Court Opinion

ID: 2762809
Source: CourtListenerOpinion
Date Created: 2014-12-19 13:18:12.223598+00
Date Added: 2024-06-11T11:27:12.841037
License: Public Domain

Michigan Supreme Court
                                                                                             Lansing, Michigan

Syllabus
                                                                Chief Justice:         Justices:
                                                                Robert P. Young, Jr.   Michael F. Cavanagh
                                                                                       Stephen J. Markman
                                                                                       Mary Beth Kelly
                                                                                       Brian K. Zahra
                                                                                       Bridget M. McCormack
                                                                                       David F. Viviano
This syllabus constitutes no part of the opinion of the Court but has been             Reporter of Decisions:
prepared by the Reporter of Decisions for the convenience of the reader.               Corbin R. Davis

             WAYNE COUNTY EMPLOYEES RETIREMENT SYSTEM v WAYNE CHARTER
                                     COUNTY

       Docket No. 147296. Argued October 8, 2014 (Calendar No. 8). Decided December 18, 2014.

               The Wayne County Employees Retirement System and the Wayne County Retirement
       Commission brought an action in the Wayne Circuit Court against Wayne Charter County and
       the Wayne County Board of Commissioners, alleging that a county ordinance defendants enacted
       in 2010 concerning the retirement system, Wayne County Enrolled Ordinance No. 2010-514,
       violated Const 1963, art 9, § 24 and the Public Employment Retirement System Investment Act
       (PERSIA), MCL 38.1132 et seq. The ordinance placed a $12 million limit on the balance of the
       retirement system’s reserve for inflation equity known as the Inflation Equity Fund (IEF), which
       was funded by investment earnings on pension assets. The ordinance also placed a $5 million
       limit on a discretionary distribution of money from the IEF known as the “13th check,” which
       had been made annually in varying amounts to eligible retirees and survivor beneficiaries to help
       fight the effects of inflation. The ordinance required any amount in the IEF exceeding the $12
       million cap to be debited from the IEF and credited to the assets of the defined benefit plan,
       where it would be used to offset or reduce the annual required contribution (ARC) that the
       county was required to make to the defined benefit plan under Const 1963, art 9, § 24. The
       county filed a counterclaim alleging, among other things, that the retirement commission had
       violated its fiduciary duties by mismanaging the retirement system’s assets. The court, Michael
       F. Sapala, J., granted defendants’ motion for summary disposition regarding plaintiffs’
       constitutional and statutory objections to the ordinance, and plaintiffs appealed. The court
       granted summary disposition in favor of plaintiffs on the fiduciary-duty count of the county’s
       counterclaim, and the county cross-appealed. The Court of Appeals, MURPHY, C.J., and
       O’CONNELL and BECKERING, JJ., reversed, holding that the transfer of funds from the IEF and
       the offset against the county’s ARC obligation violated the requirement in MCL 38.1133(6) that
       the funds be for the exclusive benefit of the retirement system’s participants and their
       beneficiaries and that the county had used the IEF funds in violation of the prohibited transaction
       rule set forth in MCL 38.1133(6)(c). 301 Mich. App. 1. Defendants appealed.

               In a unanimous opinion per curiam, the Supreme Court held:

             1. The Court of Appeals correctly held that the $32 million offset against the county’s
       ARC violated PERSIA for the reasons stated in the Court of Appeals opinion. The county must
satisfy its ARC obligations absent consideration of that $32 million, and the transferred funds
must be returned to the IEF. The $12 million limitation on the IEF can operate prospectively.

        2. The portion of the Court of Appeals opinion concluding that the intrasystem transfer
of retirement system assets would violate PERSIA without the corresponding offset to the ARC
was vacated, as were the portions of the opinion discussing the constitutional implications of the
amended ordinance in relation to Const 1963, art 9, § 24 and the determination that the
transferred funds, once returned to the IEF, must be used only for the purposes of that fund. The
Court of Appeals’ rulings that were not challenged in the Supreme Court were left intact.

        Court of Appeals decision affirmed in part and vacated in part; case remanded to the trial
court for further proceedings.

                                    ©2014 State of Michigan
                                                                      Michigan Supreme Court
                                                                            Lansing, Michigan

Opinion
                                                Chief Justice:          Justices:
                                                Robert P. Young, Jr. Michael F. Cavanagh
                                                                     Stephen J. Markman
                                                                     Mary Beth Kelly
                                                                     Brian K. Zahra
                                                                     Bridget M. McCormack
                                                                     David F. Viviano

                                                      FILED DECEMBER 18, 2014

                             STATE OF MICHIGAN

                                   SUPREME COURT

 WAYNE COUNTY EMPLOYEES
 RETIREMENT SYSTEM and WAYNE
 COUNTY RETIREMENT COMMISSION,

               Plaintiffs/Counterdefendants-
               Appellees,

 v                                                       No. 147296

 CHARTER COUNTY OF WAYNE,

               Defendant/Counterplaintiff-
               Appellant,
 and

 WAYNE COUNTY BOARD OF
 COMMISSIONERS,

               Defendant-Appellant.

 BEFORE THE ENTIRE BENCH

 PER CURIAM.

       The Wayne County Employees Retirement System (“retirement system”) was

 established in 1944 “for the purpose of providing retirement income to eligible
employees and survivor benefits.”        Wayne County Charter § 6.111.       Currently, the

retirement system consists of five defined benefit plans, one defined contribution plan,

and the Inflation Equity Fund (IEF). Each year, the county is required by Const 1963,

art 9, § 24, to make an “annual required contribution” (ARC).           An annual actuarial

valuation determines the ARC amount. MCL 38.1140m.

       The IEF was created in 1985 by county ordinance to provide a pool of money for

discretionary payments to eligible retirement system participants and beneficiaries in

addition to those payments required by the pension system, as a method to counteract the

effect of inflation. Payments from the IEF are known as the “13th check.” The IEF is

funded by investment profits earned on the assets held in the defined benefit plans and

the IEF, to the extent those profits exceed a certain rate of return.

       In 2010, Wayne County faced a substantial fiscal obligation in order to satisfy its

actuarially determined ARC. In order to satisfy its ARC obligation, the county passed an

ordinance amendment, Wayne County Code of Ordinances (WCCO), §§ 141-32 and 141-

36, as amended by Wayne County Enrolled Ordinance No. 2010-514. As is relevant

here, the amended ordinance limited the IEF to a maximum balance of $12 million, and

directed that IEF funds exceeding that amount be transferred to the retirement system’s

defined benefit plans. Because the IEF balance at the time was significantly greater than

$12 million, the ordinance resulted in a transfer of $32 million from the IEF into the

defined benefit plans. The amended ordinance further permitted the county to use the

$32 million transfer from the IEF to the defined benefit plans as an offset against its ARC

obligation.

                                               2
         The retirement system challenged the 2010 ordinance amendment, claiming, inter

alia, that the transfer and corresponding ARC offset violated Const 1963, art 9, § 24, and

various provisions of the Public Employee Retirement Systems Investment Act

(PERSIA), MCL 38.1132 et seq. The county moved for summary disposition, which the

trial court granted, ruling that the IEF did not amount to an “accrued financial benefit” as

considered in Const 1963, art 9, § 24, and that the amended ordinance’s transfer and

offset did not violate PERSIA.

         The Court of Appeals reversed the trial court, holding that the transfer of funds

from the IEF and offset against the county’s ARC obligation violated the requirement in

MCL 38.1133(6) that the funds be for the “exclusive benefit” of the retirement system’s

participants and their beneficiaries and that the county used the IEF funds in violation of

the “prohibited transaction rule,” MCL 38.1133(6)(c).1 Wayne Co Employees Retirement

Sys v Wayne Co, 301 Mich. App. 1; 836 NW2d 279 (2013).

1
    When the complaint in this case was filed, MCL 38.1133(6) stated in relevant part:

                 The system shall be a separate and distinct trust fund and the assets of
         the system shall be for the exclusive benefit of the participants and their
         beneficiaries and of defraying reasonable expenses of investing the assets of
         the system. With respect to a system, an investment fiduciary shall not cause
         the system to engage in a transaction if he or she knows or should know that
         the transaction is any of the following, either directly or indirectly:

                                             * * *

               (c) A transfer to, or use by or for the benefit of, the political
         subdivision sponsoring the system of any assets of the system for less than
         adequate consideration. . . .

PERSIA was recently amended, effective March 28, 2013. 2012 PA 347. As amended,
the relevant portions of the statute are found in MCL 38.1133(8). However, because the

                                               3
           We affirm the Court of Appeals in part. Except as noted later in this opinion, we

agree with the Court of Appeals that, in this case, the transfer of funds from the IEF to the

retirement system’s defined benefit plans, coupled with the offset against the county’s

ARC obligation, violated PERSIA for the reasons stated in the Court of Appeals opinion.

Id. at 30-46 (finding a violation of the “exclusive benefit rule” in MCL 38.1133(6)), and

id.   at     46-48   (finding   a   violation   of   the   “prohibited   transaction   rule”   in

MCL 38.1133(6)(c)). Accordingly, we affirm the Court of Appeals’ holding that the $32

million that was offset against the county’s ARC violates PERSIA, and the county must

satisfy its ARC obligations absent consideration of that $32 million. Id. at 52.

           However, we also vacate two aspects of the Court of Appeals opinion. First, we

vacate footnote 29 and corresponding portions of the Court of Appeals opinion in which

the panel reasoned that, because the transfer of IEF funds, even without a corresponding

offset to the county’s ARC, would violate PERSIA, the transferred funds must be

returned to the IEF account and used “for the purpose intended.”               See Wayne Co

Retirement Sys, 301 Mich. App. at 51 n 29. Although the county raised the theory that the

transfer of IEF funds without an offset is valid under PERSIA in Count II of its

counterclaim, the trial court did not rule on this alternative claim because it ruled that the

county’s ordinance was “legal as written.” It was therefore unnecessary for the Court of

Appeals to rule on this issue, and since this issue received only cursory treatment by the

parties in the Court of Appeals, the preferable course would have been to remand for

current complaint was filed before the effective date of the amendments, we refer to the
preamendment version of PERSIA.

                                                 4
further proceedings on this claim. The Court of Appeals nonetheless addressed the

matter, and although we invited further development of it in this Court, the county failed

to pursue it in its brief and at oral arguments, instead taking the position that the presence

of the corresponding offset had no bearing on the validity of the transfer under PERSIA.

The county’s abandonment of the issue on appeal has rendered it unnecessary, and has

left us ill equipped to address the merits of whether the amended ordinance’s transfer

would be permissible under PERSIA without the corresponding offset. Accordingly, we

express no opinion on the issue of whether the intrasystem transfer of retirement system

assets without a corresponding offset to the plan sponsor’s ARC violates PERSIA, and

leave that question open for another day. Nonetheless, because the county has abandoned

this issue in the instant case, we leave in place the Court of Appeals’ determination that

the transferred funds must be returned to the IEF. See Mitcham v Detroit, 355 Mich. 182,

203; 94 NW2d 388 (1959) (“The appellant himself must first adequately prime the pump;

only then does the appellate well begin to flow.”); Horetski v American Sandblast Co,

340 Mich. 323, 327; 65 NW2d 702 (1954).

       Thus, while we vacate footnote 29 in its entirety, to the extent that the remedy

fashioned by the Court of Appeals was based on its conclusion that the transfer even

without an offset violates PERSIA, we leave its remedy intact for purposes of this case

because, as stated above, the county abandoned its argument that the transfer without the

offset does not violate PERSIA. Accordingly, we affirm the Court of Appeals’ holding

that “the $32 million that was offset against the county’s ARC [must] be[] returned,

restored, or credited to the IEF, with the county being required to satisfy its ARC

obligations absent consideration of that $32 million.” Wayne Co Retirement Sys, 301
5
Mich. App. at 52. Additionally, we affirm the Court of Appeals’ conclusion that “the $12

million IEF limitation can operate prospectively” and that

      [a] proper prospective application of the $12 million IEF limitation would
      entail limiting future funding of the IEF until it dropped below $12 million,
      which is exactly how WCCO, § 141-32(b)(1), operates and is presently
      structured, where it provides the formula for annual funding of the IEF,
      subject to the $12 million IEF balance limit. Accordingly, WCCO, § 141-
      32(b)(1), remains wholly intact and WCCO, § 141-32(a)—the provision
      setting forth the $12 million IEF limit—also remains in effect, but with the
      caveat that the limit is inapplicable in regard to the previously existing $44
      million (or $32 million excess) until those IEF assets are first reduced down
      to $12 million. With respect to the $5 million dollar IEF distribution limit
      found in WCCO, § 141-32(b)(2), it is already prospective in nature,
      operating to limit disbursements made after the 2010 ordinance became
      effective. [Id. at 52-53 (footnote omitted).][2]

      Second, we vacate the portions of the Court of Appeals opinion discussing the

constitutional implications of the amended ordinance in relation to Const 1963, art 9,

§ 24. As the Court of Appeals expressly acknowledged, it is not necessary to consider

any potential constitutional implications of the amended ordinance because this case can

be decided by applying PERSIA alone. See Wayne Co Retirement Sys, 301 Mich. App. at

35 n 23. Because “questions of constitutionality are not decided where a case may be

disposed of without such a determination,” MacLean v Mich State Bd of Control for

Vocational Ed, 294 Mich. 45, 50; 292 N.W. 662 (1940) (citation omitted), the Court of

2
  In keeping with our decision to leave open the question whether the mere transfer of
retirement assets without a corresponding offset to a plan sponsor’s ARC violates
PERSIA, nothing in our decision to affirm the Court of Appeals remedy in this case
should be read as necessarily allowing or precluding any municipality, including the
county, from enacting an ordinance that directs the intrasystem movement of system
assets. As stated within, we decline to determine whether, or under what conditions, such
a transfer is permissible under PERSIA.

                                            6
Appeals’ analysis of the issue is dicta.      Accordingly, we vacate as unnecessary all

portions of the Court of Appeals opinion that considered whether the IEF benefits

constitute “accrued financial benefits” for purposes of Const 1963, art 9, § 24, including

all discussion of “group” accrued benefits.

       In summary, we affirm the portions of the Court of Appeals opinion holding that

the transfer of $32 million from the IEF to the retirement system’s defined benefit plans

and corresponding offset against the county’s ARC obligation in this case violated

PERSIA for the reasons stated in the Court of Appeals opinion. We likewise affirm the

Court of Appeals’ determination that the transferred funds must be returned to the IEF.

However, we vacate as beyond the scope of the instant appeal the reasoning underlying

that determination—namely, the portions of the Court of Appeals opinion concluding that

the transfer at issue would violate PERSIA without the corresponding offset against the

county’s ARC obligation, and the determination that the transferred funds, once returned

to the IEF, must be used only for the purposes of that fund going forward. The net effect

of our decision is that the issue whether the transfer without a corresponding offset

violates PERSIA remains an open one, but the remedy fashioned by the Court of Appeals

in this case is left undisturbed for purposes of this case.       Finally, we vacate as

unnecessary the portions of the Court of Appeals opinion discussing the constitutional

                                              7
implications of the amended ordinance in relation to Const 1963, art 9, § 24.3 We

remand to the trial court for proceedings and entry of judgment not inconsistent with this

opinion.

                                                       Robert P. Young, Jr.
                                                       Michael F. Cavanagh
                                                       Stephen J. Markman
                                                       Mary Beth Kelly
                                                       Brian K. Zahra
                                                       Bridget M. McCormack
                                                       David F. Viviano

3
  The Court of Appeals also ruled on the validity of a number of other aspects of the
amended ordinance; these rulings have not been challenged before this Court, and thus
remain intact.

                                            8