Shelby Tp. Police and Fire Retirement Bd. v. Charter Tp. of Shelby

• Decision Date: 27 August 1991
• Docket Number: No. 86109,86109
• Citation: 438 Mich. 247,475 N.W.2d 249
• Court: Michigan Supreme Court
• Parties: SHELBY TOWNSHIP POLICE AND FIRE RETIREMENT BOARD, a municipal corporate entity, Plaintiff-Appellant, v. CHARTER TOWNSHIP OF SHELBY, Shelby Township Supervisor, Shelby Township Clerk, Shelby Township Treasurer and Shelby Township Trustee, Defendants-Appellees. 438 Mich. 247, 475 N.W.2d 249

Page 249

475 N.W.2d 249

SHELBY TOWNSHIP POLICE AND FIRE RETIREMENT BOARD, a municipal corporate entity, Plaintiff-Appellant, v. CHARTER TOWNSHIP OF SHELBY, Shelby Township Supervisor Shelby Township Clerk, Shelby Township Treasurer and Shelby Township Trustee Defendants-Appellees.

No. 86109.

438 Mich. 247, 475 N.W.2d 249

Supreme Court of Michigan.

Argued March 6, 1991.

Decided Aug. 27, 1991.

[438 MICH 249] Lewis R. Thumm, Mount Clemens, for plaintiff-appellant.

John A. Dolan, Jerald R. Lovell, Mount Clemens, for defendants-appellees.

John H. Bauckham, Thomas M. Canny, Kalamazoo, for amicus curiae Michigan Townships Ass'n.

[438 MICH 250] Ronald Zajac, Ronald Zajac, P.C., Detroit, for amicus curiae Mich. Ass'n of Public Employee Retirement Systems.

Sachs, Nunn, Kates, Kadushin, O'Hare, Helveston & Waldman, P.C. by Theodore Sachs, Ronald R. Helveston, Eileen Nowikowski, Detroit, for amicus Mich. State Fire Fighters Union.

OPINION

MALLETT, Justice.

We granted leave to determine (1) whether the township's annual pension fund contribution mandated by Const.1963, art. 9, Sec. 24 must include current service costs and unfunded accrued liabilities, (2) whether the township's annual contribution to the retirement system may be determined by the retirement board's hired actuary in accordance with 1937 P.A. 345, and (3) whether the trial court erred in not issuing a writ of mandamus requiring the township to comply with the retirement board's certified recommendation.

We find that Const.1963, art. 9, Sec. 24 expressly requires the township to maintain the "actuarial integrity" of the pension system to include unfunded accrued liabilities. We further find that the authority delegated by M.C.L. Sec. 38.552; M.S.A. Sec. 5.3375(2) to the retirement board does not unconstitutionally abrogate the taxation, budgetary, and legislative responsibilities of the township. In finding the township's appropriation to be inadequate, we remand this case to the trial court for a determination consistent with this Court's holding that the township maintain the actuarial integrity of the pension retirement system.

Facts

On August 7, 1967, the residents of Shelby Township voted by referendum to adopt the terms of 1937 P.A. 345 and authorize allotment of a tax of one-half mill to provide for the township's contribution to the Fire and Police Pension Fund. The Shelby Township Retirement Board, created under 1937 P.A. 345, administered the police and fire pension system as adopted by Shelby Township. Following the establishment of the pension system, the township collected and deposited into the pension fund the full proceeds from the one-half mill tax per year collected pursuant to the voter's authorization. The pension fund has accrued asset reserves totaling $5 million, and at no time has the pension fund ever defaulted on payment of any pension when it was due and payable.

Each year, the retirement board "certifies" the amount the township should contribute to the pension fund. The "certified" amount from 1979 through 1983 has been higher than the actual contributions made by the township. The sum contributed by the township nearly equaled the sum collected pursuant to the voter approved tax of one-half mill.

In 1983, the board commenced an action asking the trial court to issue a writ of mandamus directing the township board to appropriate and pay the difference between the board-certified amount, determined actuarially by Mrs. Sonnanstine of Gabriel, Roeder, Smith, and what the township actually paid. The board's actuaries determined the pension fund to be underfunded through December 31, 1983, in the amount of $619,557, which is now $2,537,255.

The township, relying on the actuarial services of Mr. David Kays, stated that the board's actuarial determination was incorrect, and argued under applicable statutes and constitutional mandates that the township need only contribute annually the greater of ten percent of aggregate payroll, current service costs, or enough to pay pensions in a given year.

The township filed a motion for summary disposition in Macomb Circuit Court. Judge Cashen declared that the township was not automatically obligated to contribute to the pension fund those amounts "certified" by the board. The court further ruled that the township had more than satisfied its minimum funding obligation. The court, however, noted that "[i]n the event additional resources are required to maintain an adequate liquidity, the Township would have the duty of providing said resources."

The board appealed by right to the Michigan Court of Appeals, which affirmed the decision of the trial court. 175 Mich.App. 163, 437 N.W.2d 352 (1989).

The board sought leave to appeal to this Court, which denied leave on April 4, 1990. 434 Mich. 895. Upon a motion for reconsideration, this Court granted leave on October 25, 1990. 436 Mich. 881, 463 N.W.2d 710.

I

To determine the annual contribution necessary to maintain the integrity of the township's pension system, we begin with an overview of Const.1963, art. 9, Sec. 24, which provides:

"The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

"Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities."

The paramount concern of the 1961 Constitutional Convention, as it debated the precise language of this section, was to ensure the proper maintenance and the actuarial integrity of the state pension system. ¹ The committee rejected pension funding methods which did not account for unfunded accrued liabilities, and which would result in the taxpayers' children bearing the financial burden of a failed pension system.

"But year after year, for more than a quarter of a century, the policy that has been followed nearly all the time has been to put into those funds just about enough to pay what you have to take out that same year.... We are simply accumulating debts that our children are going to have to pay. All we ask is that you don't get any farther behind than you are now." 2 Official Record, Constitutional Convention 1961, p. 3184.

The chairman of the Committee on Finance and Taxation, who endorsed proposed Sec. 24, explained the problem:

"The problem here is extremely difficult. Any public system that is set up should have put into it each year sufficient money to meet all of the liability accrued during that year. If that is done from the very beginning, the system is not an excessive burden; but when you go for years without putting in enough money to cover the liability accruing each year, then to try to catch up for the past deficiency becomes a problem of magnitude." 1 Official Record, Constitutional Convention 1961, p. 770.

Michigan law, at the inception of art. 9, Sec. 24, viewed pensions as gratuitous allowances which could be revoked at will because of a lack of vested right in their continuation. See 54 ALR 940, Sec. 155, p. 943. This Court thoroughly examined the history and purpose of Const.1963, art. 9, Sec. 24 in determining the constitutionality of a proposed act which called for increases in a future pension plan. Advisory Opinion re Constitutionality of 1972 PA 258, 389 Mich. 659, 209 N.W.2d 200 (1973). ² Our interpretation of the constitutional framers' intent compelled us to conclude that the Legislature could not diminish or impair accrued financial benefits. ³ Id., p. 663, 209 N.W.2d 200.

In Kosa v. State Treasurer, 408 Mich. 356, 292 N.W.2d 452 (1980), this Court addressed challenges to the funding methods used in the Public School Employee's Retirement System. The limited holding in Kosa articulated that participants have no contractual right to enforce a particular funding system. Id., pp. 368-369, 292 N.W.2d 452. We rejected the suggestion that a "borrowing" scheme is constitutional.

"While the MPSERS Board acted altruistically in meeting the urgent needs of the 'pre-con' retirees through its 'borrowing' scheme, the board directly violated the specific language of Const 1963, art 9, Sec. 24...." Id., pp. 367-368, 292 N.W.2d 452.

The township practice of underfunding the pension system has resulted in the use of a "borrowing" scheme. We find the township board to be in a predicament similar to the MPSERS in Kosa. The township has placed the board in a position of paying off unfunded accrued liabilities with appropriations from current service cost contributions. This "borrowing" scheme leaves the board in a position where money, which should be used to fund both service costs and unfunded accrued liabilities, is sufficient only to meet the current service cost needs of the system.

In Jurva v. Attorney General, 419 Mich. 209, 224-225, 351 N.W.2d 813 (1984), we decided the capability of a school district to provide early retirement incentive payments in its collective bargaining agreement. To determine the central issue, we found it imperative to address the constitutionality of the "pay as you go" method of financing pension and retirement systems. There we defined "back door spending" as the practice of using current pension funds to finance pension liabilities accrued on account of past services rendered by employees. Id., pp. 224-225, 351 N.W.2d 813. See also Kosa, supra, pp. 367-368, 292 N.W.2d 452. We concluded:

"If the school district were to fail to adequately fund the present accrued liability for pension benefits, the soundness of the pension system would be in jeopardy,...." Jurva, supra, p. 225, 351 N.W.2d 813.

Our assessment of art. 9, Sec. 24 and our examination of the constitutional debates, reveals the framers' clear intent to create a contractual obligation to ensure the full payment of financial benefits in the pension and retirement...