Wisconsin Legislature: Trust Funds; Wisconsin Retirement System;

78 Op. Att'y Gen. 198, 218 (1989)

7. Would s. 40.19 (1) present a constitutional bar to the Legislature limiting future interest credits to participant accounts and the annuity reserve to the present assumed rate (7-1/2%) and the present assumed benefit rate (5%), respectively?

78 Op. Att'y Gen. 198, 218 (1989)

It is my opinion that section 40.19(1) does not preclude the Legislature from prospectively limiting future interest crediting for that portion of a participant's account contributed after enactment of the limiting statute. Such statutory section does preclude the Legislature from limiting interest crediting for contributions made prior to the enactment of the limiting statute.

78 Op. Att'y Gen. 198, 218-219 (1989)

Section 40.19(1) provides vested contract rights "for service rendered" during employment. One of the contractual rights accrued "for service rendered" by WRS participants is the right to fixed annuity reserve surplus distributions. Section 40.19(1) was enacted effective January 1, 1982. Ch. 96, Laws of 1981. Participants who retired since that date probably have a contractual right to annuity increases based on distribution of fixed annuity surpluses. Participants employed by WRS participating employers after January 1, 1982, and not yet retired, may also have a contractual right to future annuity increases based on "benefits accrued... for service rendered." That contractual right would continue until prospectively abrogated by the hypothetical legislation.

78 Op. Att'y Gen. 198, 219 (1989)

While section 40.19(1) authorizes "forfeiture of specific rights and benefits" that have vested, such forfeiture must under that statute be based upon the participant "receiving subsequently enacted rights and benefits of equal or greater value." Your question contains no

quid

pro

quo

for those WRS participants who are affected by the interest credit limitation, so this method of requiring forfeiture of vested rights appears inapplicable.

78 Op. Att'y Gen. 198, 219 (1989)

Section 40.19(2m) also specifically guarantees to a WRS participant, who was a participating employe during the period January 1, 1982 to March 9, 1984, the right to have his or her retirement benefit determined under the statutes in effect on his or her termination. Such section states as follows:

78 Op. Att'y Gen. 198, 219 (1989)

Any person who is a participant in the Wisconsin retirement system

before March 9, 1984

, and who is not subsequently a participating employe in the Wisconsin retirement system shall continue to have the amount of, and eligibility for, the person's benefits determined in accordance with the statutes in effect on the date the person terminated as a participating employe.

78 Op. Att'y Gen. 198, 219 (1989)

Fixed annuity reserve distribution as mandated in section 40.27(2) is an element of "benefits determined in accordance with the statutes in effect on the date the person terminated as a participating employe." Section 40.19(1) precludes abrogation of that contractual right "by any subsequent legislative act."

78 Op. Att'y Gen. 198, 219-220 (1989)

Even those WRS participants who were not participating employes after January 1, 1982, and thus not covered by the vesting language of section 40.19(1), may be held to have vested rights abrogated by the interest limitation. Section 40.19(3), applying to WRS participants who were not participating employes after January 1, 1982 (the date of merger of the retirement systems), limits the benefit vesting to "the statutes in effect on the date the person terminated." Such section states:

78 Op. Att'y Gen. 198, 220 (1989)

Any person who is a participant in the Wisconsin retirement fund or a member of either the state teachers retirement system or the Milwaukee teachers retirement fund

prior to January 1, 1982

, and who does not subsequently become a participating employe in the Wisconsin retirement system, shall continue... to have the amount of and eligibility for the person's benefits determined in accord with the statutes in effect on the date the person terminated as a participating employe.

78 Op. Att'y Gen. 198, 220 (1989)

The statutory benefits which vested on termination of employment prior to January 1, 1982, also included annuity improvements from distribution of annuity reserve surpluses.

See

secs. 41.20(1)(a) and 42.357(5), Stats. (1979). Statutes in effect prior to January 1, 1982, further provided that annuity reserve surplus distributions "shall not be offset against any other benefit received but shall be paid in full, nor shall any other benefit being received be reduced by any such distribution."

See

sec. 40.70(3), Stats. (1979). It, therefore, appears that pre-1982 annuitants may have vested rights to annuity increases from annuity reserve surpluses that would be infringed by the subject interest limitation.

78 Op. Att'y Gen. 198, 220-221 (1989)

The degree of impairment determines the level of scrutiny by the courts. If there is substantial impairment, the courts will carefully examine the nature and purpose of the legislation. Whether there is a substantial impairment is not limited to the amount of money involved but takes into consideration whether "the legislation in question nullified an express term of the contract which was bargained for and reasonably relied upon by the parties."

Cannon

, 111 Wis. 2d at 558. Active employes and annuitants are and were employed during times when the statutes vest in them the right to unlimited annuity improvements based on surpluses in the annuity reserve. It was not unreasonable for participants to expect such unlimited interest crediting to annuity reserve accounts to continue for past service. While the severity of the impairment is not indicated, I assume that it would be severe if the hypothetical statutes were enacted in this session given the accelerated pass through by 1989 Wisconsin Act 13 at sections 9 and 47(2).

78 Op. Att'y Gen. 198, 221 (1989)

It, therefore, appears that the impairment is severe and proscribed by the United States and Wisconsin Constitutions unless there "exist[s] a significant and legitimate public purpose behind the legislation," which purpose should be "directed towards remedying a broad and general social or economic problem."

Chappy v. LIRC

, 136 Wis. 2d 172, 187-88, 401 N.W.2d 568 (1967), "[I]t seems clear that, for the police power of the state of Wisconsin to affect the constitutionally protected right of contract, there should be evidence that the legislation is necessary for the vital interests of the state."

State ex rel. Bldg. Owners v. Adamany

, 64 Wis. 2d at 300. Limiting of the interest crediting to annuitants does not appear to rise to the magnitude of "remedying a broad and general social or economic problem" nor would it seem to be "necessary for the vital interests of... the state."

78 Op. Att'y Gen. 198, 221 (1989)

There is nothing in question 6 which indicates such a public purpose. Saving and transfer of revenues to other purposes does not in itself indicate such a "vital interest."

78 Op. Att'y Gen. 198, 221 (1989)

A government entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.

78 Op. Att'y Gen. 198, 221 (1989)

United States Trust Co. v. New Jersey

, 431 U.S. 1, 26 (1977). (Footnote omitted.)

78 Op. Att'y Gen. 198, 222 (1989)

A statute that seeks to modify, by the invocation of the police power, a constitutionally guaranteed right, such as the right of contract, should be carefully drawn to show that the use of such power is necessary and exigent and serves a vital purpose of government. While courts are willing to indulge any reasonable presumption to sustain police-power-type legislation, they ought not be asked to speculate or conjure up possible explanations to support a legislative act.

78 Op. Att'y Gen. 198, 222 (1989)

State ex rel. Bldg. Owners v. Adamany

, 64 Wis. 2d at 303.

78 Op. Att'y Gen. 198, 222 (1989)

Present statutes allow "equitable" distribution of annuity surpluses.

See

sec. 40.27(2)(b), Stats.

78 Op. Att'y Gen. 198, 222 (1989)

[A] State is not completely free to consider impairing the obligations of its own contracts on a par with other policy alternatives. Similarly, a State is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well.

78 Op. Att'y Gen. 198, 222 (1989)

United States Trust Co. v. New Jersey

, 431 U.S. at 30-31. It should be noted that the Legislature has chosen a more moderate course in the past by limiting interest crediting to employe accumulation accounts on a prospective basis.

See

section 40.04(4)(a)2. which limits interest to the assumed benefit rate and section 40.04(4)(a)2m (as created by 1989 Wisconsin Act 13) which prospectively limits separation benefit interest to three percent. I therefore conclude that legislation limiting interest crediting to annuity reserve accounts, for contributions made before the enactment of the limiting statute, would probably be held unconstitutional.

78 Op. Att'y Gen. 198, 222 (1989)

Your eighth question states:

78 Op. Att'y Gen. 198, 222-223 (1989)

8. If a negative answer to any of the previous questions is based on the fact that many participants have made additional contributions to the WRS over and above the legally-required contributions, would the answers become positive if the statutory changes in each case specified that the full investment earnings credit would be added to all such additional contribution amounts while limiting or directing the credits to required contribution accounts as previously noted?

78 Op. Att'y Gen. 198, 223 (1989)

None of the negative answers to previous questions is based on participants' rights generated from making additional deposits or being the beneficiary of additional deposits made by employers. Employes and employers (on behalf of employes) may make additional contributions to the WRS. Sec. 40.05(1)(a)5. and (2)(g), Stats. "[A]dditional employer contributions shall be available for all benefit purposes [except separation benefit] and shall be administered and invested on the same basis as employe additional contributions...." Sec. 40.05(2)(g), Stats. A participant's account in the employe accumulation reserve is credited with both employer and employe additional deposits. Thus participants who have additional deposit credits have, as a minimum, the contractual rights of participants arising from required employe deposits.

78 Op. Att'y Gen. 198, 223 (1989)

The Legislature has apparently recognized greater rights resulting from additional deposits. Section 40.04(4)(a)2., which limits interest crediting to employe accumulations accounts to the assumed benefit rate (five percent) for participants after December 31, 1984, does not include "employe and employer additional contribution accumulations" within such interest limitation. Similarly, the section 40.04(4)(a)2m. (as created by 1989 Wisconsin Act 13) limitation of interest to three percent for separation benefit purposes for those terminating covered employment on or after January 1, 1990, does not apply to additional contributions. While there are indications that there may be other bases for objection to statutes infringing on rights resulting from additional contributions, a discussion of such bases is unnecessary here absent specific statutory language for analysis.

78 Op. Att'y Gen. 198, 223 (1989)

Your final question states:

78 Op. Att'y Gen. 198, 224 (1989)

9. Is there any constitutional bar to the Legislature closing the present WRS and creating a new retirement system applicable to all future service of existing and future employes using the present WRS assets to fund all benefits accrued to the date of closing and applying the "excess" assets to reducing taxes?

78 Op. Att'y Gen. 198, 224 (1989)

It is my opinion that the Legislature can, without violating contract rights, close the present WRS and create a new retirement system for future service if it does not abrogate the various rights vested on the date of terminating the WRS. One of those vested rights is that of fixed annuity reserve surplus distributions under section 40.27. A second vested right is that of choosing the alternative purchase money form of annuity under section 40.23(3). A third right vested is that of a pre-1982 participant, applying for a separation, to have the effective rate of interest (including TAA increases to the current income account) credited in determining the amount of the separation benefit. Secs. 40.25(2) and 40.04(4)(a)2., Stats. I, therefore, have no basis upon which to assume that there would be any "excess assets" available on the hypothetical closing of the WRS since these vested rights have substantial claims on the trust funds.

78 Op. Att'y Gen. 198, 224 (1989)

Section 40.19(1) explicitly provides that "[r]ights 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." Such statute continues by stating that the system can be repealed at any time and "there shall be no right to

further

accrual

nor to future exercise of rights for service

after

... repeal." This contractual right based on service rendered includes benefits determined by and based upon monies in the TAA.

78 Op. Att'y Gen. 198, 224-225 (1989)

The Wisconsin Supreme Court has held, in the case of teachers, that certain benefits vested at commencement of teaching service. In

State ex rel. Stafford v. State A. and I. Board

, 219 Wis. 31, 33, 261 N.W. 718 (1935), the court held that a legislative enactment that required payment from the contingency fund of the State Retirement System (for teachers) to one not belonging to the group entitled to a benefit violated the contractual rights of the teachers participating in the fund. The court stated:

78 Op. Att'y Gen. 198, 225 (1989)

The conceded facts show the nonexistence of a right or claim in this particular fund in Mr. Stafford at the time of his death. It therefore follows that the attempt to place within the reach of Stafford's estate or of his beneficiary this fund, or any portion of it, results in the invasion of the rights of others, because it is a direct impairment of contractual rights of teachers entitled to participate in said fund under a contract between them and the state.

78 Op. Att'y Gen. 198, 225 (1989)

219 Wis. at 33. There was no showing, in the case, that employed teachers' ultimate annuities would be affected other than by a potential lessening of the "distribution of gains and savings" authorized by section 42.34, Stats. (1935).

78 Op. Att'y Gen. 198, 225 (1989)

Similarly in

State ex rel. O'Neil v. Blied

, 188 Wis. 442, 447, 206 N.W. 213 (1925), an attempt by the Legislature to repeal, retroactively, a death benefit provision of the 1921 Teachers Retirement Act was held to be an unconstitutional impairment of teachers employment contracts. Repeal of the death benefit was held constitutional, however, for teachers hired after the effective date of the repealing act.

78 Op. Att'y Gen. 198, 225 (1989)

State Teachers' Retirement Board v. Giessel

, 12 Wis. 2d 5, 9-10, 106 N.W.2d 301 (1960), the court stated:

78 Op. Att'y Gen. 198, 225-226 (1989)

It is argued that the plaintiff board is required to pay out funds according to law and appropriations from the earnings of the fund have been made by law each year, and therefore there is no vested right in the gross earnings of the fund. We do not agree. The teacher's right, based on contract, extends to the retirement system. The earnings on investments, part of which represent contributions made by the teachers and part contributed by the state under the contract with them, constitute assets of the system. The reserve for contingencies set up by the board is a part of the system.