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04/25/95 ANN MUSSELMAN v. JOHN ENGLER

April 25, 1995

ANN MUSSELMAN, HERSCHEL IRONS, ZELMA RIFKIN, KATHERINE KEELING, JEANINE POIRIER, MARY CHRISTIAN, ETTA MAE PIERCE, AND C. ANN GRAHAN, PLAINTIFFS-APPELLANTS,
v.
JOHN ENGLER, AS GOVERNOR OF THE STATE OF MICHIGAN, DOUGLAS B. ROBERTS, AS TREASURER, PATRICIA A. WOODWORTH, AS DIRECTOR OF THE DEPARTMENT OF MANAGEMENT AND BUDGET, THOMAS H. MCTAVISH, AS AUDITOR GENERAL, GARY D. HAWKS, AS ACTING STATE SUPERINTENDENT OF PUBLIC INSTRUCTION, MICHIGAN PUBLIC SCHOOL EMPLOYEES RETIREMENT BOARD, AND THE LEGISLATURE OF THE STATE OF MICHIGAN, DEFENDANTS-APPELLEES.



Before The Entire Bench (except Weaver, J.). Chief Justice James H. Brickley, Justices Charles L. Levin, Michael F. Cavanagh, Patricia J. Boyle, Dorothy Comstock Riley, Conrad L. Mallett, Jr., Elizabeth A. Weaver. Riley, J. (concurring in part and Dissenting in part).

The opinion of the court was delivered by: Boyle

Opinion

BOYLE, J.

The question presented concerns funding of retirement health care benefits for members of the Public School Employees Retirement System. Although we find that the failure to fund these benefits as they arise violates Const 1963, art 9, § 24, we cannot grant the plaintiffs' request for mandamus.

I

FACTS AND PROCEDURAL HISTORY

The plaintiffs in these consolidated cases are current and retired public school employees who are members of the Michigan Public School Employees Retirement System (MPSERS). That system, established pursuant to MCL 38.1301 et seq.; MSA 15.893(111) et seq., covers employees of public local school districts, intermediate school districts, tax-supported community or junior colleges, and various state universities. MCL 38.1305(1); MSA 15.893(115)(1); MCL 38.1306(4); MSA 15.893(116)(4). Retirees receive both a monthly monetary allowance, see MCL 38.1384; MSA 15.893(194), and various health care benefits, see MCL 38.1391; MSA 15.893(201). This case concerns those health care benefits.

Health insurance premiums for retired public school employees were first funded by the state in 1975. Under 1974 PA 244, § 27e, the Retirement Board paid "hospitalization and medical coverage insurance premium . . . not to exceed $25.00 per month . . . ." That act further specified that premiums would be paid "only during those fiscal years for which an appropriation is made which is sufficient to cover the premium payments likely to be made for that year or on a terminal funding basis." Id.

This statute was amended several times over the next few years. Each amendment increased the amount of the premium that the state would pay. In 1983, the act was amended to provide that "the retirement system shall pay the entire monthly premium . . . ." 1983 PA 143.

In 1985, the statutes governing health care benefits for members of MPSERS were amended extensively. See 1985 PA 91. While the state continued to pay the entire monthly premium for retirees' health benefits, that payment was no longer contingent on a yearly appropriation. Instead, the statute required the board to pay the entire monthly premium for any retirant or beneficiary receiving a monthly retirement allowance: "the retirement system shall pay the entire monthly premium or membership or subscription fee for . . . a retirant or retirement allowance beneficiary who elects coverage in a group health benefits plan authorized by the retirement board and the department." 1985 PA 91, § 91(1).

The statute also required the state to fund benefits being earned by *fn1 current employees: "the contribution rate for other benefits, including health benefits, shall be computed using an individual projected benefit entry age normal cost method of valuation." 1985 PA 91, § 41(2). Pursuant to this statute, the state prefunded retirement health care benefits until fiscal year 1990-91.

On June 18, 1991, however, while the state was in the midst of budgetary problems, the Governor issued Executive Order *fn2 No. 1991-17. That order reduced the appropriation to the public school employees retirement system by approximately $54 million *fn3 by amending the controlling statute: *fn4

(1) The appropriations to the public school employees retirement system from the school aid fund, as provided jointly by Act 214 of the Public Acts of 1990 and Act 357 of the Public Acts of 1990, hereby are reduced by $53,795,700 GFGP/School Aid Fund ($55,773,300 Gross) as a result of the following revision of section 41(2) of Act 300 of the Public Acts of 1980 (public school employees retirement act of 1979) as amended:

SECTION 41(2)

(2) The contribution rate for benefits payable in the event of the death of a member before retirement or the disability of a member shall be computed using a terminal funding method of valuation. The contribution rate for other benefits, including health benefits, shall be computed using an individual projected benefit entry age normal cost method of valuation. FOR THE 1990-91 STATE FISCAL YEAR, THE CONTRIBUTION RATE FOR HEALTH BENEFITS SHALL BE COMPUTED USING A CASH DISBURSEMENT METHOD.

On July 3, 1991, plaintiffs filed a complaint for Writ of Mandamus with the Court of Appeals, asserting that Executive Order No. 1991-17 violated several provisions of the Michigan Constitution and the United States Constitution. On November 19, 1991, the Court summarily denied the plaintiffs' complaint.

In preparation for fiscal year 1991-92, the Governor made an executive recommendation to cease actuarially prefunding health benefits. Pursuant to this recommendation, the Legislature did not fund benefits being earned by current employees, and appropriated funds only to pay insurance premiums for retirees and beneficiaries. See 1991 PA 119. On April 16, 1992, Governor Engler issued Executive Order No. 1992-6, which amended 1980 PA 300, § 41(2) in a way similar to Executive Order No. 1991-17, except that it applied to the "1991-92 state fiscal year."

On December 10, 1991, plaintiffs filed both a motion for rehearing and a motion to amend their complaint by adding a count challenging 1991 PA 119. On February 4, 1992, the Court of Appeals granted both motions and ordered "a full hearing on the merits in the same manner as an appeal of right."

For the 1992-93 fiscal year, the Legislature appropriated funds only to pay insurance premiums of retirees and beneficiaries, which amounted to just over $229 million. See 1992 PA 148. Again, the Legislature did not appropriate money for health benefits being earned by current employees, and amended MCL 38.1341(2); MSA 15.893(151)(2), accordingly:

Except as otherwise provided in this subsection, the contribution rate for other benefits, including health benefits, shall be computed using an individual projected benefit entry age normal cost method of valuation. For the 1992-93 state fiscal year, the contribution rate for health benefits shall be computed using a cash disbursement method. [ 1992 PA 158 (emphasis added).]

On February 23, 1993, however, the appropriation was cut by approximately half, a reduction of $115.6 million, in Executive Order No. 1993-6. Because the entire appropriation had been necessary just to pay insurance premiums for retirees and beneficiaries, reduction had to come from somewhere else. The order specified that "health insurance benefits shall be paid from the Reserve for Health Benefits as provided by section 34 of Act 300 of the Public Acts of 1980."

Plaintiffs then moved to amend their complaint for mandamus to add a count alleging that the state's actions in the 1992-93 budget year also violated the constitution. This motion was denied April 12, 1993.

On July 19, 1993, the Court of Appeals denied plaintiffs' petition for mandamus (hereinafter "Musselman I"). 200 Mich. App. 656; 505 N.W.2d 288 (1993). The majority *fn5 declined to reach the merits, and instead ruled that it was "without authority to order the relief requested by the plaintiffs in any event":

In the present case, it is clear that plaintiffs are not seeking to compel the performance of a ministerial act. Rather, they seek an order compelling the Governor to exercise his discretion under Const 1963, art 5, § 20 in a particular manner. We cannot provide such a remedy. Furthermore, it is not within our province to order the Legislature to appropriate funds. [Id. at 662-664.]

In addition, the majority found that the plaintiff had not established that any of the remaining defendants possessed authority to appropriate or transfer money to the Retirement System. Id. at 665.

On August 2, 1993, plaintiffs filed an original complaint for mandamus regarding the 1992-93 budget year (hereinafter "Musselman II"). This complaint was summarily denied. We granted the plaintiffs application for leave to appeal in both cases. 445 Mich 881 (1994).

II

THE CONSTITUTIONALITY OF FUNDING PENSION HEALTH CARE BENEFITS ON A CASH DISBURSEMENT BASIS

There is no dispute that, since the 1990-91 fiscal year, the state has failed to fund retirement health care benefits being earned *fn6 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, *fn7 which requires that "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." 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 "financial 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, *fn8 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 of 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 N.W.2d 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 of 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: *fn9

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?

See also Jurva v Attorney General, 419 Mich 209, 224-225; 351 N.W.2d 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. *fn10 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 "health 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, the Chrysler Corporation began providing health insurance for its retirees and their eligible dependents on a split pay basis. *fn11

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 F.2d 406, 410 (CA4, 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 Sup't of Public Instruction, 392 Mich 613; 221 N.W.2d 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. *fn12 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 ...


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