Board of Trustees v. Attorney General of the Commonwealth of Kentucky, No. 2002-SC-0699-DG (Ky. 10/23/2003), 2002-SC-0699-DG.

Decision Date23 October 2003
Docket NumberNo. 2002-SC-0699-DG.,No. 2002-SC-0700-DG.,2002-SC-0699-DG.,2002-SC-0700-DG.
PartiesBOARD OF TRUSTEES of the Judicial Form Retirement System, Appellant v. ATTORNEY GENERAL of the Commonwealth of Kentucky, Appellee and Board of Trustees of the Kentucky Retirement System, Appellant v. Attorney General of the Commonwealth of Kentucky, Appellee.
CourtUnited States State Supreme Court — District of Kentucky

James T. Gilbert, Coy, Gilbert & Gilbert, Richmond, KY, Counsel for Appellant Board of Trustees of the Judicial Form Retirement System (2002-SC-0699-DG).

William P. Hanes, J. Eric Wampler, James Dodrill, Kentucky Retirement Systems, Frankfort, KY, Counsel for Appellant Board of Trustees of the Kentucky Retirement System (2002-SC-0700-DG).

A. B. Chandler, Ill, Attorney General, State Capitol, Frankfort, KY, D. Brent Irvin, Assistant Attorney General, Civil & Environmental Law Division, Office of the Attorney General, Frankfort, KY, Jennifer L. Carrico, Assistant Attorney General, Criminal Appellate Division, Office of the Attorney General, Frankfort, KY, Counsel for Appellee Attorney General of the Commonwealth of Kentucky (2002-SC-0699-DG AND 2002-SC-0700-DG).


COOPER, Justice


This appeal involves the validity of House Bill (HB) 389(4) which amended a provision of the Judicial Retirement Act, KRS 21.450(3). It presents three questions: (1) whether the amendment fails because of the legislature's failure to obtain an actuarial analysis to accompany the amendment in accordance with KRS 6.350; (2) whether the amendment is unintelligible and thus void for vagueness; and (3) whether by virtue of its vagueness, the amendment constitutes an unconstitutional delegation of legislative power to the executive branch. While not in violation of KRS 6.350, the amendment's vagueness is fatal under the latter two questions.

As amended, KRS 21.450 now reads (amendatory language emphasized):

The benefits provided by KRS 21.350 to 21.510 to be paid shall be funded through contract with a reputable life insurance company authorized to do business in this state, or through investment and reinvestment of funds in securities which, at the time of making the investment, are by law permitted for the investment of funds by fiduciaries in this state, or through a combination of such methods. To the extent that funding is provided through insurance contract, no contributions, payments or premiums shall be subject to any tax on insurance premiums or annuity considerations. The investment committee for the judicial retirement fund shall be trustee of any and all funds contributed or appropriated to the retirement system, and shall have sole authority to make insurance contracts or investments.

(2) The board members or any investment adviser shall discharge their duties with respect to the funds of the retirement system solely in the interest of the members and beneficiaries and:

(a) For the exclusive purposes of providing benefits to members and their beneficiaries and defraying reasonable expenses of administering the plan;

(b) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and

(c) In accordance with the laws, regulations and other instruments governing funds.

(3) Any accrual of benefits provided under this or any other applicable statute shall be no less than the benefit adjustment provided for in KRS 21.405(4) from the date of the last establishment of that benefit.

The "benefit adjustment provided for in KRS 21.405(4)" is an annual cost-of-living increase of judicial retirement benefits based on the Consumer Price Index (CPI), not to exceed five percent. Since KRS 21.450 does not contain an "accrual of benefits" provision, the "benefit adjustment" must refer to benefits awarded under "any other applicable statute." That "applicable statute" could not be a statute similar to KRS 21.450 because there is no statute pertaining to the funding of retirement benefits or the duties of a retirement board of trustees or investment adviser that contains an "accrual of benefits" provision. See KRS 21.440; KRS 21.530; KRS 21.540; KRS 21.550; KRS 21.560; KRS 61.570; KRS 61.645; KRS 61.650; KRS 61.660.

The Board of Trustees of the Judicial Form Retirement System (JFRS) administers both the Judicial Retirement Plan described in KRS 21.345, et. seg., and the Legislators' Retirement Plan, KRS 6.500, et seg. KRS 21.530 provides:

For administrative purposes only, as hereinafter provided, the Legislators' Retirement Plan and the Judicial Retirement Plan shall be coordinated under the name, Judicial Form Retirement System, but each of the plans shall maintain its separate identity.

(Emphasis added.)

However, "any other applicable statute" providing an "accrual of benefits" could not refer to a statute pertaining to actual judicial or legislative retirement benefits because KRS 21.405(4) and KRS 6.521(2) already apply annual CPI increases to those benefits. Instead, Appellant asserts that the "other applicable statute" is KRS 61.510(13), a section of the Kentucky Employees Retirement System (KERS) which does not purport to provide for an "accrual of benefits" but only defines "creditable compensation" of KERS members as "salary, tips . . . and fees" for purposes of calculating their retirement benefits under KRS 61.595, et seg., and "for members of the General Assembly, it [creditable compensation] shall mean an assumed salary of twenty-seven thousand-five hundred dollars ($27,500) per annum. . . ." Appellant claims this "assumed salary" is the "accrual of benefits" to which the CPI increases in HB 389(4) apply — retroactively to 1982, "the date of the last establishment of the assumed salary and prospectively after July 14, 2000, the effective date of HB 389(4). Retroactive application of CPI increases from 1982 through 1999 would increase the "assumed salary" by 72% from $27,500.00 to $47,308.00.

The significance of KRS 61.510(13) is that KRS 6.520(1) calculates a legislator's initial retirement benefit by multiplying 3.5% of the legislator's "final compensation" times the legislator's years of service and defines "final compensation" as the "creditable compensation" defined in KRS 61.510(13). A 72% increase in the "assumed salary" would, therefore, translate into a concomitant 72% increase in a legislator's retirement benefits. For example, a legislator earning $27,500.00 and retiring after twenty years of service would be entitled to an annual retirement benefit of $19,250.00 before HB 389(4) (3.5% X $27,500.00 X 20 years) but an annual retirement benefit of $33,115.60 after HB 389(4) (3.5% X $47,308.00 X 20 years) even though the legislator never earned a salary in excess of $27,500.00.

This theory that the amendment of KRS 21.450 actually amended KRS 61.510(13) has three immediately apparent flaws. First, HB 389(4) refers to an "accrual of benefits provided under . . . any . . . applicable statute." (Emphasis added.) However, no "accrual of benefits" is "provided under" KRS 61.510(13); it merely identifies a legislator's "creditable compensation," which is but one factor used in calculating that legislator's initial retirement benefit. Second, the theory misapplies accrual of benefits to creditable compensation. "Accrual of benefits" means, in a defined benefit plan,1 "the process of accumulating pension credits for years of credited service, expressed in the form of an annual benefit to begin payment at normal retirement age." Employment Benefit Plans: A Glossary of Terms, supra note 1, at 1. Applying that definition, "accrual of benefits" pertains not to the retiree's "creditable compensation" but to the retiree's "service credits," i.e., the retiree's years of creditable service, KRS 6.515, yet another factor used in calculating the initial retirement benefit. Clearly, annual CPI increases do not apply to allow the accumulation of additional "service credits." A third flaw in the theory is that HB 389(4) refers to the "last establishment of that benefit," and "creditable compensation," in the case of a legislator, is an assumed "salary," not a benefit.


Senate Bill 349.

On March 13, 2000, Senate Bill (SB) 349 was introduced and read on the Senate floor. 2000 Sen. J. 1544. As written, Section 1(13) of SB 349 would have read as follows:

[F]or members of the General Assembly who retire under Section 12 of this Act, or who die in office, "final compensation" shall be forty-five thousand dollars ($45,000). The assumed salary for legislators in this subsection shall be adjusted annually . . . to reflect changes in the current purchasing power of the dollar. The maximum possible compensation for legislators under this subsection shall be based precisely upon the consumer price index formula approved in Matthews v. Allen, Ky., 360 S.W.2d 139 (1962).

Thus, its sponsor clearly intended for SB 349 to increase the "assumed salary" of legislators from $27,500.00 to $45,000.00 and to provide for CPI increases of the assumed salary on an annual basis thereafter. An actuarial analysis dated March 10, 2000, presumably obtained in compliance with KRS 6.350, indicates that the increase of the "assumed salary" to $45,000.00 would have required $725,000.00 per year of additional funding for the JFRS. Letter from Gagel to Early of 3/10/00, at 3. When the tenor of the floor debate indicated that the proposed increases would fail, SB 349 was withdrawn and replaced by a committee substitute that retained the $27,500.00 "assumed salary" and did not provide for future annual CPI increases. 2000 Sen. J. 1590. The committee substitute then passed the Senate and was sent to the House where it was reported and received its first reading on March 24, 2000. 2000 House J. 4622. On March 27, 2000, a House floor amendment to SB 349 (committee substitute) was...

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