Opinion ID: 1824125
Heading Depth: 1
Heading Rank: 2

Heading: the constitutionality of funding pension health care benefits on a cash disbursement basis

Text: There is no dispute that, since the 1990-91 fiscal year, the state has failed to fund retirement health care benefits being earned [6] by current employees (as opposed to benefits owed to retired members, which have continually been satisfied in full). The plaintiffs allege that this failure violates the second sentence of Const 1963, art 9, § 24, [7] which requires that [f]inancial 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. We agree. A. RETIREMENT HEALTH CARE BENEFITS FALL WITHIN CONST 1963, ART 9, § 24 At the outset we emphasize that the defendants do not argue that health care benefits are not [f]inancial benefits arising on account of service rendered in each fiscal year.... We have neither a factual record nor legal arguments on the subsidiary question when health care benefits arise, and we intimate no opinion regarding that question. Instead, the threshold issue before us is defendants' contention that health benefits are not `accrued financial benefits' within the first paragraph of art 9, § 24  and are not therefore subject to the prefunding requirements of the second paragraph thereof. Defendants trace the drafting history of art 9, § 24, [8] noting that delegate proposals and proceedings before the Committee on Finance and Taxation applied to benefits or accrued benefits. They argue that the subsequent addition of the word financial suggests that the provision governs only direct payments to the retirant, and that therefore, although health care may be a benefit, it is not a financial benefit. Whether the restriction to financial benefits excludes health care benefits from the scope of the provision depends to some extent on one's point of view. From the perspective of the employee, it is not completely clear that health insurance is a financial benefit. Although health insurance is not cash that retirants may spend as they wish, employees receive health insurance in lieu of additional compensation, and they would have to purchase insurance if it were not provided to them. This analysis tends to show that retirement health care benefits are financial benefits, but the fact that it does not yield a conclusive answer indicates that this point of view is likely the wrong one. Instead, the proper perspective from which to interpret the term financial benefits seems to be that of the government. The purpose of the provision is, after all, to check legislative bodies, requiring them to fund pension obligations annually, and thereby preventing back door spending. Article 9, § 24 arose out of concern about legislative bodies failing to fund pension obligations at the time they were earned, so that the liabilities of several public pension funds greatly exceeded their assets. At the time of the Constitutional Convention, the Committee on Finance and Taxation estimated that it would require nearly $600 million to make the two public school employees retirement systems actuarially sound. See 1 Official Record, Constitutional Convention 1961, p 771. Thus, many pensioners had accumulated years of service for which insufficient money had been set aside in the pension reserve funds to pay the benefits to which their years of service entitled them. Kosa v State Treasurer, 408 Mich 356, 365; 292 NW2d 452 (1980). Failing to fund pension benefits at the time they are earned amounts to borrowing against future budgets, or back door spending. Cf. 1 Official Record, Constitutional Convention 1961, pp 772-773. Back door spending was the term used by the delegates to refer to the process of establishing pensions without paying the costs at the same time. The delegates intended to prevent this: [9] In other words, they should put enough money in there so when they retire the money is there. And there was a very specific purpose for this. I was one of the ones that pushed it. I wanted employers, legislative bodies and city councils to be very aware of what they were spending when they gave a person, a public employee, a retirement program. In other words, how much did it cost per year? ... [F]rom now on any governmental body cannot avoid paying for a retirement fund that they promise an employee. They've got to make those payments annually, on time. [1 Official Record, Constitutional Convention 1961, p 772 (delegate Stafseth).] See also Jurva v Attorney General, 419 Mich 209, 224-225; 351 NW2d 813 (1984) (the purpose of the provision was to prevent the shifting of the burden for pensions from the taxpayers who derived benefit from the services rendered to future taxpayers by `back door' spending). For the purpose of securing pension benefits and preventing back door spending, failing to prefund retirement health care benefits is no different from failing to prefund monthly retirement allowances  a practice that defendants concede is prohibited. [10] In both cases, the cost of the benefit either must be paid as the benefits are earned by the taxpayers who are receiving the direct benefits from the services, or it must be paid as the benefits come due by taxpayers who have received no direct benefit from the services. The constitution requires that benefits be funded as they are earned. Therefore, because the purpose of the provision is to prevent governmental units from amassing bills for pension payments that they do not have money to pay, we hold that the term financial benefits must include retirement health care benefits. Defendants argue that the framers and ratifiers of Const 1963, art 9, § 24 could not have had health benefits in mind when they adopted the provision, because state retirement systems did not pay for employee health care benefits until roughly a decade after adoption of the Constitution of 1963. The defendants' only evidence for this proposition, however, is that [h]ealth benefits were not provided at all under the teacher's retirement act until 1974. This fact does not show either that health care benefits were not part of retirement plans during the early 1960's or that the drafters of the provision did not contemplate that health care benefits might fall within the provision some day. Whether or not they were funded by the state, health care benefits appear to have increasingly been a part of retirement plans across the nation at the time this provision was drafted and adopted. See Kleinmann, Fringe benefits for public school personnel (Bureau of Publications, Teacher's College, Columbia University: New York, 1962), p 20. Michigan residents in particular would have been aware of the possibility that retirees might receive health care benefits. On January 1, 1962, approximately one month before the delegates discussed the proposal that was to become Const 1963, art 9, § 24, Chrysler Corporation began providing health insurance for its retirees and their eligible dependents on a split pay basis. [11] Moreover, even assuming that the possibility that retirement health care benefits would become part of pension plans did not occur to all or some of the framers of Const 1963, art 9, § 24, the scope of the provision is not necessarily limited by the specific benefits they actually thought of. The very idea behind formulating a general rule, as opposed to a set of specific commands, is that a rule governs possibilities that could not have been anticipated at the time. Given that the justification for applying this rule to monthly retirement allowances is equally applicable to health care benefits, it seems fair to say that prefunding of health care benefits is what the framers intended. Defendants also point to definitions in other legal sources that distinguish health care benefits from monthly living allowances in the form of cash payments. Under ERISA, for example, the term accrued benefit does not include ancillary benefits such as payment of medical expenses or insurance. See 26 CFR, part 1, 1.411(a)-7(a)(1), (c)(3). There is simply no reason to assume that a word or phrase carries the same meaning whenever it appears regardless of the context. Health care benefits are not accrued benefits under ERISA because ERISA is intended to insure prefunding only of retirement allowances. The distinction between health care benefits and monthly retirement allowances merely reflects the congressional policy determination that vesting of these ancillary benefits would seriously complicate the administration and increase the cost of plans whose primary function is to provide retirement income. Sutton v Weirton Steel Div of Nat'l Steel Corp, 724 F2d 406, 410 (CA 4, 1983). B. AMENDMENT OF THE STATUTE REQUIRING PREFUNDING DOES NOT CURE THE PROBLEM Defendants argue that the constitution permits amendment of 1985 PA 91, § 41(2), the statute that provides for prefunding retirement health care benefits, because appropriations by one Legislature do not bind succeeding Legislatures. See, e.g., Oakland Schools Bd of Ed v Superintendent of Public Instruction, 392 Mich 613; 221 NW2d 345 (1974). While we agree with the proposition advanced, the argument is misplaced. The prefunding requirements of Const 1963, art 9, § 24 apply to pension benefits that must be paid. [12] The only alternative, leaving the bill for yet a future Legislature, exacerbates the problem. Unlike emergency cuts of nearly any other type of service, cuts of pension funds must be directly repaid, and at a much higher cost. [13] The obligation to pay retirement health care benefits does not arise from the appropriations statutes. It is a contractual right arising from the fact that employees have worked in reliance on the statutory promise that the board will pay earned health care benefits of any member receiving a retirement allowance. Moreover, as a practical matter, pension obligations differ from nearly every other type of government spending insofar as they simply cannot be reduced or cut. Leaving aside the desirability of such choices, it would be possible for the government to stop funding many of the projects it now plans to pay for. For example, if the Legislature had passed a statute saying that it would fund highway improvement for the next five years, it could choose to cease funding highway expansion and repair in any given year. The state would not get wider highways that year, and traffic congestion would probably increase, but the state could pay this price if it needed to save the money. Similarly, the state could reduce the appropriation for its police force. Local communities previously benefiting from state police protection would either receive less police protection, divert local revenues from other sources, or seek new revenues. Michigan governmental units do not have the option, however, of not paying retirement benefits. Unlike highway construction or police protection, which a governmental unit can choose to receive less of, it is impossible to receive less service from the pensioner. The pension is payment for work already completed, or deferred compensation. [14] See, for example, Jacoby v Grays Harbor Chair & Mfg Co, 77 Wash 2d 911, 915; 468 P2d 666 (1970), [15] and Hoefel v Atlas Tack Corp, 581 F2d 1, 5 (CA 1, 1978) (applying Massachusetts law) and authorities cited therein.