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December 20, 2014

MSC holds that Wayne County ordinance violates the Public Employment Retirement System Investment Act

In Wayne County Employees Retirement System v. Wayne Charter County, No. 147296, the Michigan Supreme Court held that a $32 million dollar transfer from the county retirement system’s Inflation Equity Fund to its defined contribution plans violated the exclusive benefit rule and the prohibited transaction rule under the Public Employee Retirement Systems Investment Act (PERSIA), MCL 38.1132 et seq. The exclusive benefit rule requires that the retirement system be for the exclusive benefit of the plan’s participants and their beneficiaries, MCL 38.1133(6), while the prohibited transaction rule prohibits transfers for the benefit of the political subdivision sponsoring the system for less than adequate consideration, MCL 38.1133(6)(c).
 
The Wayne County retirement system consists of five defined benefit plans, one defined contribution plan, and the Inflation Equity fund, which is meant to help offset the effect of inflation for all participants of the system. The County makes a mandatory annual contribution to the system. In 2010, in order to help it meet the required contribution amount, the County passed an ordinance limited the balance of the Inflation Equity fund to $12 million dollars and transferring the excess, $32 million at the time, to the defined benefit plans. The ordinance provided that the excess money counted as an offset against the County’s annual required contribution.
 
The retirement system challenged the ordinance, alleging that it violated article 9, section 24 of the Michigan Constitution, and violated PERSIA. The trial court held that the Inflation Equity Fund was not an accrued financial benefit such that the transfer would violate the Michigan Constitution, and that the transfer did not violate PERSIA. The Court of Appeals reversed, (see an earlier blog of COA opinion here) holding that the transfer violated PERSIA because the law requires the funds to be for the exclusive benefit of the plan participants, and that the transfer of funds was a prohibited transaction under PERSIA. However, the Court of Appeals also held that the $12 million limit could apply prospectively by limiting the Inflation Equity Fund’s funding until the balance dropped below $12 million.
 
The Michigan Supreme Court agreed that the transfer violated the exclusive benefit rule and the prohibited transaction rule from PERSIA, and that the $12 million limit could apply prospectively. However, the court vacated portions of the Court of Appeals’ opinion. The Court of Appeals held that the $32 million dollars transferred from the Inflation Equity Fund must be returned and used for its intended purpose. The Michigan Supreme Court held that since the trial court did not consider whether the transfer may have been legal if the county had not used it to offset its annual required contribution, the Court of Appeals should have remanded for further proceedings. Nevertheless, the court held that the county had abandoned the claim and upheld the Court of Appeals’ ruling that the funds must be returned in place. The Michigan Supreme Court also vacated the portion of the Court of Appeals’ opinion discussing the constitutional implications of the transfer as unnecessary because the transfer violated PERSIA. 

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