Jones v. Board of Trustees of Kentucky Retirement Systems
| Decision Date | 22 November 1995 |
| Docket Number | SC-840-TG,SC-493-TG,Nos. 94-SC-487-TG,s. 94-SC-487-TG |
| Citation | 910 S.W.2d 710 |
| Parties | 19 Employee Benefits Cas. 2196 Brereton C. JONES, Governor, et al., Appellants, v. BOARD OF TRUSTEES OF KENTUCKY RETIREMENT SYSTEMS, et al., Appellees. ; 94-; and 94- |
| Court | United States State Supreme Court — District of Kentucky |
Frank F. Chuppe, Virginia H. Snell, Beverly J. Glascock, Wyatt, Tarrant & Combs, Louisville, for Appellants, Brereton C. Jones, Governor, Kevin J. Hable, Secretary, Claude M. Vaughn, State Budget Director, Frances Jones Mills, Treasurer, and W. Patrick Mulloy, II, Secretary of Finance Administration Cabinet.
H. John Schaaf, Nancy R. Osborne, Legislative Research Commission, Frankfort, for Appellants, Jody Richards, John A. "Eck" Rose, and The Members of the Legislative Research Commission.
William E. Johnson, Squire N. Williams, Jr., Stephen R. Turnbull, Johnson, Judy, True & Guarnieri, L.L.P., Frankfort, William P. Hanes, David T. Miller, Frankfort, for Appellees, Kentucky Retirement Systems.
C. David Emerson, Emerson & Bayer, Lexington, for Amicus Curiae, Kentucky Association of State Employees.
Gary W. Napier, Reece & Lang, P.S.C., Lexington, Michael E. Gurley, Hamilton and Faatz, Denver, CO, for Amici Curiae, Public Employees' Retirement Association of Colorado and Utah State Retirement Office.
John D. Adkisson, Drew Liebert, Nossman, Guthner, Knox & Elliott, Sacramento, CA, Richard H. Koppes, General Counsel, Kayla J. Gillian, Asst. General Counsel, Board of Administration, California Public Employees' Retirement System, Sacramento, CA, Lawrence P. Boulger, Chief Counsel, State Teachers' Retirement System, Sacramento, CA, for Amici Curiae, California Public Employees' Retirement System and The California State Teachers' Retirement System.
The Kentucky Employees Retirement System (KERS) was created by statute in 1956 to provide a secure means of retirement savings for state government employees. KERS is one of several retirement systems, which include county employees, state employees, and state police, governed by the Board of Trustees (Board). Five trustees are elected by KERS members, three are appointed by the Governor, and the Commissioner of Personnel occupies the final position. KRS 61.645(1). The Board oversees the system in a fiduciary capacity, and administers the plan "solely in the interest of the members and beneficiaries...." KRS 61.650(1).
In 1972, the General Assembly enacted KRS 61.692 which provides:
It is hereby declared that in consideration of the contributions by the members and in further consideration of benefits received by the state from the member's employment, KRS 61.510 to 61.705 shall, except as provided in KRS 6.696, constitute an inviolable contract of the Commonwealth, and the benefits therein shall, except as provided in KRS 6.696, not be subject to reduction or impairment by alteration, amendment, or repeal.
KERS membership is mandatory for all full time public employees who are not members of another retirement system. Regular employee members are required to contribute 5% of their wages. Hazardous duty workers and state police officers must contribute 7% of their wages into the system. The state, pursuant to KRS 61.565, must contribute to the system. The amount of the state contribution and whether it may be mandated by the Board is at issue in this litigation.
In September 1991, the Board of Trustees' actuary determined that the state contribution to the system should be increased because of losses in investment return, salary increases, and expected increases in medical premium rates. The actuary recommended that the state rate of contribution to the plan, beginning July 1, 1992, be set as follows: for KERS nonhazardous, 8.66%, up from 7.65%; for KERS hazardous, 17.55%, up from 15.5%; and for SPRS, 21.84%, up from 19.57%. The Board adopted the proposed increases and included them in its budget request.
The Governor declined to follow the Board's recommendations. He submitted a state rate of contribution the same as that of the previous year. In the process of so doing, the Governor concluded that valuation of KERS assets should be modified to reflect market value, not book value as was being used by the Board. It was suggested that market value better reflected the financial condition of KERS. No actuarial assistance was used in reaching this conclusion. Utilization of the market value of assets is required in pension funding for Employee Retirement Income Security Act (ERISA) qualified plans, and it is typical of the valuation method used in most public plans.
After the General Assembly enacted the 1992 Budget Bill, the Board, on advice of its actuary, adopted the modified market system of asset valuation. The actuary noted, however, that state contribution rates should be re-examined due to uncertainty with regard to medical funding expense and health insurance benefits when viewed under the new valuation method. In passing, we observe that the legislative and judicial retirement plans of Kentucky use book valuation of assets.
The Board filed a Petition for Declaration of Rights, pursuant to KRS 418. It claimed that the 1992 Budget Bill usurped the authority of the Board to act independently to set actuarially sound employer contribution rates. The Board asserted that failure to meet its contribution requests impaired KERS member contract rights under KRS 61.692. It claimed the protection of Section 19 of the Kentucky Constitution, and of Article I, Section 10, and the Fifth and Fourteenth Amendments to the United States Constitution.
On April 22, 1992, the Franklin Circuit Court granted summary judgment in favor of the Board, holding Part III, Subsection 16 of the Budget Bill void as an unlawful impairment of KERS members' inviolable contract rights, including all statutory rights specifically referenced in KRS 61.692. The court ordered appellants to "take such steps as are necessary to cause employer agencies immediately to pay over to the Kentucky Retirement Systems all past due employer contributions plus interest ... based upon the rates established by the Board rather than the rate set out in the budget bill." Effectively, the judgment of the trial court granted unrestricted power to the Board to say what sum it should receive as payments from the Commonwealth. Of course, we assume the trial court included an implied condition that the Board not act arbitrarily.
While we recognize that the retirement savings system has created an inviolable contract between KERS members and the Commonwealth, and acknowledge that the General Assembly can take no action to reduce the benefits promised to participants, we must nevertheless reverse the trial court. Contrary to the approach it took, the focus of the litigation should be upon what, if any, substantive contractual infringement occurred by virtue of the actions of the Governor and General Assembly in rejecting the recommendations of the Board. We conclude that since there was no showing that any benefit commitment made to KERS members was infringed, or threatened, the Board had no power to mandate rates of contribution and require their adoption.
Prior to reaching the issues which are decisive, it is necessary to address appellants' procedural claims. As a first matter, we hold that the named appellants do not have immunity in this action. In Rose v. Council for Better Education, Inc., Ky., 790 S.W.2d 186 (1989), we held that the General Assembly was properly brought before the Court in a declaratory judgment action addressing the General Assembly's constitutional obligations regarding an efficient system of common schools. In Rose, the Speaker of the House and President of the Senate were named as defendants in the action and we held that although they could not by themselves enact legislation, they could "defend the constitutionality of an act or acts," and it was "only common sense and practical to hold that service [of process] on both President Pro Tempore of the Senate and the Speaker of the House of Representatives named in their respective capacities is sufficient to acquire jurisdiction over the General Assembly in this action." Id. at 204-05.
Similarly, in Philpot v. Patton, Ky., 837 S.W.2d 491 (1992), we rejected immunity in a declaratory judgment action "to decide whether the General Assembly has failed to carry out a constitutional mandate and that members of the General Assembly are not immune from declaratory relief of this nature simply because they are acting in their official capacity." Id. at 493-94 (citing Rose v. Council for Better Educ., Inc., Ky., 790 S.W.2d 186 (1989)); see also Kraus v. Kentucky State Senate, Ky., 872 S.W.2d 433, 439 (1994) (). It would undermine and destroy the principle of judicial review to hold that the General Assembly could act with immunity, contrary to the Kentucky Constitution. Any such holding would leave citizens of this Commonwealth with no redress for the unconstitutional exercise of legislative power. This we will not do. Fischer v. State Bd. of Elections, Ky., 879 S.W.2d 475 (1994). There is no immunity here.
The crucial issue before us is whether the General Assembly must blindly defer to the Board in matters of state retirement funding. We have acknowledged that KERS members have a contractual right to the benefits they were promised upon retirement. Any reduction or demonstrable threat to those promised benefits might well run afoul of Section 19 of the Kentucky Constitution, but we can leave that issue for another day. In the present case there has been only a refusal by the executive and legislative branches of government to adhere to the Board's...
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