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147296 - Wayne Co Employees Retirement System v Wayne Co

Wayne County Employees Retirement System and Wayne County Retirement Commission,
Marie T. Racine
Brian G. Shannon
(Appeal from Ct of Appeals)
(Wayne – Sapala, M.)
Charter County of Wayne,
Phillip J. DeRosier
Wayne County Board of Commissioners,


In the mid-1980’s, Wayne County adopted an ordinance that created a special retirement system fund known as the Inflation Equity Fund (IEF).  Each year, the fund made discretionary payments to eligible retirees and survivor beneficiaries that were intended to provide extra cash to offset the effects of inflation. 

In 2010, Wayne County enacted Wayne County Enrolled Ordinance 2010-514, which changed the way the IEF operated.  The ordinance placed a $12 million limit on the IEF’s balance, and also placed a $5 million limit on the distribution of funds from the IEF to eligible recipients.  Before the 2010 ordinance, there was no limit on the IEF’s balance, and no limit to the amount of money that could be paid out of the IEF.  As a result of the 2010 ordinance, the IEF had an excess balance of $32 million.  The ordinance required that this amount be transferred to the county’s defined benefit retirement funds, to offset or reduce the county’s defined benefit annual required contribution.  At the time, the defined benefit retirement funds were underfunded.

The Wayne County Employees Retirement System and Wayne County Retirement Commission sued, claiming that the transfer violated the Michigan Constitution and the Public Employee Retirement System Investment Act (PERSIA).   The Retirement Commission is established by the Wayne County Charter, and charged with the obligation to “administer and manage the Retirement System.”  The retirement system plaintiffs first argued that the 2010 ordinance violated Article 9, Section 24 of the Michigan Constitution, which states:  “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 plaintiffs also argued that the county violated PERSIA when it took a credit against the retirement system’s trust assets for the county’s benefit during a period of underfunding, treated the IEF assets as county assets, and overrode the discretion of the Wayne County Retirement Commission in the management of the IEF. 

The trial court saw no violations and granted summary disposition to the county, dismissing the plaintiffs’ claims. But in a published opinion, the Court of Appeals reversed.  The appeals court concluded that the county’s transfer of funds violated the “exclusive benefit” and “prohibited transaction” rules found at MCL 38.1133(6) [now codified at MCL 38.11339(8)].  MCL 38.1133(6) states that a public employee retirement 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 . . . .”  The Court of Appeals held that the “assets of the system” clearly encompassed both the assets in the traditional defined benefit plans and the assets of the IEF.  Accordingly, explained the appeals court, if the county was to comply with MCL 38.1133(6), it was “imperative and mandatory that assets in the IEF be held solely for the good of participants and beneficiaries, who alone could use those assets to their advantage – not the County, the County Board, or anyone else for that matter.”  This did not happen, held the Court of Appeals.  “Instead of honoring and protecting the IEF in connection with its designated purpose, the County Board improperly invaded the assets of the IEF to lessen its financial burden” with respect to funding the defined benefit retirement plans.  For this reason, the 2010 ordinance violated the exclusive-benefit rule of MCL 38.1133(6) by “authorizing the County to take advantage of and benefit from the use of the assets of the Retirement System, IEF assets, instead of leaving those assets in place for the exclusive benefit of the participants and their beneficiaries.  The County, in raiding the IEF for its own benefit, depleted and redirected IEF assets that had been designated for a purpose other than payment of regular pension benefits . . . circumventing the intent of the IEF ordinance.” 

The Court of Appeals also held that the 2010 ordinance caused the retirement system to violate MCL 38.1133(6)(c), which states that 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 . . ., either directly or indirectly[,] . . . [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.”  This statute, explained the appeal court, “absolutely prohibits” the Retirement Commission from engaging in a transaction that allows the assets of the retirement system to be used by or for the county’s benefit.  The 2010 ordinance forced the retirement system to engage in a prohibited transaction by allowing the county to benefit from the use of assets in the IEF, the Court of Appeals reasoned.  In light of its conclusion that the 2010 ordinance violated PERSIA, the Court of Appeals explained that it found it unnecessary, for the most part, to analyze the claim that the 2010 ordinance violated the Michigan Constitution.

The Wayne County defendants appeal.  They argue that the funds transferred from the IEF to the defined benefit retirement plans were still used for the exclusive benefit of the retirement system participants and their beneficiaries, and that MCL 38.1133(6) was not violated.  Likewise, they argue that the transfer was not a prohibited transaction under MCL 38.1133(6)(c), because it was merely an intra-system transfer of assets, and that the transaction is permitted by MCL 38.1140m.  The Supreme Court has ordered oral argument on the application, directing the parties to address:  “(1) whether the Court of Appeals erred in holding that provisions of Wayne County Enrolled Ordinance 2010-514 violate the Public Employee Retirement System Investment Act, MCL 38.1132 et seq.; and (2) whether the ordinance violates Const 1963, art 9, § 24.”