The annuities and all other benefits in the amounts and on the terms and conditions and in all other respects as provided in chapter 589, laws of 1921, as amended and then in effect in such city shall be obligations of such benefit contract on the part of the city and the retirement board and each policeman and beneficiary having such a benefit contract shall have a vested right to such annuities and other benefits and they shall not be diminished or impaired by subsequent legislation nor by any other means without his consent.

74 Op. Att'y Gen. 100, 104-105 (1985)

Milwaukee firemen received identical treatment and contract status from section 19, chapter 440, Laws of 1947, which created new section 67 of chapter 423, Laws of 1923. Subsection (b) thereof used the same language as section 67(b) of chapter 589, Laws of 1921, differing only in the references to the creating law and to policemen.

74 Op. Att'y Gen. 100, 105 (1985)

Section 30 of chapter 441, Laws of 1947, strengthened the Milwaukee retirement system then in effect by creating a new section 14 of chapter 396, Laws of 1937. Subsection 2 of the newly-created section 14 provided:

74 Op. Att'y Gen. 100, 105 (1985)

The benefits of members, whether employes in service or retired as beneficiaries, and of beneficiaries of deceased members in the retirement system created by chapter 396, laws of 1937, as amended, shall be assured by benefit contracts as herein provided:

74 Op. Att'y Gen. 100, 105 (1985)

(a) Every such member and beneficiary shall be deemed to have accepted the provisions of this act and shall thereby have a benefit contract in said retirement system of which he is such member or beneficiary as of the effective date of this act unless, within a period of 30 days thereafter, he files with the board administering the system a written notice electing that this act shall not apply to him. The annuities and all other benefits in the amounts and upon the terms and conditions and in all other respects as provided in the law under which the system was established as such law is amended and in effect on the effective date of this act shall be obligations of such benefit contract on the part of the city and of the board administering the system and each member and beneficiary having such a benefit contract shall have a vested right to such annuities and other benefits and they shall not be diminished or impaired by subsequent legislation or by any other means without his consent.

74 Op. Att'y Gen. 100, 105-106 (1985)

Chapter 459, Laws of 1921, established a state retirement system to provide retirement benefits for public school, normal school and university teachers. This system replaced an earlier system established in 1911 which was insolvent.

State Teacher's Retirement Board v. Giessel

, 12 Wis. 2d 5, 8, 106 N.W.2d 301 (1960). Section 42.52, as created by section 3, chapter 459, Laws of 1921, provided: "The benefits payable to, or other right and interest of any member, beneficiary, or distributee of any estate under any provision of the state retirement law shall be exempt from any tax levied by the state or any subdivision thereof,...." Although the Legislature didn't characterize the interests of participants and beneficiaries as contractual, the supreme court did in

Giessel

, 12 Wis. 2d at 9:

74 Op. Att'y Gen. 100, 106 (1985)

The nature of the state teachers' retirement system and the rights of the members thereof have been the subject of four prior decisions of this court:

State ex rel. Dudgeon v. Levitan

(1923), 181 Wis. 326, 193 N.W. 499;

State ex rel. O'Neil v. Blied

(1925), 188 Wis. 442, 206 N. W. 213;

State ex rel. Stafford v. State Annuity & Investment Board

(1935), 219 Wis. 31, 261 N.W. 718;

State ex rel. Thomson v. Giessel

(1952), 262 Wis. 51, 53 N. W. (2d) 726. The result of these decisions is that the teachers have a contractual relationship with the state and a vested right in the state teachers' retirement system.

74 Op. Att'y Gen. 100, 106 (1985)

Milwaukee teachers were given a retirement system in 1907 by chapter 453, Laws of 1907, which created section 925-xx, Stats. (1907). That section was repealed and recreated by chapter 510, Laws of 1909, effective June 22, 1909.

74 Op. Att'y Gen. 100, 106 (1985)

An income tax exemption was provided in 1929 by the enactment of chapter 266, section 3, Laws of 1929.

74 Op. Att'y Gen. 100, 106 (1985)

Subsection (17) of section 42.55¯

of the statutes is amended to read: (42.55) (17) All annuities granted under the provisions of this section shall be exempt from

taxation, and from

execution, attachment and garnishment process, and no annuitant shall have the right to transfer or assign his annuity.

74 Op. Att'y Gen. 100, 106 (1985)

While I was unable to locate a specific legislative declaration that a member's rights under this retirement system were based on or assured by a benefit contract, it is clear to me that the Legislature understood that contractual rights were involved when it passed section 6, chapter 78, Laws of 1957, creating section 38.24(3)(L):

74 Op. Att'y Gen. 100, 106 (1985)

Nature of contractual rights unchanged

. It is not intended that the enactment of this act (chapter [78], Laws of 1957), shall extend or impair the nature of any contractual rights of members of the retirement fund.

74 Op. Att'y Gen. 100, 106-107 (1985)

Finally, I am unable to locate the session laws granting an exemption from income taxation for benefits payable from the Milwaukee annuity and benefit funds for police and firefighters. These funds were closed to new members on July 30, 1947 as I earlier stated herein. Their tax exemption was preserved, however, by the language of section 4, chapter 267, Laws of 1963, which preserved the exemption for members who had retired from such systems as of December 31, 1963.

74 Op. Att'y Gen. 100, 107 (1985)

I conclude that a person who retired from any of the retirement systems referred to in section 71.03(2)(d) as of December 31, 1963, is a party to a contract between that person and the governmental units referred to in that subsection. Further, any person who, on December 31, 1963, was then a member of any of the retirement systems referred to and who had retired on or before March 8, 1984, is a party to a contract between themself and the governmental units referred to. The contractual rights of the individuals just previously described will not be impaired in any way by section 1276(m) of Assembly Amendment 1 to 1985 Assembly Bill 85.

74 Op. Att'y Gen. 100, 107 (1985)

Finally, as to the remaining subset, these persons who, on December 31, 1963, were then members of the retirement systems referred to and who, on March 9, 1984, were still members of said retirement system or its successor, it is my opinion they, too, are parties to contracts between themselves and the governmental units referred to. The question now becomes whether or not these contracts will be impaired by the proposed legislation.

74 Op. Att'y Gen. 100, 107 (1985)

Our supreme court discussed the law regarding impairment in

Cannon

, 111 Wis. 2d at 554-55.

74 Op. Att'y Gen. 100, 107 (1985)

The first step in analyzing a contract clause problem is to determine whether an obligation of contract has been impaired. In

Home Building & Loan Assn. v. Blaisdell

, 290 U.S. at 431, the court held:

74 Op. Att'y Gen. 100, 107 (1985)

"The obligations of a contract are impaired by a law which renders them invalid, or releases or extinguishes them (

Sturges v. Crowninshield

supra

, pp. 197, 198) and impairment, as above noted, has been predicated of laws which without destroying contracts derogate from substantial contractual rights." (Footnote omitted.)

74 Op. Att'y Gen. 100, 107-108 (1985)

In a recent case the United States Supreme Court indicated that legislation which alters the contractual expectations of the parties impairs the obligation of contract.

Allied Structural Steel Co. v. Spannaus

, 438 U.S. 234, 245-46 (1978). This court has recognized that a contract is impaired when the consideration agreed upon is altered by legislation.

State ex rel. Building Owners v. Adamany

, 64 Wis. 2d at 291;

Paylowski v. Eskofski

, 209 Wis. 189, 193, 244 N.W. 611 (1932).

74 Op. Att'y Gen. 100, 108 (1985)

Cannon

, involved a legislative attempt to reduce the salaries of certain Milwaukee County judges by the amount of pension benefits each received from prior judicial service in Milwaukee County. Prior to August 1, 1978, Milwaukee County circuit judges received compensation from both the state and Milwaukee County. Thus, each was eligible to participate in the Milwaukee County Employes Retirement System and the Wisconsin Public Employes Retirement System to the extent of compensation received from each.

74 Op. Att'y Gen. 100, 108 (1985)

Pursuant to the Court Reform Act, chapter 449, Laws of 1977, county supplements to judicial pay were abolished as of July 1, 1980. The state thus became the sole provider of judicial compensation. However, there was an exception for Milwaukee County circuit judges who held office on July 31, 1978, and who would continue to serve in that capacity. Those judges could elect to continue receiving their salary from both the state and Milwaukee County.

74 Op. Att'y Gen. 100, 108 (1985)

Six Milwaukee County circuit judges (five of whom are plaintiffs) chose not to participate in the dual system and thus terminated their membership in the Milwaukee County system. Two circuit judges became appellate court judges and did not have the option of dual system membership. Each of the plaintiffs elected to begin receiving a pension from the Milwaukee County Employes Retirement System.

74 Op. Att'y Gen. 100, 108 (1985)

Subsequently, the Legislature enacted chapter 38, Laws of 1979, creating section 40.91, Stats. (1979-80), which reduced these judges' salaries by the amount of retirement benefits each receives from the Milwaukee County Employes Retirement System. The plaintiffs sued, prevailing in the trial court. The court of appeals reversed and the supreme court accepted a petition for review.

74 Op. Att'y Gen. 100, 108 (1985)

The supreme court began its analysis by noting that plaintiffs had a contract with the Milwaukee County Employes Retirement System. It then looked to determine whether or not an obligation of contract was impaired and held:

74 Op. Att'y Gen. 100, 108-109 (1985)

Thus Chapter 38 effectively, albeit indirectly, deprives the plaintiffs of the benefits properly due them under their MCERS contracts. We would be putting form over substance if we held that only a direct reduction in pension benefits constitutes an impairment. Accordingly, we conclude that the obligations of the plaintiffs' MCERS contracts are impaired by the salary setoff device of Chapter 38, Laws of 1979.