80 Op. Att'y Gen. 101 (1991)

80 Op. Att'y Gen. 101, 101 (1991)
Employe Trust Funds Board; Employe Trust Funds, Department Of; Retirement Systems; The Employe Trust Funds Board must under section 40.05(2n), Stats., divide post-1990 contribution rate adjustments between employer and employe contributions. An increase in employe contributions based upon such division is not a constitution contract clause violation. The Board lacks the authority to redetermine the unfunded accrued actuarial liability for calendar year 1991 rate setting purposes as an alternative to a contribution increase. OAG 17-91

September 9, 1991

80 Op. Att'y Gen. 101, 101 (1991)
GARY I. GATES, Secretary
  Department of Employe Trust Funds

80 Op. Att'y Gen. 101, 101 (1991)
  On behalf of the Employe Trust Funds Board (ETFB), you request my opinion on several questions concerning the board's authority to set employe and employer contribution rates for Wisconsin retirement system purposes. These percentages of payroll contributions plus investment earnings provide the assets to fund the retirement benefits provided by the system. The ETFB, an administrative agency created by the Legislature, has only those powers which are expressly conferred or necessarily implied by the statutes under which the agency operates. Kimberly-Clark Corp. v. Public Service Comm., 110 Wis. 2d 455, 461-62, 329 N.W.2d 143 (1983).

80 Op. Att'y Gen. 101, 101 (1991)
  Employe retirement contributions are established by state statute as a percentage of each payment of earnings. Section 40.05, Stats., provides in part:

80 Op. Att'y Gen. 101, 101 (1991)
  (1)   Employe retirement contributions. For Wisconsin retirement system purposes employe contributions on earnings for service credited as creditable service shall be made as follows:

80 Op. Att'y Gen. 101, 101 (1991)
  (a)   Except as provided in par. (b) and sub. (2n):

80 Op. Att'y Gen. 101, 102 (1991)
  1.   For each participating employe not otherwise specified, 5% of each payment of earnings. [general employe]

80 Op. Att'y Gen. 101, 102 (1991)
  2.   For each participating employe whose formula rate is determined under s. 40.23(2m)(e)2, 5.5% of each payment of earnings. [elected and executive]

80 Op. Att'y Gen. 101, 102 (1991)
  3.   For each participating employe whose formula rate is determined under s. 40.23(2m)(e)3, 6% of each payment of earnings. [protective]

80 Op. Att'y Gen. 101, 102 (1991)
  4.   For each participating employe whose formula rate is determined under s. 40.23(2m)(e)4, 8% of each payment of earnings. [firefighters]

80 Op. Att'y Gen. 101, 102 (1991)
  ....

80 Op. Att'y Gen. 101, 102 (1991)
  (b)   In lieu of employe payment, the employer may pay all or part of the contributions required by par. (a), but all the payments shall be available for benefit purposes to the same extent as required contributions deducted from earnings of the participating employes.

80 Op. Att'y Gen. 101, 102 (1991)
  ....

80 Op. Att'y Gen. 101, 102 (1991)
  (2m)   Benefit adjustment contribution. Except as provided in sub. (2n), in addition to the amounts under subs. (1) and (2), a benefit adjustment contribution equal to 1% of earnings shall be paid by or for participating employes whose formula rate is determined under s. 40.23(2m)(e)1 and 3. This contribution shall be deducted from each payment of earnings to participating employes unless the employer provides through its compensation provisions or agreements that all or part of the contribution will be paid by the employer. For benefit purposes, this contribution shall be treated as if it were an employer required contribution regardless of whether the employer or the employe pays the contribution.

80 Op. Att'y Gen. 101, 102-103 (1991)
  While employe contributions differ depending upon employe category (general, elected and executive, protective, firefighter), only the general category, the largest group, will be considered in this opinion since that is the group which is the basis for the Wisconsin Education Association Council (WEAC) request which caused your opinion request. Caution is suggested, however, in light of your statement, on page one of your letter, that "whatever answers are given will be applied to all four categories." This opinion does not address any possible differences that theoretically could arise, between employment categories, in the application of section 40.05(2n) because the elected/executive and firefighter employe groups are not required to make the one percent benefit adjustment contribution.

80 Op. Att'y Gen. 101, 103 (1991)
  The general employe retirement contribution thus established by section 40.05 consists of the basic five percent at subsection (1)(a)1., plus the one percent benefit adjustment contribution of subsection (2m) plus or minus any contribution rate adjustment required by subsection (2n).

80 Op. Att'y Gen. 101, 103 (1991)
  Employer retirement contributions are established by state statute as the percentage of earnings necessary to fund the promised future retirement benefits after deducting the amounts generated from the employe required and benefit adjustment contributions.

80 Op. Att'y Gen. 101, 103 (1991)
  Section 40.05(2) provides in part:

80 Op. Att'y Gen. 101, 103 (1991)
  Employer retirement contributions. For Wisconsin retirement system purposes:

80 Op. Att'y Gen. 101, 103 (1991)
  (a)   Each participating employer shall make contributions for current service determined as a percentage of the earnings of each participating employe, determined as though all employes of all participating employers were employes of a single employer, but with a separate percentage rate determined for the employe occupational categories specified under s. 40.23(2m). A separate percentage shall also be determined for subcategories within each category determined by the department to be necessary for equity among employers.

80 Op. Att'y Gen. 101, 104 (1991)
  (am)   The percentage of earnings under par. (a) shall be determined on the basis of the information available at the time the determinations are made and on the assumptions the actuary recommends and the board approves by dividing the amount determined by subtracting from the then present value of all future benefits to be paid or purchased from the employer accumulation reserve on behalf of the then participants the amount then credited to the reserve for the benefit of the members and the present value of future unfunded prior service liability contributions of the employers under par. (b) by the present value of the prospective future compensation of all participants.

80 Op. Att'y Gen. 101, 104 (1991)
  ....

80 Op. Att'y Gen. 101, 104 (1991)
  (c)   The percentage rates determined under this subsection shall become effective as of the beginning of the calendar year to which they are applicable and shall remain in effect during the calendar year, except that the secretary, upon the written certification of the actuary, may change any percentage determined under par. (b) during any calendar year for the purpose of reflecting any reduced obligation which results from any payment of advance contributions.

80 Op. Att'y Gen. 101, 104 (1991)
  Section 40.03(5)(b) requires that the actuary:

80 Op. Att'y Gen. 101, 104 (1991)
  Shall make a general investigation at least once every 3 years of the experience of the Wisconsin retirement system relating to mortality, disability, retirement, separation, interest, employe earnings rates and of any other factors deemed pertinent and to certify, as a result of each investigation, the actuarial assumptions to be used for computing employer contribution rates, the assumed rate and the tables to be used for computing annuities and benefits....

80 Op. Att'y Gen. 101, 105 (1991)
Based upon the recommendations of the actuary, the ETFB is authorized by section 40.03(1)(e) to "approve the contribution rates and actuarial assumptions determined by the actuary...."

80 Op. Att'y Gen. 101, 105 (1991)
  The actuarial recommendations adopted by the ETFB that are the subject of the questions you ask are described on pages 1-2 of your letter where you state:

80 Op. Att'y Gen. 101, 105 (1991)
One recommendation in the Actuarial Valuation was to adjust the future investment earnings assumption from 7.5 to 7.8 percent. Another recommendation was to increase the contribution rate for "normal cost" (current service) by .2 percent of payroll effective January 1, 1991. Relying upon Section 40.05(2n), which became effective on May 19, 1989, the Board determined that the adjustment was to be apportioned as directed, half to the employer rates under sub. (2)(a) and (am) and half to benefit adjustment contributions (paid by employes) under sub. (2m).

80 Op. Att'y Gen. 101, 105 (1991)
The actuary noted in his report that the principal cause of the proposed adjustment in contribution rates for 1991 was the provision to the actuary of corrected creditable service figures which increased participant service by an average of about one year. He further reported and the Department confirmed that the extra year of service had always been recorded on Department records but that the Department had not reported the additional service to the actuary beginning with the 1986 valuation year due to a computer programming error. The Department and consulting actuary were not aware of the reporting problem due to the concurrent merging of data bases for what had been three predecessor retirement systems.

80 Op. Att'y Gen. 101, 105 (1991)
Your questions thus relate to the increase to the 1991 contribution rate of .2 percent of payroll which increase the ETFB apportioned half to employer rates and half to benefit adjustment contributions. I have altered the order of your questions to provide better continuity in answering.

80 Op. Att'y Gen. 101, 106 (1991)
  You ask:

80 Op. Att'y Gen. 101, 106 (1991)
[D]oes Section 40.05(2n) apply or rather may the Board determine that only Section 40.05(2)(a) applies....

80 Op. Att'y Gen. 101, 106 (1991)
  Section 40.05(2)(a) establishes employer contributions as the percentage of earnings necessary to fund the retirement benefit after deducting the amount generated by employe-required and benefit-adjustment contributions. Section 40.05(2n) additionally provides that any required increase in employer contributions (not caused by benefit improvements under 1989 Wisconsin Act 13) or decrease be shared equally between employer and employe contributions. Section 40.05(2n) states:

80 Op. Att'y Gen. 101, 106 (1991)
  Contribution rate adjustment. (a) If the board, on the advice of the actuary, determines that an increase or decrease in contribution rates is necessary for any annual period after 1989, the board, on the advice of the actuary, shall adjust contribution rates in the following manner:

80 Op. Att'y Gen. 101, 106 (1991)
  1.   One-half of the increase or decrease in contribution rates shall be provided for by an increase or decrease in employer contributions under sub. (2)(a) and (am), except as provided in subd. 3.

80 Op. Att'y Gen. 101, 106 (1991)
  2.   One-half of the increase or decrease in contribution rates shall be provided for by an increase or decrease in benefit adjustment contributions under sub. (2m), except as provided in subd. 3 or par. (b).

80 Op. Att'y Gen. 101, 106 (1991)
  3.   Any increase in contribution rates required after 1989 that results from benefit improvements under 1989 Wisconsin Act 13, which would otherwise increase employer contribution rates over the 1989 rate shall be provided for by an increase in benefit adjustment contributions under sub. (2m). Notwithstanding sub. (2m), an employer may not pay for all or part of any increase in benefit adjustment contributions that is required under this subdivision.

80 Op. Att'y Gen. 101, 107 (1991)
  (b)   If under par. (a) 2 a decrease in benefit adjustment contributions under sub. (2m) would reduce the amount under sub. (2m) to less than zero, the employe contribution rates under sub. (1) shall be decreased.

80 Op. Att'y Gen. 101, 107 (1991)
  It is my opinion that section 40.05(2n) controls and the ETFB is required to divide the contribution adjustment between employer and employe contributions. Correspondingly, the ETFB lacks the statutory authority to increase only the employer contribution under section 40.05(2)(a).

80 Op. Att'y Gen. 101, 107 (1991)
  WEAC suggests that there is ambiguity in the phrase "for any annual period after 1989" and that it is unclear as to whether the period intended (to invoke the adjustment division between employer and employe contributions) is the period during which the error was made or the period during which the correction is made. While the correction was made in the 1991 contribution rates, the error occurred beginning with the December 31, 1985, valuation, prior to enactment of section 40.05(2n). I find nothing in the language of section 40.05 however that indicates that the Legislature intended mechanical mistake correction to be handled any different than actuarial mistakes. The whole purpose of section 40.05(2) is to adjust the contribution rate to ameliorate prior mistakes.

80 Op. Att'y Gen. 101, 107 (1991)
  As stated by the actuary (Wisconsin Department of Employe Trust Funds 9th Annual Actuarial Valuation, December 31, 1989, at 37):

80 Op. Att'y Gen. 101, 107 (1991)

  The principal areas of risk assumption are:

80 Op. Att'y Gen. 101, 107 (1991)
(i) long-term rates of investment income likely to be generated by the assets of the retirement fund -- this includes both realized and unrealized appreciation and depreciation

80 Op. Att'y Gen. 101, 107 (1991)
(ii) rates of mortality among participants, retirants and beneficiaries

80 Op. Att'y Gen. 101, 107 (1991)
(iii) rates of withdrawal of active participants

80 Op. Att'y Gen. 101, 107 (1991)
(iv) rates of disability among participants

80 Op. Att'y Gen. 101, 108 (1991)
(v) patterns of salary increases to be experienced by participants

80 Op. Att'y Gen. 101, 108 (1991)
(vi) the age and service distribution of actual retirements.

80 Op. Att'y Gen. 101, 108 (1991)
In making a valuation the actuary must project the monetary value of each risk assumption for each distinct experience group, for the next year and for each year over the next half-century or longer.

80 Op. Att'y Gen. 101, 108 (1991)
Once actual risk experience has occurred and been observed, it will not coincide exactly with assumed risk experience, regardless of the skill of the actuary, the completeness of the data, and the precision of the calculations. Each valuation provides a complete recalculation of assumed future risk experience and takes into account all past differences between assumed and actual risk experience. The result is a continual series of small adjustments to the computed contribution rate.

80 Op. Att'y Gen. 101, 108 (1991)
The listed areas of risk assumption are subject not only to errors resulting from projection but also to mechanical errors in reporting and computation. The actuary indicates that actual risk experience "will not coincide exactly with assumed risk experience, regardless of the skill of the actuary, the completeness of the data and the precision of the calculations." This summary of risk analysis assumes the possibility of error both in projection and in generation of the data.

80 Op. Att'y Gen. 101, 108 (1991)
  Similarly, the Joint Survey Committee on Retirement Systems Report on Senate Bill 148, which created section 40.05(2n), states at 3:

80 Op. Att'y Gen. 101, 108 (1991)
This bill provides that any future changes in the contribution rates after 1990 shall be shared equally between employer and employe participants of the system.

80 Op. Att'y Gen. 101, 108-109 (1991)
The focus again is to the handling of changes required after 1990, not on the cause of the changes. This is in direct contrast to section 40.05(2n)(a)3. which requires that "[a]ny increase in contribution rates required after 1989 that results from benefit improvements under 1989 Wisconsin Act 13... shall be provided for by an increase in benefit adjustment contributions under sub. (2m)." Since the Legislature has in subsection (2n)(a)3. specifically related the increase to the cause but has not done so in subsection (2n)(a), it is not appropriate to expand the (2n)(a) language to treat a change resulting from a pre-1989 error differently than a change resulting from an erroneous assumption. It is therefore my opinion that section 40.05(2n) applies to future changes to the contribution rates regardless of the type of error that necessitated the changes.

80 Op. Att'y Gen. 101, 109 (1991)
  You also ask:

80 Op. Att'y Gen. 101, 109 (1991)
Does the Board action to increase contribution rates to employes for 1991 impair an existing contractual right of employes as suggested in the WEAC memo dated December 5, 1990?

80 Op. Att'y Gen. 101, 109 (1991)
  As discussed in my response to the previous question, section 40.05(2n) requires that one-half of the contribution rate increase be assigned to employe contribution rates. It is my opinion that neither section 40.05(2n) nor its implementation by the ETFB impairs an existing contractual right of employes affected.

80 Op. Att'y Gen. 101, 109 (1991)
  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, ex post facto law, nor any law impairing the obligation of contracts, shall ever be passed...."

80 Op. Att'y Gen. 101, 109-110 (1991)
  As the court stated in State ex rel. Cannon v. Moran, 111 Wis. 2d 544, 554, 331 N.W.2d 369 (1983), "[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 Ass'n. v. Blaisdell, 290 U.S. 398, 431 (1934). "The first step is to inquire whether the challenged statute has 'operated as a substantial impairment of a contractual relationship'" (case cites omitted). Chappy v. LIRC, 136 Wis. 2d 172, 187, 401 N.W.2d 568 (1987). "There is some indication that, where only a minimal alteration is present, 'the inquiry ends as no constitutional violation has occurred'" (case cites omitted). Chappy, 136 Wis. 2d at 188, n.9.