Opinion ID: 1203735
Heading Depth: 2
Heading Rank: 3

Heading: Illegality of Failure to Appropriate Adequate Funds

Text: In fiscal years 1986-87 and 1988-89, the Legislature failed to appropriate any general funds to meet the contributions required of the State, as earned for the trust by the work of State employees. In fiscal years 1985-86 and 1987-88, the Legislature transferred and expired the already insufficient appropriations into the general fund, again failing to meet the State's required contributions. These actions by the Legislature were improper and illegal. Further, the failure of the Respondent Trustees to act in the face of these illegal legislative maneuvers and their compliance in channeling pension trust dollars improperly into the general fund are breaches of their fiduciary duties as Trustees. [12] Because we find that the failure to properly fund PERS is improper as violative of statute, trust, and constitution, we discuss each of these theories in turn.
Section 32(a) provides that the contributions to be made by the State as an employer to PERS shall be paid to the retirement system quarterly and when paid shall be credited to the employers accumulation fund. In none of the four years in question were the required quarterly payments made, thus violating Code § 5-10-32(a). In 1985-86 and 1987-88, the expiration legislation was passed and effective in February of the same fiscal year as the appropriation. The transfer and expiration of funds undertaken by the Legislature was in violation of statute. West Virginia Code § 12-3-12 (Supp.1988) provides that appropriations remaining undrawn at the end of the fiscal year shall be deemed to have expired at the end of the year for which it is made. The Respondents have cited no other constitutional or statutory provision authorizing the Legislature to expire funds. By the terms of Code § 12-3-12, appropriations may not be expired until the end of the fiscal year for which the appropriations are made; the actions of the Legislature to transfer and expire the pension trust fund appropriations, which represent moneys earned for the trust by State employees, prior to the end of the relevant fiscal years are invalid, unlawful, and void. It is fundamental to our constitutional law and we affirm that the Legislature cannot amend general substantive statutes with budgetary language. Compare and contrast W.Va. Const. art. VI, §§ 28-31 the procedure for enacting general law with W.Va. Const. art. VI, § 51 the procedure for enacting budget and supplementary appropriation bills. Hechler v. McCuskey, ___ W.Va.___, 365 S.E.2d 793 (1987); see O'Connor v. Margolin, ___ W.Va. ___, 296 S.E.2d 892 (1982). The Legislature's improper expiration of the appropriations worked an expropriation from the PERS trust funds. By February of each of those years, two quarters of the fiscal year had passed, and according to Code § 32(a), half of the funds appropriated as earned for the trust by State employees should have been paid to PERS and credited to the EAF. [13] The Respondent Trustees are charged with the management of PERS and the effectuation of the pension trust statute. W.Va.Code § 5-10-5. It is their statutory and fiduciary duty to have earned and appropriated funds drawn down in a timely fashion and to see that they are credited to the proper accounts. [14] The Respondents' failure to request payment of most of the funds appropriated for the first parts of the fiscal years 1985-86 and 1987-88 would have led to the loss to PERS of interest. In the face of the expiration legerdemaine, the result was the loss of the earned appropriations, as well the interest thereon.
The Respondent Trustees did not draw down the appropriated funds, that is, the money earned for the trust by State employees, according to the statute. They did not question the Legislature's action when the pension trust fund's appropriation was expired contrary to statute even though they had been earned for the trust through services rendered. Cf. In re State Employees' Pension Plan, 364 A.2d 1228 (Del.Sup.1976). Finally, they actually cooperated with the Legislature's invasion of the EAF by receiving and then transferring to the general fund the employers' contributions earned by employees paid from special revenue funds, apparently including federal grant moneys specifically allocated for pension matching. All of these acts are violations of the Respondent Trustees fiduciary duties to the PERS and its participants. It is clear from reading the PERS statute that the Board of Trustees have broad powers in administering and managing the various pension trust funds. W.Va.Code §§ 5-10-5 to -13. The PERS Board, as trustee of retirement funds ... must dispose of them according to the law. The board has a fiduciary duty to protect the fund and the interests of all beneficiaries thereof, and it must exercise due care, diligence, and skill in administering the trust. 67 C.J.S. Offiicers and Public Employees § 244 (1978); see Mount v. Trustees of the Public Employees' Retirement System of New Jersey, 133 N.J.Super. 72, 335 A.2d 559 (1975). In the instant matters regarding funding of PERS, the Respondent Trustees, at best, have acted with gross negligence in failing to draw down earned and appropriated funds or protest lack of adequate appropriations as earned. At worst, the Respondent Trustees have acted in complicity to divert the employers' contributions earned by employees from special revenue funds into the general fund. Given these multiple breaches of fiduciary duties by the Respondent Trustees, they must take calculated steps necessary to recover these funds for the PERS.
The acts of the various Respondents resulting in the inadequate funding of the PERS are also invalid because they violate the prohibitions against impairment of contract contained in the federal constitution, U.S. Const., art. I, § 10, cl. 1, and in our State's constitution, W.Va. Const. art. III, § 4. A statute is treated as a contract when the language and circumstances evince a legislative intent to create private rights of a contractual nature. United States Trust Co. v. New Jersey, 431 U.S. 1, 17 n. 24, 97 S.Ct. 1505, 1519 n. 24, 52 L.Ed.2d 92 (1977); see Barron v. Board of Trustees of Policeman's Pension & Relief Fund, ___ W.Va. ___, 345 S.E.2d 779 (1985); see also Waite v. Civil Service Commission, 161 W.Va. 154, 241 S.E.2d 164 (1977). The state and federal contracts clauses limit the power of a state to modify its contracts with other parties. U.S. Trust, 431 U.S. at 17, 97 S.Ct. at 1515. We have held that [a] `property interest' includes not only the traditional notions of real and personal property, but also extends to those benefits to which an individual may be deemed to have a legitimate claim of entitlement under existing rules or understandings. Syl.Pt. 3, Waite, 161 W.Va. 154, 241 S.E.2d 164. We have applied this concept of a property interest in pension cases. Barron, ___ W.Va.___, 345 S.E.2d 779. In other jurisdictions, the modern trend and majority view is that a public employee's rights under a public pension statute are contract rights. 60A Am.Jur.2d Pensions and Retirement Funds § 1620 (1988); see, e.g., Hanson v. City of Idaho Falls, 92 Idaho 512, 446 P.2d 634 (1968); Halpin v. Nebraska State Patrolmen's Retirement System, 211 Neb. 892, 320 N.W.2d 910 (1982); Singer v. City of Topeka, 227 Kan. 356, 607 P.2d 467 (1980) (and cases cited therein); State Teachers' Retirement Board v. Giessel, 12 Wis.2d 5, 106 N.W.2d 301 (1960). A contrary ruling would contradict analogous rulings we have made in other pension cases. DePond v. Gainer, ___ W.Va.___, 351 S.E.2d 358 (1986); In re Dostert, ___ W.Va.___, 324 S.E.2d 402 (1984); Wagoner v. Gainer, 167 W.Va. 139, 279 S.E.2d 636; see Campbell v. Kelly, 157 W.Va. 453, 202 S.E.2d 369 (1974). Indeed, the respondent Governor and Commissioner conceed that the PERS statute creates such rights. We, therefore, now hold that retired and active PERS plan participants have contractually vested property rights created by the pension statute, and such property rights are enforceable and cannot be impaired or diminished by the State. This Court has already considered the limitations on legislative action imposed by constitutional restrictions on the impairment of contracts, and has held as follows: Legislative modifications to a pension plan must be reasonable, and the test for reasonableness is whether the alteration to the pension scheme serves to keep the system sound and flexible.... While the law recognizes that states retain some reserve power to modify by statute existing contractual [pension] relationships when the public interest so requires, such modifications must be reasonable and necessary to serve important public purposes. Allied Structual Steel Co. v. Spannaus, 438 U.S. 234, 242, 98 S.Ct. 2716, at 2721, 57 L.Ed.2d 727 (1978); Marvel v. Danneman, 490 F.Supp. 170, at 175 (D.C.Del.1980). It follows that when a statutory modification attempts to change important provisions of an existing contract outside the limits of the reserved state powers, the legislation will impair obligations of the contract and will be declared unconstitutional. Wagoner v. Gainer, 167 W.Va. at 154-55, 279 S.E.2d at 645-46; see 6A Am.Jur.2d Pensions § 1625. Even the respondent Governor and Commissioner acknowledge that Wagoner v. Gainer addressed contract impairment involving public pension programs. For some time other courts have recognized these principles. See, e.g., Allen v. City of Long Beach, 45 Cal.2d 128, 131, 287 P.2d 765, 767 (1955); Singer v. City of Topeka, 227 Kan. 356, 607 P.2d 467. We find little merit in the Respondent's argument that this underfunding constitutes merely a technical, rather than a substantial, impairment of the State's contract with public employees and retirants. See U.S. Trust Co., 431 U.S. at 21, 97 S.Ct. at 1517. The respondent Governor and Commissioner argue that, since pension benefits are currently being paid, any impairment of contract is minimal. They cite a Michigan Supreme Court case, Kosa v. Treasurer of the State of Michigan, 408 Mich. 356, 292 N.W.2d 452 (1980), as support for their argument that [a] clear distinction must be drawn between the right to receive pension benefits and the funding method adopted by the Legislature to assure that monies are available for the payment of such benefits. Id. at 371, 292 N.W.2d at 460. This same argument was made to and rejected by the California Court in Valdes v. Cory, 139 Cal.App.3d 773, 189 Cal.Rptr. 212 (1983), the Washington Court in Weaver v. Evans, 81 Wash.2d 461, 495 P.2d 639, and the Pennsylvania Court in Dombrowski v. City of Philadelphia, 431 Pa. 199, 245 A.2d 238 (1968). Those cases found that even where a unilateral reduction in the state's share of pension contributions, as earned by State employees, does not result in out-of-pocket losses for plan participants, they still have a vested interest in the integrity and security of the funds available to pay future benefits. See, e.g., Valdes, 139 Cal.App.3d at 785, 189 Cal.Rptr. 222. We agree with this reasoning. The Legislature has not articulated any public purpose for the underfunding of employer contributions earned by State employees for the PERS trust, and none of the Respondents argue that said underfunding serves to keep the pension system sound and flexible or is offset by comparable new advantages to the participants. Our State's Legislature is not the first to yield to the temptation of diverting pension funds in hard economic times. As was observed over a decade ago, [o]n several occasions, governments have failed to continue the actuarial appropriations they had promised to make to the pension system, and courts have uniformly held these missed appropriations to be contract violations. Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv.L. Rev. 992, 1006 (1977); see, e.g., Valdes v. Cory, 139 Cal.App.3d 773, 189 Cal.Rptr. 212; Dombrowski, 431 Pa. 199, 245 A.2d 238; see also Weaver v. Evans, 80 Wash.2d 461, 495 P.2d 639.
We find in our State Constitution protection for the public pension participants independent from the federal constitution's contract clause. We have already noted our State's Constitution contains its own impairment of contracts clause. W.Va. Const. art. III, § 4. West Virginia's organic law also provides for compensation when private property is taken for public use, W.Va. Const. art. III, § 9, and due process of law when a person is deprived of property rights, W.Va. Const. art. III, § 10. Our analysis of the rights affirmed by each of these state constitutional sections includes consideration of applicable federal constitutional standards, [u]ltimately, however, we must be guided by our own principles in establishing our State standards, recognizing that so long as we do not fall short of the federal standard our determination is final. Waite, 161 W.Va. at 158-59, 241 S.E.2d at 167. We have firmly established that our State's due process clause, W.Va. Const. art. III, § 10, may, in certain instances, require higher standards of protection than afforded by the federal constitution. Syl.Pt. 1, State v. Bonham, ___ W.Va. ___, 317 S.E.2d 501 (1984) ( quoting Syl.Pt. 2, Pauley v. Kelly, 162 W.Va. 672, 255 S.E.2d 859 (1979). We have also held that inherent in article three, section ten of our Constitution is the concept of substantive due process and that due process protections extend to any significant property interest. Don S. Co. v. Roach, 168 W.Va. 605, 285 S.E.2d 491 (1981). We have already reconfirmed today that our Constitution insures that the people will receive the benefit of legislative enactments. Syl.Pt. 1, Cooper v. Gwinn, ___ W.Va. ___, 298 S.E.2d 781. State law, through the pension statute, establishes contractually based property rights in pension plan participants who have contributed from their wages and have earned the contributions of their employers. Wagoner v. Gainer, 167 W.Va. 139, 279 S.E.2d 636; see Campbell v. Kelly, 157 W.Va. 453, 202 S.E.2d 369. These rights are recognized and protected under our State's Constitution. W.Va. Const. art. III, §§ 4, 9, 10. Thus, the realization and protection of public employees' pension property rights is a constitutional obligation of the State. The State cannot divest the plan participants of their rights except by due process, although prospective modifications which do not run afoul of the federal or State impairment clauses are possible. We understand that the Governor and the Legislature are anxious to avoid difficult choices in raising revenues or cutting expenditures. Nevertheless, the diversion of earned pension trust fund contributions to the State's general revenue fund amounts to little more than an end-run around the constitutional requirement for a balanced budget, W.Va. Const. art. VI, § 51, and deficit financing of state government from earned savings of public employees. The State has a contract with PERS members and retirants, who have earned the employers' contribution due the PERS trust, and it is not proper for the State to unilaterally modify that contract to the detriment of the participants, see Wagoner v. Gainer, 167 W.Va. 139, 279 S.E.2d 636, and it is fundamental that any modifications must comport with our State's stringent due process requirements, W.Va. Const. art. III, § 10. The State has promised certain pension rights to public employees as a part of their compensation for services rendered. The PERS has grown with earned contributions of employee and employer alike, held in trust. The amount of employer contributions earned by State employees which have been wrongfully withheld or diverted over the past four years is a public debt, which must be repaid. The payment of statutorily promised pension benefits, on maturity, is a general and moral obligation of the State. We would be faithless to our constitutional duties to allow a raid on the PERS trust for purposes of political expediency, forcing future officials to place a heavy tax burden on posterity to pay for today's profligacy. As an initial measure, the diversion of retirement funds from special revenue accounts must cease immediately. The Respondent Trustees are hereby mandated to engage an independent actuary to conduct an audit and study to determine pursuant to W.Va.Code, 5-10-31, whether the System has been rendered actuarially unsound through the underfunding of the past four years. If it is determined that the System is actuarially unsound, then the Respondent Trustees must develop an appropriation plan which will return the System to actuarial soundness. The audit, study, and appropriation plan are to be completed within one hundred eighty (180) days of the issuance of this opinion on rehearing. The amount specified in the appropriation plan to bring the System to actuarial soundness is to be included each year in the Respondent Trustees' certificate to the Governor along with the annual amount required pursuant to W.Va.Code § 5-10-32(a). The extra payment required by the appropriation plan shall not be prorated over more than six budget years beginning with fiscal year 1990-91. The Respondent Governor and Commissioner and their successors are hereby mandated to include the extra appropriation as well as the regular appropriation under W.Va.Code § 5-10-32, in their proposed budget beginning with fiscal year 1990-91.