Maintenance of the Maine State Retirement System's funding in a timely manner and on an actuarially sound level

# MAINE STATE LEGISLATURE The following document is provided by the LAW AND LEGISLATIVE DIGITAL LIBRARY at the Maine State Law and Legislative Reference Library http://legislature.maine.gov/lawlib Reproduced from scanned originals with text recognition applied (searchable text may contain some errors and/or omissions) **This document is from the files of the Office of the Maine Attorney General as transferred to the Maine State Law and Legislative Reference Library on January 19, 2022** 79-173 RICHARD S. COHEN ATTORNEY GENERAL STEPHEN L. DIAMOND JOHN S. GLEASON JOHN M. R. PATERSON ROBERT J. STOLZ DEPUTY ATTORNEYS GENERAL # STATE OF MAINE DEPARTMENT OF THE ATTORNEY GENERAL AUGUSTA, MAINE 04333 September 26, 1979 Honorable Bennett D. Katz 27 Westwood Road Augusta, Maine 04330 Dear Senator Katz: We hereby respond to your request for an opinion regarding the legislative intent underlying the enactment of the statute which created the present Maine State Retirement System. 5 M.R.S.A. §§ 1001-1181. More specifically, you have asked us to determine whether the statute, when considered in light of its specific terms and legislative history, contemplates that the State will maintain the System's funding in a timely manner and on an actuarially sound level. With the caveat that we have not considered the questions of whether legislative action or inaction inconsistent with the Retirement System's statute might constitute an implied repeal or amendment 1/ or whether a legislative intent to bind the State to a particular level of funding would result in an enforceable legal duty, 2/ we answer your question in the affirmative. At the outset, it will be useful to set out the course of analysis followed in this opinion in order that you will be aware of the limited nature of the conclusion reached. We first reviewed the present statute in its entirety in order to determine whether the scheme as a whole would support an interpretation that the statute contemplates systematic funding by the State to maintain the System in an actuarially sound condition. We have concluded that 1/ Underlying this issue is the more fundamental question of the extent to which a legislature may constitutionally alter the terms of a retirement system with respect to present members and retirees. We do not purport to reach that question here. 2/ Even if the Legislature intended to impose a duty upon itself, the doctrine of the separation of powers may create obstacles to judicial enforcement of such a duty. Page 2 it does.3/ 3/ The length of the Retirement System's statute precludes its convenient reproduction herein. Our later analysis, however, focuses primarily on three parts of the Act which set out the method whereby the State's contribution is computed, 5 M.R.S.A. § 1062(3)(B)-(D); the procedure of State funding, 5 M.R.S.A. § 1062(5); and the duties and powers of the System's actuary, 5 M.R.S.A. § 1031(12). These sections are representative of the language running through the statute indicating that the System was meant to be funded by the State on a systematic and ongoing basis so as to ensure that it is maintained in an actuarially funded status. In light of their particular relevance to our analysis, we set them out in relevant part below: 5 M.R.S.A. § 1062(3) B. On account of each member there shall be paid annually into the Retirement Allowance Fund by the State an amount equal to a certain percentage of the annual earnable compensation of such member to be known as the 'employer contribution.' The rates per cent of such contribution to be known as the employer contribution rate shall be fixed on the basis of the assets and liabilities of the retirement system as shown by actuarial valuation. C. The employer contribution rate shall be determined as the percentage of the members' compensation payable during the members' periods of membership required to provide the difference between the total liabilities for retirement allowances not provided by the members' contributions and the amount of the assets in the Retirement Allowance Fund. The employer contribution rate shall be determined on actuarial bases adopted by the board of trustees. Such rate shall be determined by the board of trustees after each valuation and shall continue in force until a new valuation is made. D. The aggregate payment by the State into the Retirement Allowance Fund shall be at least sufficient, when combined with the amount in the Retirement Allowance Fund, to provide the benefits payable out of the fund during the year then current. 5 M.R.S.A. § 1062(5) State contributions. The board of trustees shall submit budget estimates to the State Budget Officer in accordance with section 1665. These estimates shall show the total requirements necessary to meet the liabilities incurred for the Retirement Allowance Fund, the Survivors' Benefit Fund and the Expense Fund for the ensuing biennium. On July 1, 1973 and thereafter on each and every payroll from which retirement contributions are deducted the State Controller shall cause a charge to be made to each Page 3 Fn. 3 Cont. department, agency or governmental unit of an amount or amounts in payment of the employer costs of all charges related to the Retirement System and which shall be credited to the appropriate funds as listed in section 1062, sub section 1. Percentage rates to be predetermined by the actuary and approved by the board of trustees shall be applied to the gross salaries of members appearing on such payrolls and the resultant charges shall be periodically credited to the corresponding retirement fund. 5 M.R.S.A. § 1031(12) 12. Actuary; duties; annual valuation of funds; experience investigations; compensation values A. The board of trustees shall designate an actuary who, if an individual, shall be a Fellow of the Society of Actuaries. If the actuary is a firm of actuaries, it shall designate one of its members to perform the functions required of the actuary under this chapter who shall be a Fellow of the Society of Actuaries. The actuary shall be the technical advisor to the board of trustees on matters regarding the operation of the funds created by this chapter and shall perform such other duties as are required in connection therewith. He shall certify the amounts of the benefits payable under this chapter, except for benefits payable under subchapter VI. B. The actuary shall make annual valuations of the assets and liabilities of the retirement system on the basis of such actuarial assumptions as the board of trustees shall adopt and shall furnish a written report to the board of trustees with respect to each such valuation. Each such report shall also include an analysis of the year's operations and all results shall be separated between those applicable to benefits payable by employer contributions and employee contributions, where properly determinable. C. The actuary shall make such investigations as he deems necessary of the experience of the system as to the factors which affect the cost of the benefits provided by the retirement system, for the purpose of determining the actuarial assumptions to be recommended to the board of trustees for adoption in connection with actuarial determinations required under this chapter. Such investigations shall be made as frequently as the actuary deems expedient but at least once in each 3-year period following January 1, 1976. D. The actuary shall determine the equivalent cash compensation value to the members of the system of the benefits provided for them by the retirement system and shall furnish such information to the Commissioner of Personnel. Page 4 Having reached that conclusion, our research and analysis concentrated on the legislative debate and other historical materials surrounding the original enactment of the Retirement System's statute in 1942 and the three substantial revisions which took place in 1947, when the teachers became part of the System (P.L. 1947, c. 384); 1955, when the System was re-organized and streamlined (P.L. 1955, c. 497); and 1975, when the System was further revised (P.L. 1975, c. 622). In light of the significant legislative debate, which will be discussed below, concerning the underlying theory of the System as originally enacted, we sought in the legislative materials following the original enactment evidence of significant change in that original theory. No such evidence was found. Additionally, we traced the statutory history of three specific sections of the present law which we viewed as strongly indicative of the underlying intent of the System in terms of funding. These sections are: 5 M.R.S.A. § 1062(3), particularly subsections (B) through (D), which determine the State's contribution to the System; § 1031(12) which sets out the scope of the actuary's duties and responsibilities; and § 1062(5), which specifies the mechanics whereby the State's contribution is made. Again, seeking major changes in, or elimination of, these sections as an evidence of a change in the fundamental theory underlying the System, we found only insignificant and technical changes.4/ The Maine State Retirement System was enacted in generally its present form (except that it did not include the State's teachers) by the Legislature in a 1942 special session. P.L. 1941, c. 328, "An Act to Provide a Jointly-Contributory Retirement System for State Employees Except Teachers." It was, by its title and its terms, a "jointly-contributory" system providing for contributions from both employee and State, as employer. See P.L. 1942, c. 328, § 227-M(4). The new system replaced a scheme for state pensions which provided for no systematic funding by the State, nor contributions on the part of the employee. See R.S. 1930, c. 158, §§ 20-23. The change of systems which took place in 1942 indicated a fundamental change in legislative philosophy regarding the funding of the State Retirement System. The pre-1942 System was what is termed a "pay-as-you-go" scheme, under which the Legislature had to appropriate yearly the full amount of all pension benefits to be paid during that year but did not appropriate any funds to cover future benefits. See, e.g., 1941 Me. Leg. Rec. at 1352 (remarks of Representative Payson); see generally R. Tilove, Public Employee Pension Funds 132-41 (1976) for a discussion of the distinction between "pay-as-you-go" and "reserve" funding. The System enacted in 1942 included specific procedures for State and employee contributions. State contributions were based not only on the amount of current benefits but also on actuarial determinations 4/ It should be noted that this opinion does not purport to deal with, and has in fact ignored, the myriad changes in coverage, benefits and groups included or excluded over the history of the System. It is our view, supported by the evidence, that these changes neither alter nor affect the underlying funding mechanism and theory of the System. Page 5 of amounts necessary to establish a reserve to ensure payment of State pensions in the future. See c. 328, supra, § 227-M. The original statute further specified the duties of the System's actuary in arriving at assumptions which were to be adopted by the Board as the basis for determining the State's contribution to the System. Id., § 227-K(11), (12); § 227-M. Section 227-M(6) provided the mechanism for State contributions. Thus, the terms of the original statute establish that the new Retirement System contemplated systematic and timely State funding computed on an actuarial basis, which is clearly distinct from the funding practice under the prior, "pay-as-you-go" statute. A review of the legislative history of the 1942 Act, as well as a preceding bill which was similar, if not identical, but which failed to pass, not only supports the above view but appears to establish beyond question the awareness of the Legislature of the significance of the change in systems for purposes of funding by the State. The most telling evidence of the Legislature's commitment to systematic funding of the Retirement System appears in the debate during the 1941 regular session on a similar jointly-contributory retirement scheme. L.D. 1033, introduced in the 1941 regular session, appears, without a word-by-word review, to encompass all of the provisions of the later enactment and certainly reflects that Act in the area of State funding. Hence, the legislative discussion of L.D. 1033 is useful in determining the intent underlying enactment. In this regard, the debate of L.D. 1033 offers strong evidence of the intent of the Legislature to adopt an actuarially based, systematic funding scheme for the State Retirement System. Representative Payson's remarks are absolutely clear on this issue and are not controverted by any other discussion. * * * For that reason, we went over into the study of a contributory system. We realized immediately the objection to a contributory system. Under the present pension system you just sit around and let the bill grow. You do not lay aside a cent to meet it. Every year an employee works for you under the present system, a certain amount is accruing that has to be paid to that person sometime but you do not lay aside a nickel a year to pay it, and when the bill becomes due, the State either goes broke or else repudiates the pension system altogether and the employees get nothing. We feel that we should try to avert that situation. These employees, under the present system today, have nothing but the moral obligation of the State to pay them that pension. If you want to repeal that bill tomorrow, under which you pay those pensions, that wipes it out, and that is all there is to it. We felt it was fair to the employees and fair to the State to set up a pension system where the State laid Page 6 aside money every year to meet its obligations. Then the State could be facing that situation and going along, and at the same time we would protect the employees by giving them a system which we felt the State would keep up. * * * * The system is set up on an actuarial sound basis. * * * * The contributions of the State are worked out on a similarly careful basis. The normal contribution of the State is set up on a certain percentage, just above two per cent, and that will take care of the normal contributions the State would have to make, if we were starting this pension system with all new employees, just to meet the future. Then, in addition to that, to take care of the pensions which have already been earned or partly earned, the State sets aside another percentage, about 1.92 as I recall it, to take up the slack, and pay for old pensions which have been earned or partly earned. * * * * As I said when I presented the report of the committee - and I will say to you again - this is a bill whereby the Legislature will meet squarely the expense that is running up under the pension bill. It is an honest, plain proposition. You face the facts and appropriate the money. Under the old system you duck, and defer the thing until the bill comes due, two years later, and then you are in a devil of a stew. 1941 Me. Leg. Rec. at 1352-53 (remarks of Representative Payson) These remarks clearly recognize the unfairness to the employee and the burdensome expense of a "pay-as-you-go" system and even more clearly establish that the Legislature, in enacting a contributory funded system, sought to provide the employee with more to rely on than the "moral obligation" of the State. Other evidence surrounding the enactment of the retirement statute supports the legislative intent cited above. The report of the Recess Committee created by the 89th Legislature to study the retirement situation, which report was the basis for both L.D. 1033 Page 7 and the bill which finally passed,5/ recommends a systematically funded system and specifically rejects a "pay-as-you-go" scheme. Recess Committee on State Contributory Pension System, Report on a Proposed Retirement System for State Employees, 21-23 (1941). Finally, the legislative discussion of the bill which finally passed also clearly recognizes the funded nature of the system, requiring ongoing contributions by the State. 1943 Me. Legis. Rec. (1942 special session), 124-26 (remarks of Representative Payson).6/ Relying on the language of the statute itself and taking into account the very strong evidence in the legislative debate and other materials, it can be concluded that, in 1942, the Legislature enacted a retirement system for State employees which was intended to significantly alter the existing "pay-as-you-go" system by providing for systematic actuarial funding with State contributions being made on a timely and ongoing basis. The Legislature clearly recognized the nature of the new system and quite evidently meant to establish a system which would be more reliable to employees and, over time, less expensive to the State. A single question remains: Does the present system bear a sufficiently close relationship, in its relevant parts, to the 1942 enactment to conclude that the same funding theory is still in effect? We answer that question in the affirmative based on our review of the various revisions of the statute as a whole and certain of its specific provisions. There have been three major revisions of the Maine State Retirement System law since its enactment in 1942. A review of those three revisions indicates, for purposes of this opinion, no significant changes in the method or mechanism of funding the System, nor any important alterations in the role of the System's actuary. In 1947, the Legislature unified the teachers' retirement scheme with the Maine State Retirement System. See P.L. 1947, c. 384. The new statute was substantially the same in terms of funding, and the changes were generally such as to protect the new members from loss of benefits and otherwise to integrate the teachers into the existing state system. Beyond indicating the intent to unify the system, 1947 Me. Leg. Rec. at 1923, the legislative history is unhelpful. Chapter 384 worked no significant change in the funding provisions of the 5/ The originally introduced bill, L.D. 1033, passed the Legislature but was vetoed by the Governor because of a lack of monies to fund it. 1941 Me. Leg. Rec. 1531-32, 1543-44. In his veto message, the Governor recognized the need for such a system. Id. at 1545-44. 6/ Because the bill had been thoroughly considered at the previous session, the remarks at this session are much less lengthy and comprehensive. Nonetheless, they support the interpretation arrived at in this opinion. Page 8 1943 statute, and there is no legislative history indicating any intent to change the funding system at that time.7/ Another major revision of the System occurred in 1955, when, inter alia, the present scheme relating to the organization of funds was effectuated. P.J. 1955, c. 417. Here again, a review of the three areas noted above shows no substantial changes in the theory and mechanism of State funding, and the relevant historical materials reflect a continuing awareness that the System is to be operated on an actuarially funded basis. See Bowles, Andrews & Towne, Report to Legislative Recess Committee on Me. State Retirement System and Social Security Coverage, at 4, 11, 59 (1954). The final major revision was accomplished by P.L. 1978, c. 622, and was partly addressed, without complete success, to integrating the benefit levels and qualification requirements for the various covered groups. While this law did enact the present version of 5 M.R.S.A. § 1031(12), re-organizing and consolidating the duties of the System's actuary, no substantial changes were made either in that area or in the funding scheme. Again, the legislative materials evidence the awareness of the Legislature of the necessity of State funding, see, e.g., Committee on Veterans and Retirement, Report of Study of the Maine State Retirement System, at 4 (1975), but contain no evidence whatsoever of an intent to change the underlying theory of the System. A similar review of the three statutory areas of funding, mechanics of State contribution, and the actuary's power and duties (as adopted by the Board) turns up no evidence of any significant changes in these areas, from the point of view of theory of funding. 5 M.R.S.A, § 1062(3)(B)-(D) governs the amount the State is to contribute to the Maine State Retirement System. The relevant subparagraphs have remained relatively the same throughout the history of the System. Some technical changes were adopted in the 1955 revision, and in 1969, the provisions for separate "accrued liability" (representing the System's unfunded liability for pre-system membership) and "normal" contributions were integrated making a single "employer contribution." P.L. 1969, c. 45. While there is no legislative history regarding this amendment, it appears clear that the change was in effect a simplification and consolidation of the section. The State's contribution is still based on actuarial assumptions, presupposing the continuing funding of the System by the State on a systematic basis. Significantly, the "proviso" in subparagraph (D) of § 1062 regarding the necessity of an aggregate payment at least sufficient to carry the System through the current fiscal year has been retained throughout its history. The provision of the present act relating to the mechanics of the State's contribution, 5 M.R.S.A. § 1062(5), has been amended 7/ Indeed, if anything, the legislative materials relating to the 1947 revision indicate an intent to strengthen the actuarially funded basis of the system by placing certain teachers on a reserve funding basis who had never been so funded prior to that time. Legislative Recess Committee, Report Regarding Unified Law of State's Pension System, at 1-2, 8 (1946). Page 9 twice over the years, but neither amendment would support an inference of basic change in the funding theory underlying the System. The 1943 amendment (P.L. 1943, c. 30) essentially changes the method whereby the State's contribution was made to place it within the budget process and to provide for a partial allocation for contribution from among various State funds. In 1973, a law entitled "An Act to Replace Lump Sum Financing of State Employees Retirement with Percentage Financing Based on Payrolls Paid" (P.L. 1973, c. 369) had the effect of placing State contributions on a completely allocative basis (except for teachers) for each State department, agency or governmental unit. The necessity of systematic State funding was reaffirmed by the addition of language requiring the budget estimates to show the amounts necessary to "meet the liabilities incurred" by the State for the various funds. No further changes have been made, and there is no relevant legislative history. It is clear, however, that, if anything, the amendments in this section have strengthened the intent that the System be funded on a systematic basis. Finally, as noted above, the 1975 revision effected certain changes in the statute relating to the duties of the System's actuary, consolidating and simplifying the statute somewhat but not changing his underlying responsibilities. There is no legislative debate or other materials which shed any light on the intent behind this change, but it clearly works no significant change in the funding theory of the System. The above review of the legislative history of the major revisions of the retirement statute and the specific relevant provisions comprising the funding scheme seem clearly to support the statutory language itself in contemplating adequate, timely and systematic actuarial funding of the System by the State through the Legislature. This method of funding was recognized as desirable and was enacted by the Legislature at the System's inception and has not been significantly altered since that time. The dearth of legislative history in this area since the original enactment certainly indicates that there has been no intention to change this aspect of the System. Such a major change would certainly generate lengthy debate and discussion. Indeed, a sampling of some of the legislative discussion in regard to provisions which would change benefits or in any way affect the cost of the System shows that a consistent concern of legislators has been the cost over time to the State of any change. E.g., 2 Me. Leg. Rec. (1975) at 2129-30 (remarks of Representatives Theriault and Leonard); 1943 Me. Leg. Rec. at 131 (remarks of Representative Murchie); 1941 Me. Leg. Rec. at 870 (remarks of Representative Murchie). This concern with cost over time is indicative of the underlying awareness of the Legislature that the System, as structured, contemplates current, systematic funding to pay for future benefits.8/ 8/ There has always been opportunity to change the System, especially since the System is the subject of legislation in almost every session. Yet, the major provisions relating to funding have not been substantially altered and have indeed been strengthened in some respects. See, e.g., 5 M.R.S.A. §§ 1005(3); 1032. Page 10 We conclude, therefore, on the basis of the statutory language and the underlying legislative history, that the Retirement System statute contemplates systematic and timely funding by the State through legislative appropriation so as to keep it on an actuarially funded basis. RICHARD S. COHEN Attorney General REC:jg