Appendix — Wisconsin State Engineering Ass'n v. Lightbourn
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Suprem< Cowrt 113.
Fic ED
01 638 ocr i¢ 2001
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 2001
STATE ENGINEERING ASSOCIATION, et al.
Petitioners,
vs.
GEORGE LIGHTBOURN, Acting Secretary of the Wisconsin
Department of Administration, et al.
Respondents.
Petition for Writ of Certiorari to the
Supreme Court for the State of Wisconsin
APPENDIX TO PETITION FOR WRIT OF CERTIORARI
HAUS, ROMAN and BANKS, LLP
WILLIAM HAUS,
Counsel of Record
MICHAEL E. BANKS
Attorneys for Petitioners, State
Engineering Association, Thomas H.
Miller, David Bushkopf, Ross Johnson,
Melvin Sensenbrenner, and Bernard
Kranz
148 East Wilson Street
Madison, WI 53703-3423
Telephone: (608) 257-0420
Facsimile: (608) 257-1383
215" Ds
TABLE OF CONTENTS FOR APPENDIX
APPENDIX A:
j 2001 WI 59 (2001). Motion for
Reconsideration denied, 2001 WI 114 (July 18,
oe fase kas des ars dea:
APPENDIX B:
Stipulation of Facts, dated March 31, 2000
APPENDIX C:
Supreme Court of Wisconsin Orders, dated
December 29, 1999, and May 25, 2000 ......
APPENDIX D:
Excerpts from 1999 Wis. Act 11 ............
APPENDIX E:
Excerpts from of Chapter 40, Wisconsin
vice ctnend vee eens Cer RNeereeeR
APPENDIX F:
MA MN ee ass Svea esas
APPENDIX G:
26 CFR § 1.401-2(a){1)-(3) ....- liverne eens
APPENDIX H:
Employe Trust Funds Board's, The Department
of Employe Trust Funds’, and Enc O
Stanchfield’s Petition for Leave to Commence
an Original Action and for Leave to Have
Petition Stand as a Complaint Seeking
Declaratory Judgment, dated December 23,
SE vce co dauvaratssebsnereaveterveness
APPENDIX I: |
Wisconsin Professional Police Association, Inc.
John Charewicz, David Mahoney, Susan
Armagost and Steven Urso's Petition for Leave
to Commence an Original Action and for Leave
to Have Petition Stand as a Complaint Seeking
Declaratory Judgment, dated January 28, 2000
APPENDIX J:
State Engineering Association, Thomas H.
Miller, David Buschkopf, Ross Johnson, Melvin
Sensenbrenner, Bernard Kranz and Thomas M.
Miller's Complaint, dated December 29, 1999 .. 214
APPENDIX K:
State Engineering Association, Thomas H.
Miller, David Buschkopf, Ross Johnson, Melvin
Sensenbrenner, Bernard Kranz and Thomas M.
Miller's Supplement to the Complaint, dated
BOGE 0 SD 0d si vdcccewdieee ee 228
APPENDIX L:
Letter dated January 15, 1999, from L. JANE
HAMBLEN, Assistant Attorney General, State
of Wisconsin, Dept. of Justice, .to ERIC O.
STANCHFIELD, Secretary, Dept. of Employe
TES va a ho dO ee ee 235
APPENDIX M: ,
Letter dated May 5, 2000 from CORNELIA
G. CLARK to COUNSEL OF RECORD. ...... 248
APPENDIX N:
Letter dated May 15, 2000 from WILLIAM
HAUS -to MS. CORNELIA G. CLARK,
CLERK OF THE SUPREME COURT ........ 250
APPENDIX O:
Excerpt of SEA Petitioner's Brief dated July 6,
DOD 636 Pas (eso bia ee 254
Sb eae ee Soar
APPENDIX P:
Excerpts from Informational Paper, Wisconsin
Retirement System #73 (January 1999) .......
APPENDIX Q:
Excerpts from Informational Paper, Wisconsin
Retirement System #73 (January 1999), Table 2
ft SO a A ee ee ee a ee 2 2 a 2 2 ee
APPENDIX R:
Table re: Wisconsin Retirement System Fixed
Fund Reserve Balances from Stipulation of
Facts, dated March 31,2000, ...............
APPENDIX S:
Table re: Estimated Required Payments and
Credits for Unfunded Liabilities from
Stipulation of Facts, dated March 31, 2000, ....
274
l
APPENDIX A
SUPREME COURT OF WISCONSIN.
WISCONSIN PROFESSIONAL POLICE ASSOCIATION,
INC., John Charewicz, David Mahoney, Susan Armagost,
Steven Urso and State Engineering Association, by its
President, Thomas H. Miller, David Buschkopf, Ross Johnson,
Melvin Sensenbrenner, Bernard Kranz and Thomas H. Miller,
Petitioners,
v.
George LIGHTBOURN, Secretary of the Wisconsin
Department of Administration, Jack C. Voi ght, Wisconsin State
Treasurer, Wisconsin Education Association Council, by its
President Terry Craney and its Vice-President, Stan Johnson,
and Donald Krahn, Margaret Guertler, Gerald Martin and
Phyllis Pope,
Respondents.
No. 99-3297-OA.
Argued Oct. 4, 2000.Decided June 12, 2001.
Professional police association, engineering association, and
associations’ members brought declaratory judgment action
challenging constitutionality of act making numerous changes
in the Wisconsin retirement system (WRS). After acceptance of
original jurisdiction, the Supreme Court, David T. Prosser, J.,
held that: (1) act received requisite three-fourths vote of entire
elected membership of legislature; (2) section of act directing
a $4 billion distribution from transaction amortization account
(TAA) did not result in an unconstitutional taking or
impairment of contract; (3) section directing that $200 million
of the estimated $1.236 billion sent to employer reserve be used
as employer contribution credits against unfunded liability did
not result in an unconstitutional taking or impairment of
2
contract; (4) act did not violate fundamental principles of
chapter on public employee trust fund or any right preserved by
statute; (5) section amending statutory assumed rate did not
usurp authority of Employee Trust Funds (ETF) Board; and (6)
section raising the 65% benefit cap by five percent for all
employees except protective occupation employees did not
violate equal protection.
Rights declared and relief denied.
William A. Bablitch, J., concurred in part and dissented in part
and filed opinion.
Shirley S. Abrahamson, Chief Justice, dissented and filed
opinion in which Ann Walsh Bradley, J., joined.
(1983)). This court usually follows these steps in evaluating
such claims.
For the petitioners, Wisconsin Professional Police Association,
Inc., John Charewicz, David Mahoney, Susan Armagost and
Steven Urso, there were briefs by Lester A. Pines, Carol Grob,
Linda Harfst and Cullen, Weston, Pines & Bach, Madison, and
oral argument by Lester A. Pines.
For the petitioners, State Engineering Association, Thomas H.
Miller, David Buschkopf, Ross Johnson, Melvin
Sensenbrenner, and Bernard Kranz, there were briefs by
Michael E. Banks and Haus, Resnick and Roman, LLP,
Madison, and oral argument by William Haus.
For the respondents, George Lightbourn, Secretary of the
Wisconsin Department of Administration, and Jack C. Voight,
Wisconsin State Treasurer, there was a brief by Ann Ustad
Smith and Michael Best & Friedrich, LLP, Madison, and oral
argument by Ann Ustad Smith.
For the respondents, Wisconsin Education Association
Council, Terry Craney, Stan Johnson, Donald Krahn, Margaret
Guertler, Gerald Martin‘and Phyllis Pope, there was a brief by
Lucy T. Brown, Anthony L. Sheehan, Michael J. Van Sistine
and Wisconsin Education Association Council, Madison, and
oral argument by Anthony L. Sheehan.
An amicus curiae brief was filed by Timothy E. Hawks and
Shneidman, Myers, Dowling, Blumenfield, Ehlke, Hawks &
Domer, Milwaukee, on behalf of the Wisconsin Federation of
Teachers, WFT, AFT, AFL-CIO.
An amicus curiae brief was filed by Bruce F. Ehlke and
Shneidman, Myers, Dowling, Blumenfield, Ehlke, Hawks &
Domer, Milwaukee, on behalf ofthe AFSCME District Council
40.
{1 DAVID T. PROSSER, J.
4
This is an original action under Article VII, Section 3(2) of the
Wisconsin Constitution. [FN1]
FN1."The supreme court has appellate jurisdiction over
all courts and may hear original actions and
proceedings. The supreme court may issue all writs
necessary in aid of its jurisdiction." Wis. Const. art.
Vil, § 3(2).
q2 The petitioners consist of two groups: (1) the Wisconsin
Professional Police Association, Inc. (WPPA) and several of its
individual members, and (2) the State Engineering Association
(SEA), by its president, Thomas H. Miller, and several of SEA's
individual members. The interests and claims of these
petitioners are not identical, but all petitioners challenge the
constitutionality of portions of 1999 Wisconsin Act 11 (Act 11)
as amended by 1999 Wisconsin Act 12. [FN2] Together, the
two acts make numerous changes in the Wisconsin retirement
system (WRS or the system).
FN2. The subject of this litigation is 1999 Wisconsin
Act 11. We note that 1999 Wisconsin Act 12 made
minor corrections to 1999 Wisconsin Act 11. This
opinion uses the terms "Act 11" or "the Act" to refer to
the combination of 1999 Wisconsin Acts 11 and 12,
unless noted otherwise. The changes found in Act 12
do not materially affect the issues in this case.
The respondents are George Lightbourn, Secretary of the
Wisconsin Department of Administration, and Jack C. Voight,
Wisconsin State Treasurer, as well as the Wisconsin Education
Association Council (WEAC) by its president, Terry Craney,
and its vice-president, Stan Johnson, and four other individuals
who are now or have been affiliated with WEAC. WEAC is the
largest organization in Wisconsin representing teachers. Many
of WEAC’'s members are participants in the WRS.
74 The supreme court limits its exercise of original
jurisdiction to exceptional cases in which a judgment by the
court significantly affects the community at large. We accepted
5
Original jurisdiction in this case because it meets that test. The
challenges to Act 11 impact the pension interests of more than
460,000 "participants" [FN3] in the system, as well as the fiscal
responsibilities of the State of Wisconsin and all government
employers [FN4] within this state whose past or present
employees are participants in the system. Historically, several
of the major cases examining public employee pension issues
have begun as original actions. See State ex rel. Dudgeon v.
Levitan, 181 Wis. 326, 193 N.W. 499 (1923); State ex rel.
Thomson v. Giessel, 262 Wis. 51, 53 N.W.2d 726 (1952)
(Giessell); State ex rel. Thomson v. Giessel, 265 Wis. 558, 61
N.W.2d 903 (1953) (Giessel II); Columbia County v. Bd. Of
Trustees of Wis. Ret. Fund, 17 Wis.2d 310, 116 N.W.2d 142
(1962). Moreover, Act 11 includes a nonstatutory provision
requesting this court to "take jurisdiction of any original action
relating to the implementation of this act." 1999 Wis. Act 11,
§ 27(4t).
FN3. Wisconsin Stat. § 40.02(45) (1997-98) defines
"participant" as "any person included within the
provisions of the Wisconsin retirement system by virtue
of being or having been a participating employee whose
account has not been closed under s. 40.25(1) or (2)."
All statutory references are to the 1997-
98 volumes of the Wisconsin Statutes
unless noted otherwise. In discussing
the changes made to Chapter 40 of the
statutes by 1999 Wis. Act 11, we cite the
1997-98 volumes in order to accurately
describe these changes. The 1999-2000
volumes of the statutes contain Chapter
40 as modified by Act 11.
Notwithstanding our use of the 1997-98
volumes of the statutes, we use the word
“employee,” as opposed to "employe,”
whenever we quote the statutes and in
all other discussion throughout this
opinion. 1999 Wis. Act 185, § 193
changed the spelling of the word
6
"employe" to "employee" in the statutes
and this change is reflected in the 1999
2000 volumes. Because the legislature
has decided to use the "ee" spelling in
at statutes, ee used the same
spelling, even in the statutory quotations
from the 1997-98 volumes and the
quotations from Act 11. We have not,
however, changed the spelling of
"employe" in any quotations from cases.
FN4. Wisconsin Stat. § 40.02(28) provides:
"Employer" means the state, including each state
agency, any county, city, village, town, school district,
other governmental unit or instrumentality of 2 or more
units of government now existing or hereafter created
within the state and any federated public library system
established under s. 43.19 whose territory lies within a
single county with a population of 500,000 or more,
except as provided under ss. 40.51(7) and 40.61(3), or
a local exposition district created under subch. II of ch.
229. Each employer shall be a separate legal
jurisdiction for OASDHI purposes.
15 Petitioners present ey challenges to components
of Act 11. SEA also challenges the legality of the entire Act on
procedural grounds. We have carefully examined each claim
presented and conclude that none of the challenged portions of
Act 11 is unconstitutional beyond a reasonable doubt. We also
conclude that the Act was not approved in violation of Article
IV, Section 26 of the Wisconsin Constitution. Consequently,
the injunction issued by this court on December 29, 1999, is
lifted so that Act 11 may be enforced.
I. FACTUAL BACKGROUND
76 This case requires a thorough grasp of the Wisconsin
retirement system. For its facts, the court relies on the lengthy
Stipulation of Facts agreed to by the parties, under the
7
supervision of Reserve Circuit Judge Michael J. Barron, and an
invaluable 75-page analysis of the system by Tony Mason of the
Legislative Fiscal Bureau. See Tony Mason, Wisconsin
Legislative Fiscal Bureau, Informational Paper No. 73,
Wisconsin Retirement System (1999) [hereinafter Wisconsin
Retirement System]. Mason's analysis is listed as a stipulated
exhibit by the parties. The court draws heavily upon these two
documents, as well as Chapter 40 of the Wisconsin Statutes, for
its discussion in this section.
V7 The Wisconsin retirement system is the product of
many years of legislative action on public employee retirement
in Wisconsin. This state's first retirement plan for public
employees was created for Milwaukee protective service
employees (police and fire) in 1891. [FNS] Many additional
retirement plans followed, including a pension plan for
Milwaukee teachers in 1909, and a statewide plan for teachers
in 1911. [FN6] As a general rule, these early plans operated
independent of each other, either as county or municipal
retirement plans or as retirement plans covering certain types of
employees, such as teachers and protective service employees.
[FN
FNS. See § 1, ch. 287, Laws of 1891, cited in Tony
Mason, Wisconsin Legislative Fiscal Bureau, -
Informational Paper No. 73 Wisconsin Retirement
System 1 (1999) [hereinafter Wisconsin Retirement
System].
FN6. Wisconsin Retirement System, supra, at | (citing
ch. 510, Laws of 1909 and ch. 322, Laws of 1911).
FN7. Wisconsin Retirement System, supra, at 1-3.
18 In 1945, the legislature studying the possibility of
consolidating various public employee retirement plans; [FN8]
and in 1947, it consolidated many of the plans into a state
system known as the Wisconsin Retirement Fund. [FN9] The
legislature also created a 10-member Joint Survey Committee
on Retirement Systems to monitor public pension plans and
proposed statutory changes to the state-operated plans. [FN10]
FN8. Wisconsin Retirement System, supra, at 2;
Stipulation of Facts at § 6. |
FN9. Wisconsin Retirement System, supra, at 2-3 (citing
ch. 206, Laws of 1947, which consolidated various
statewide pension plans).
FN10. Wisconsin Retirement System, supra, at 3 (citing
ch. 376, Laws of 1947, which created the Joint Survey
Committee on Retirement Systems).
179 Over the years, consolidation moved forward. In 1967,
the legislature reorganized the executive branch of state
government, and it created the Department of Employee Trust
Funds (DETF) as well as a seven-member Employee Trust
Funds Board ETF Board or Board) to direct and supervise the
new department. [FN11] One result of this legislation was to
bring all non-Milwaukee pension plans under the administration
of DETF. [FN12]
FN11. Wisconsin Retirement System, supra, at 4
(describing ch. 75, Laws of 1967 as "another significant
step towards retirement system consolidation").
FN12. Wisconsin Retirement System, supra, at 4
(explaining the result of ch. 75, Laws of 1967).
710 1n1975, efforts began to unite the Wisconsin Retirement
Fund, the State Teachers Retirement System, and the
Milwaukee Teachers Retirement Fund into a system to be
known as the beet ae 3] By 1982, the legislature completed
this merger and folded 90 percent of all public employees in
Wisconsin into one pension system. [FN14] This legislation
solidified the administration and management structure of the
WRS under the ETF Board. [FN15]
FN13. Wisconsin Retirement System, supra, at 4
(arguing "the most significant advancement of the post-
1948 pension fund merger philosophy was embodied in
ch. 280, Laws of 1975").
FN14. Wisconsin Retirement System, supra, at 4 (citing
ch. 96, Laws of 1981); Stipulation of Facts at 4 6.
FN15. Wisconsin Retirement System, supra, at 4
(describing effect of ch. 96, Laws of 1981).
411 For purposes of this litigation, the WRS consists of
approximately 461,000 participants: roughly 255,000 active
employees, 103,000 annuitants, and 103,000 "inactive
participants” (former participating employees who have not yet
become annuitants). [FN16]
FN16. Stipulation of Facts at 943. "An ‘inactive
participant’ is a participant who is not an annuitant or a
participating employee ." Stipulation of Facts at 4 41.
412 There are four categories of active participating
employees. The vast majority (about 234,000) are classified as
general employees. [FN17] The other three categories are (1)
elected officials and executive employees; (2) protective
service employees not subject to Titles I] and XVIII of the
federal Social Security Act; and (3) protective service
employees subject to the federal Social Security Act.
FN17. Stipulation of Facts at 4 43.
{13 At the end of 1998, the WRS was supported by nearly
1,200 different employers, including the agencies of the State of
Wisconsin. [FN18] The WRS is funded by contributions from
employers and employees, and the interest earned on these
contributions. [FN19]
FN18. Stipulation of Facts at ¥ 36.
FN19. Wis. Stat. § 40.05; Wisconsin Retirement
System, supra, at 22; Stipulation of Facts at § 15
(describing where the fixed retirement investment trust
funding comes from).
A. Employee Contributions
10
414 Employee required contributions are determined on a
statutorily-mandated percentage of an employee's income.
[FN20] The four different categories of employees are required
to contribute different percentages of their income to their
retirement. [FN21] Employee required contributions range
from 5 percent to 8 percent of employee income, depending
upon an employee's statutory classification. [FN22] In recent
years, the state and other public employers have "picked up”
most employee required contributions as part of their overall
compensation of employees. [FN23] This practice is permitted
by Wis. Stat. § 40.05(1)(b). [FN24] State and local employers
"pick up” about 99 percent of employee required contributions.
[FN25] With certain limitations, employees may enhance their
pensions by contributing more than the statutorily-required
amount. [FN26] This supplementary payment is a voluntary
contribution.
FN20. Wis. Stat. § 40.05(1); Wisconsin Retirement
System, supra, at 34.
FN21. Wis. Stat. § 40.05(1); Wisconsin Retirement
System, supra, at 34; Stipulation of Facts at 4 49.
FN22. Wis. Stat. § 40.05(1 (a); Wisconsin Retirement
System, supra, at 35 (Table 22), 44 (Table 27).
FN23. Wis. Stat. § 40.05(1)(b); Wisconsin Retirement
System, supra, at 37-38, 43 (Table 26).
FN24. Wiscorsin Retirement System, supra, at 37.
FN25. Wisconsin Retirement System, supra, at 43 (Table
26). The participants in the WRS are all public
employees. Some work for the State of Wisconsin
(state) and others work for public employers such as
counties, cities, towns, villages, school districts, and
library districts. Wis. Stat. §§ 40.02(27) and 40.21.
Throughout this opinion, we frequently refer to the state
alone when we discuss employers. In so doing, we
mean to include other public employers.
ee es
+a
OO
__
11
FN26. Wis. Stat. § 40.32.
{15 A different kind of employee required contribution is
known as a "benefit adjustment contribution." [FN27] The
benefit adjustment contribution resulted from the increased
retirement benefits approved by the legislature in 1983 Wis. Act
141. [FN28] Wisconsin Stat. § 40.05(2m) sets the benefit
adjustment contribution at 1 percent of employee earnings.
[FN29}] Many employers have chosen to pick up this
contribution for their employees; and for accounting purposes,
the "benefit adjustment contribution” is treated as an employer
contribution. [FN30] Wisconsin Stat. § 40.05(2n) permits the
ETF Board to adjust annually the required benefit adjustment
contribution rates, if so advised by the actuary. [FN31] For
example, even though Wis. Stat. § 40.05(1){a) sets employee
contribution rates at a range of 5 to 8 percent, adjustments in the
rates by the ETF Board meant that the rates ranged from 4.3 to
5.8 percent in 1999. [FN32]
FN27. Wis. Stat. § 40.05(2m); Wisconsin Retirement
System, supra, at 36-37; Stipulation of Facts at ¥ 26.
FN28. Wisconsin Retirement System, supra, at 46 (citing
1983 Wis. Act 141).
FN29. Wis. Stat. § 40.05(2m); Wisconsin Retirement
System, supra, at 36.
FN30. Wis. Stat. § 40.05(2m); Wisconsin Retirement
System, supra, at 36.
FN31. Wis. Stat. § 40.05(2n); Wisconsin Retirement
System, supra, at 36-37; Stipulation of Facts at 4 26.
FN32. Stipulation of Facts at 4 49.
B. Employer Contributions
416 Employer contributions are calculated in a different
12
manner from employee required contributions. Employer
contribution rates, expressed as a percentage of payroll, are not
set in the statutes but are determined annually as part of an
actuarial evaluation of the WRS. [FN33] Each year the WRS
consulting actuary evaluates the funding requirements for the
system to meet the costs of estimated future retirement benefits,
utilizing the actuarial assumptions determined in the consulting
actuary’s tri-annual review . [FN34] This valuation process is
typically conducted during the late spring of each year. [FN35]
The annual contribution rate developed for employers is the
amount sufficient to fund these normal costs “net of all
revenues received from the statutory employee-required
contributions, the benefit adjustment contributions and those
investment earnings credited as current income.” [FN36] The
employer contribution rates developed by the actuary are
presented to the ETF Board for formal approval and become
effective on the next January 1. [FN37]
FN33. Wis. Stat. § 40.05(2); Wisconsin Retirement
System, supra, at 38; Stipulation of Facts at q 28.
FN34. Wisconsin Retirement System, supra, at 38;
Stipulation of Facts at { 28.
FN35. Wisconsin Retirement System, supra, at 38;
Stipulation of Facts at { 28.
FN36. Wisconsin Retirement System, supra, at 38;
Stipulation of Facts at { 28.
FN37. Wisconsin Retirement System, supra, at 38;
Stipulation of Facts at { 28.
417 One of the actuarial assumptions used to determine
employer contributions is the "assumed rate," defined in Wis.
Stat. § 40.02(7) as "the probable average effective rate expected
to be earned for the fixed annuity division on a long-term
basis.” [FN38] In recent years, § 40.02(7) set the assumed rate
at 7.5 percent (subject to modification by the ETF Board as
provided in that statute). [FN39] However, in 1992, the ETF
Board, upon recommendation of the actuary, changed the
13
assumed rate to 8 percent, and it used that assumed rate for
purposes of determining contribution rates for calendar years
1993 through 2000. [FN40]
FN38. Stipulation of Facts at ¥ 29.
FN39. Stipulation of Facts at 4 29.
FN40. Stipulation of Facts at 4 29.
18 Another of the actuarial assumptions used to value the
employer contributions is an assumption for across-the-board
salary increases. [FN41] For years § 40.02(7) set the actuarial
assumption for across- the-board salary increases at 1.9 percent
less than the assumed rate (subject to modification by the ETF
Board as provided in that statute). [FN42] However, the
assumption for across-the-board salary increases was changed
by the ETF Board, upon the recommendation of the actuary,
several times. [FN43) The actuary's three-year investigation
dated 1988, recommended (and the Board approved) changing
the salary increase assumption from 6.0 percent to 5.6 percent.
[FN44] The actuary’s three-year investigation dated 1994
recommended (and the Board approved) changing the salary
increase assumption from 5.6 percent to 5.3 percent. The
actuary's three-year investigation dated 1997 recommended (and
the Board approved) changing the salary increase assumption
from 5.3 percent to 4.8 percent. [FN45]
FN41. Stipulation of Facts at { 30.
FN42. Stipulation of Facts at 4 30.
FN43. Stipulation of Facts at 30.
FN44. Stipulation of Facts at 4 30.
FN45. Stipulation of Facts at ¥ 30.
{19 In addition to the employer required contributions for
current service, employers are required to pay contributions for
ja
any unfunded prior service liability (unfunded liability) that is
owed to the WRS. [FN46] An employer's unfunded liability is
the result of two factors: (1) a grant of credit under the WRS
for services rendered by an employee before the =
joined the WRS; and (2) an increase in benefits for an
employee's prior service that is not wholly funded by money
already in hand. [FN47] The second situation is now more
common. When the legislature authorizes increased benefits
for WRS participants and retroactively applies the benefit
increase to prior service, it may force employers to make
unexpected additional contributions to the employer reserve to
fund the retroactive benefit increase. [FN48] Once a
retroactive benefit increase is approved by the legislature,
employers usually have to "make up” for not having made
contributions in the past to fund that benefit increase.
FN46. Wis. Stat. § 40.05(2)(b); Stipulation of Facts at
q 31 (citing Wis. Stat. § 40.05(2)(b)); Wisconsin
Retirement System, supra, at 39.
FN47. Stipulation of Facts at 4 31; Wisconsin
Retirement System, supra, at 39.
FN48. Wisconsin Retirement System, supra, at 39.
420 Employer contribution rates for the payment of
unfunded liability are currently amortized over 40 years. [FN49]
Permitting employers to spread contributions for unfunded
liability over many years has enabled employers to finance
retroactive benefits and service credit. "For most WRS
employers, [payments began in 1986 and] payments to retire the
accrued liabilities arising from ious benefit
improvements will continue until 2026.” [FNSO}
FN49. Wis. Stat. § 40.05(2)(b); Stipulation of Facts at
q 32 (citing Wis. Stat. § 40.05(2\(b)); Wisconsin
Retirement System, supra, at 39.
FNS50. Wisconsin Retirement System, supra, at 39.
15
C. WRS Trusts
{21 The WRS includes two distinct trusts: a variable
retirement investment trust (variable trust) and a fixed
retirement investment trust (fixed trust or FRIT). [FN51] For
purposes of this litigation, the variable trust contains
approximately $7 billion [FN52] and the fixed trust contains
about $48.7 billion. [FN53] The variable trust, which is not
directly at issue in this case, is invested almost exclusively in
common and preferred stock. [FN54] By contrast, the fixed
trust contains a more diversified portfolio of investments than
the variable trust. [FN55] The diversification of the fixed trust
decreases a participant's potential to earn . large investment
profit, but also decreases a participant's potential investment
"loss. [FN56]
FNS1. Wis. Stat. § 40.04(3); Wisconsin Retirement
System, supra, at 24-26; Stipulation of Facts at q 12.
FNS2. Wisconsin Retirement System, supra, at 26.
FNS53. Stipulation of Facts at 415. The $48.7 billion
figure does not necessarily reflect actual cash holdings
of the fixed trust. Stipulation of Facts at qi2 n. 2.
Rather, accounting measures factor into the balance of
the trust. Stipulation of Facts at $12 n. 2. In addition,
the manner in which certain types of investment
holdings of the fixed trust are valued, such as real estate,
affect the balance of the trust. Wisconsin Retirement
System, supra, at 28-29.
Further, the fixed trust does not necessarily hold $48.7
billion now. However, for ses of this litigation, the
parties have agreed that the fixed trust contained that
amount at the end of 1998 and we will use end- of-1998
figures throughout this opinion unless otherwise
explicitly stated. Stipulation of Facts at 915 (indicating
total balance as of the last day of 1998). The 1998
figures were the most comprehensive available when the
parties submitted briefs in this case. The precise
account balances are not necessary to decide the
constitutionality of Act 11.
q22
16
FN54. Wisconsin Retirement System, supra, at 26. The
variable trust permits participation only for employees
who elected to participate in the variable trust prior to
April 30, 1980. Wis. Stat. § 40.04(7){a). Section
319g, ch. 221, Laws of 1979 precluded any additional
elections to participate in the variable trust after April
30, 1980. Thus, the number of employees participating
in the variable trust is limited and is dwindling as
employees leave public employment.
An employee who elected to participate in the variable
trust before April 30, 1980, currently can place up to 50
percent of the employee and employer contributions in
the variable trust. Wis. Stat. § 40.04(7a). Any
employee contributions not made to the variable trust
are credited to the employee's account in the fixed trust.
Wis. Stat, § 40.04(7). Employees also have the right to
terminate their participation in the variable trust. Wis.
Stat. § 40,04(7){a).
Act 11 will once again allow —o to elect to
participate in the variable trust. | Wis. Act 11, §
= kn petitioners have not challenged this portion of
ct il.
FN55. Wisconsin Retirement System, supra, at 25 (Table
14). The fixed trust funds include investments in
common and preferred stocks, public bonds, private
farang securities, short-term cash holdings, and real
estate. Id.
FN56. Wisconsin Retirement System, supra, at 25-26.
There are 12 different accounts and reserves within the
fixed retirement investment trust. [FN57] The 12 accounts are
as follows: (1) Wis. Stat. § 40.65 duty disability reserve, (2)
income continuation insurance reserve, (3) long term disability
insurance reserve, (4) accumulated sick leave conversion
credits, (5) Milwaukee death benefit account, (6) Milwaukee
retirement systems account, (7) Wis. Stat. § 62.13 police and
17
fire account, (8) WRS employer accumulation reserve, (9) WRS
employee accumulation reserve, (10) WRS annuity reserve, (11)
WRS undistributed earnings account, and (12) transaction
amortization account. [FN58] Only two of the accounts, the
Milwaukee retirement systems account and the WRS
NS) earnings account, are not affected by Act 11.
59
FNS7. Stipulation of Facts at 912; Wisconsin
Retirement System, supra, at 25.
FNS58. Wis. Stat. § 40.04(5); Stipulation of Facts at
q12.
FNS59. Stipulation of Facts at 413.
{23 _ The four accounts or reserves most pertinent to this case
are the WRS employer accumulation reserve, the WRS
employee accumulation reserve, the WRS annuity reserve, and
the transaction amortization account (TAA). [FN60]
FN60. Stipulation of Facts at 414; Wis. Stat. § 40.04(3)
(outlining statutory structure for accounts and reserves
of the public employee trust fund).
D. Employer Accumulation Reserve
724 The employer accumulation reserve holds employer
required contributions plus benefit adjustment contributions,
whether paid by employees or employers, and such other
amounts as provided in Wis. Stat. § 40.04(5). [FN61] For
omg of this litigation, this account holds about $11.5
illion. [FN62] The in the employer reserve are held in
one merged account. [FN63] In effect, the funds are pooled.
[FN64] At the same time, the funds in this account are invested
in both the fixed and variable trusts, depending upon the extent
of employee choices to invest employer contributions in each
trust respectively. [FN65]
FN61. Stipulation of Facts at 914; Wis. Stat. §
40.04(5).
18
FN62. Stipulation of Facts at 412.
FN63. Wis. Stat. § 40.04(5); Wisconsin Retirement
System, supra, at 23; Stipulation of Facts at 417.
FN64, Wis. Stat. § 40.04(5); Wisconsin Retirement
System, supra, at 23; Stipulation of Facts at 917.
FN65. Wisconsin Retirement System, supra, at 23; Wis.
Stat. § 40.04(7).
425 Unfunded acciued liabilities operate as a debt for
employers. [FN66] For accounting purposes, they are listed as
an asset--that is, as a receivable--of the system. [FN67]
FN66. Wis. Stat. § 40.05(2)(b); Stipulation of Facts at
413 1-32 (citing Wis. Stat. § 40.05(2)(b) and describing
unfunded liabilities as "owed to the WRS” and a
"debt"); Wisconsin Retirement System, supra, at 39.
FN67. Wisconsin Department of Employee Trust Funds,
Comprehensive Annual Financial Report 24 (1998).
E. Employee Accumulation Reserve
426 The employee accumulation reserve holds the funds
contributed by or on behalf of employees. [FN68] For purposes
of this litigation, the account balance of the employee reserve
is just short of $10 billion. [FN69] Unlike the employer
reserve, the employee reserve contains individual accounts for
each active and inactive employee. [FN70] All emplo
aera shri aes adh + MB et
statute and any additional voluntary contributions, are credited
to each employee's individual pag wo Me, Even if an
employer picks up contributions on of the employee, the
contributions are credited to the employee's individual account.
[FN72] The funds in the employee reserve are invested in both
the fixed and variable trusts, depending upon whether an
employee has chosen to invest a portion of the contributions for
19
him or her in the variable trust. [FN73]
FN68. Wis. Stat. § 40.04(4)(a); Stipulation of Facts at
114; Wisconsin Retirement System, supra, at 23.
FN69. Stipulation of Facts at 412.
FN70. Wis. Stat. § 40.04(4)(a); Wisconsin Retirement
System, supra, at 23; Stipulation of Facts at q16.
FN71. Wis. Stat. § 40.04(4)(a); Wisconsin Retirement
System, supra, at 23.
FN72. Wis. Stat. § 40.04(4)(a); Wisconsin Retirement
System, supra, at 37; Stipulation of Facts at q14.
FN73. Wisconsin Retirement System, supra, at 23; Wis.
Stat. § 40.04(4)(a)2. and (7).
F. Annuity Reserve
127 The third pertinent account is the annuity reserve.
[FN74] For ses of this litigation, the annuity reserve has
a balance of $14.8 billion. [FN75] The annuity reserve holds
funds for employees who choose to accept an annuity instead of
a oe payment upon leaving public service. [FN76]
Most long-term a choose some form of annuity when
leaving public employment. [FN77]
FN74. Wis. Stat. § 40.04(6); Stipulation of Facts at
414.
FN75. Stipulation of Facts at 412.
FN76. Wisconsin Retirement System, supra, at 24;
Stipulation of Facts at 414.
FN77. Wisconsin Retirement System, supra, at 46.
Some employees choose a separation benefit when they
leave public employ. This benefit is not an enmity and
20
is not typical for long-term employees. Wisconsin
Retirement System, supra, at 46.
428 Long-term employees typically choose from a variety of
annuity options when leaving public employment. There are
three types of annuities: straight life annuity, life annuity with
guarantee period, and joint survivorship annuity. [FN78] In
addition, two permissible calculation methods lead to two
different benefit options, a money purchase plan or a formula
benefit plan. [FN79]
FN78. Wis. Stat. § 40.24(1); Wisconsin Retirement
System, supra, at 56-57.
FN79. Wis. Stat. § 40.24; Wisconsin Retirement
System, supra, at 48.
929 The formula benefit plan provides an annuity fora
retiring employee based on a percentage of the employee's final
average earnings. [FN80] A statutory formula determines an
employee's initial annuity. [FN81] Different classes of public
employees are eligible for different percentage calculations in
determining annuities. [FN82] The WRS has been described as
a defined benefit plan to the extent that its participants are
eligible to receive a specific retirement benefit calculated to the
following formula: (creditable service) x (final average
earnings) x (formula multiplier) x (actuarial adjustment for
retirement prior to the normal retirement date). [FN83]
FN80. See Wis. Stat. § 40.24; Wisconsin Retirement
System. supra at 48-51; see also Wis. Stat. § 40.02(33)
(defining average earnings).
FN81. Wis. Stat. § 40.23(2), (2m).
FN82. Wis. Stat. § 40.23(2), (2m); Stipulation of Facts
at { 46.
FN83. Stipulation of Facts at 48; see also Wis. Stat. §
40.23(2) and (2m).
21
"The WRS is a hybrid plan with characteristics of both
a defined benefit plan and a defined contribution plan.”
Stipulation of Facts at § 7. Defined benefit plans are
discussed in Associati tat Vv.
Milwaukee County, 199 Wis.2d 549, 558-59, 544
N.W.2d 888 (1996). In Wisconsin Retired Teachers
Ass'n v. Employe Trust Funds Board, 207 Wis.2d 1, 12,
558 N.W.2d 83 (1997), the court noted that an
employee's base annuity, the formula benefit, "is
guaranteed by the State.”
{30 — The elements of this formula are defined in Chapter 40
of the statutes: "creditable service" is defined in Wis. Stat. §
40.02(17); "final average earnin_’s” is defined in Wis. Stat. §
40.02(33); "normal retirement date” is defined in Wis. Stat. §
FN84. Stipulation of Facts at 78.
FN85. Stipulation of Facts at 79.
431 The money purchase plan can offer a departing
employee a better annuity if accumulated funds can purchase a
larger annuity, based on actuarial tables, than a formula benefit.
[FN86]
FN86. See Wis. Stat. § 40.23(3); Wisconsin Retirement
System, supra, at 53.
932 When an employee leaves public service, a variety of
monies are transferred to the annuity reserve to finance the
employee's annuity. [FN87] The entire balance of the
employee's account in the employee reserve is transferred to the
22
employer reserve to the annuity reserve "that when increased by
an interest income assumption of 5% annually will fully finance
the [employee's] future benefit payments." [FN90] Even after
the funds are sent to the annuity reserve, the monies continue to
be invested in the fixed trust [FN91] or in the variable trust in
the same proportion as prior to the employee leaving public
service. [FN92]
FN87. Wisconsin Retirement System, supra, at 24;
Stipulation of Facts at 414.
FN88. Wisconsin Retirement System, supra, at 24;
Stipulation of Facts at 414.
FN89. Wisconsin Retirement System, supra, at 26;
Stipulation of Facts at 414.
FN90. Wisconsin Retirement System, supra, at 24.
FN91. Wisconsin Retirement System, supra, at24; Wis.
Stat. § 40.04(3) and (7).
FN92. Wisconsin Retirement System, supra, at 24; Wis.
Stat. § 40.04(3) and (7).
G. Transaction Amortization Account
933 The final pertinent account is the transaction
amortization account, or TAA. [FN93] For purposes of this
litigation, the TAA holds approximately $11.5 billion. [FN94]
The TAA functions more as an accounting mechanism than as
a receptacle for funds, such as the employer or employee
reserves. [FN95] All gains and losses of the fixed trust are
credited to the TAA, including both realized and unrealized
gains and losses. [FN96] "The purpose of the TAA is to
smooth the impact of investment gains or losses on the accounts
and reserves of the Fixed Trust.” [FN97] Spreading the impact
of gains and losses over a period of years, as opposed to
absorbing actual investment experiences immediately, tends to
create greater predictability for determining the contributions
necessary to fund the WRS. [FN98]
23
FN93. Wis. Stat. § 40.04(3). Stipulation of Facts at
414.
FN94. Stipulation of Facts at 412.
FN95. Stipulation of Facts at 920; Wisconsin
Retirement System, supra, at 28 (noting accounting
effects of TAA).
FN96. Wis. Stat. § 40.04(3)(a); Wisconsin Retirement
System, supra, at 28; Stipulation of Facts at $20.
FN97. Wisconsin Retirement System, supra, at 28.
FN98. Wisconsin Retirement System, supra, at 28.
34 On December 31st of each year, 20 percent of the TAA
balance is distributed to the fixed trust. [FN99] This
distribution from the TAA is divided proportionately among all
the accounts in the fixed trust, including the employee,
employer, and the annuity reserves. [FN100] It enables the
other accounts in the fixed trust to receive the investment
income gained by the fixed trust. [FN101] Prior to 1989, only
7 percent of the TAA was distributed each year. [FN102]}
However, 1989 Wis. Act 13 changed the distribution to 20
percent at year’s close. [FN103]
FN99. Wis. Stat. § 40.04(3)(a); Wisconsin Retirement
System, supra, at 28; Stipulation of Facts at 421.
FN100. Wis. Stat. § 40.04(3)(a); Wisconsin Retirement
System, supra, at 28; Stipulation of Facts at 420.
FN101. Wis. Stat. § 40.04(3)(a); Wisconsin Retirement
System, supra, at 28; Stipulation of Facts at 420.
FN102. Wis. Stat. § 40.04(3)(a) (1987-88); Wisconsin
Retirement System, supra, at 28; Stipulation of Facts at
q21.
24
FN103. Stipulation of Facts at 421.
435 Twice in the past, the legislature approved legislation
providing for special one-time distributions from the TAA,
apart from the annual statutory distributions. In 1987, the
legislature passed 1987 Wis. Act 27, in which $230 million was
distributed from the TAA to the various accounts in the trust.
[FN104] Part of the $230 million was distributed to the annuity
reserve to fund a special investment performance dividend
(SIPD) for a specific group of annuitants. [FN105] Various
employee associations successfully challenged the
constitutionality of 1987 Wis. Act 27, §§ 436m, 684r, and
688km in Wisconsin Retired Teachers Ass'n v. Employe Trust
Funds Board, 207 Wis.2d 1, 8, 558 N.W.2d 83 (1997). The
Retired Teachers court did not decide that case, however, on the
propriety of the distribution from the TAA. [FN106] Thus,
about $74.2 million was distributed to the employee reserve,
$77.2 million to the employer reserve, and $78.5 million to the
annuity reserve, according to the petitioner's brief in Retired
Teachers.
FN104. 1987 Wis. Act 27; Wisconsin Retirement
System, supra, at 29; Stipulation of Facts at 22.
FN105. 1987 Wis. Act 27; Retired Teachers, 207
Wis.2d at 8, 558 N.W.2d 83; Wisconsin Retirement
System, supra, at 29; Stipulation of Facts at 422.
FN106. Retired Teachers, 207 Wis.2d at 8, 558 N.W.2d
83; Stipulation of Facts at 22.
936 Two years later, the legislature passed 1989 Wis. Act
13, in which $500 million was distributed from the TAA.
[FN 107] This legislation did not face a legal challenge. [FN108]
The 1989 legislation also distributed money to the employee,
employer, and annuity reserves. [FN109] Like the 1987 and
1989 Acts, Act 11 orders a lump sum distribution from the
TAA to the accounts and reserves in the fixed trust.
FN107. 1989 Wis. Act 13; Wisconsin Retirement
System, supra, at 29; Stipulation of Facts at $22.
25
FN108. Stipulation of Facts at 422.
FN109. 1989 Wis. Act 13, § 47(2).
Il. ACT 11
{37 _ This section discusses the history and substance of
Act 11.
{38 Assembly Bill 495 was introduced on October 1, 1999,
and referred to the Joint Survey Committee on Retirement
Systems. Assembly Bulletin, Assembly Bill 495, at 169 (Dec.
31, 2000). On October 4, 1999, the committee held a public
hearing on the bill and then took executive action. Jd The
Assembly Speaker referred the bill to the Assembly Calendar of
October 6, 1999, and Assembly Bill 495 was taken up, voted
upon, and passed that day. /d. The bill was immediately
messaged to the Senate, referred to and then withdrawn from
the Committee on Senate Organization, and voted upon by the
Senate on October 6, 1999. Jd. On December 16, 1999, the
Governor signed the bill into law as 1999 Wisconsin Act 11.
Id. Early drafts of pension enhancement bills were under review
from the beginning of the legislative session. [FN110}
FN110. Legislative Reference Bureau Drafting File for
1999 Wis. Act 11, Legislative History for 1999
Assembly Bill 495.
{39 Assembly Bill 495 is described in its relating clause as
an Act "relating to: benefit improvements, interest crediting,
variable annuity option, contribution credits for employers,
death benefits, credit for legislative service, recognition of
income and capital gains and losses in the fixed retirement
investment trust and affecting certain actuarial assumptions and
liabilities under the Wisconsin retirement system." Several of
these changes require discussion.
A. Benefit Improvements
740 The formula multiplier or percentage multiplier
26
described in §§ 29-30 varies according to employee
classification. [FN111] For a protective occupation participant
covered by social security, an elected official, and an executive
participating employee, the formula multiplier is 2 percent.
[FN112] For a protective occupation participant not covered by
social security, the formula multiplier is 2.5 percent. [FN113]
For all other participants in the WRS, the formula multiplier is
1.6 percent. [FN114]
FN111. Stipulation of Facts at 410; Wis. Stat. §
40.23(2)(b) 1-4 and (2m)(e)1-4.
FN112. Wis. Stat. § 40.23(2m)\(e)2-3.
FN113. Wis. Stat. § 40.23(2m\(e}4.
FN114. Wis. Stat. § 40.23(2m\e)1.
941 Act 11 increases the formula multipliers for all classes
of participating employees in the WRS for creditable service
performed before January 1, 2000 as follows: [FN115]
FN115. Act 11 affects the formula multiplier only for
"participants who are participating employees after
March 9, 1984.” Wis. Stat. § 40.23(2m).
1) Protective occupation participants not covered by social
security, from 2.5 percent to 2.665 percent. [FN116]
FN116. 1999 Wis. Act 11, § 20 (amending Wis. Stat. §
40.23(2m \e) 4).
2) Protective occupation participants covered by social
security, from 2 percent to 2.165 percent. [FN117]
FN117. 1999 Wis. Act 11, § 19 (amending Wis. Stat. §
40.23(2m)e) 3).
3) Elected officials and executive participating employees,
from 2 percent to 2.165 percent. [FN118]
27
FN118. 1999 Wis. Act 11, § 18 (amending Wis. Stat. §
40.23(2m \(e) 2).
4) Other participants, from 1.6 percent to 1.765 percent.
[FN119]
FN119. 1999 Wis. Act 11, § 17 (amending Wis. Stat. §
40.23(2m \(e) 1).
The Act provides that creditable service performed after
January 1, 2000 shall be calculated according to the prior
multipliers. [FN120]
FN120. 1999 Wis. Act 11, §§ 17-20.
{42 The Act also applies the increased multiplier for past
service only to "individuals who are participating employees in
the Wisconsin retirement system on January 1, 2000." [FN121]
FN121. 1999 Wis. Act 11, § 28(2).
143 Act11 alsoraises the benefit cap, namely, the maximum
amount of initial retirement annuity guaranteed by the state, for
most employees. [FN122] Under the law in place before Act 11,
maximum amount of an initial annuity for a participant in
the WRS was 65 percent of the participant's final average
earnings. [FN123] The one exception to this rule was for a
protective occupation participant not covered by social security
whose initial annuity was capped at 85 percent of the
participant's final average earnings. [FN124] Act 11 raises to 70
percent the cap for all participating employees who are capped
at 65 percent, except for protectives covered by social security,
whose initial annuities will continue to be capped at 65 percent.
[FN125] It also maintains the 85 percent cap for protectives not
covered by social security. [FN126]] For these protectives, the
maximum initial annuity cap will stay at 85 percent of final
average earnings.
FN122. 1999 Wis. Act 11, § 16.
28
FN123. Wis. Stat. § 40.23(2m)(b).
FN124. Wis. Stat. § 40.23(2m)(b).
FN125. 1999 Wis. Act 11, § 16.
FN126. 1999 Wis. Act 11, § 16.
444 The benefit cap hike applies only to active participating
employees in the Wisconsin retirement system on January 1,
2000. [FN127] Thus, by the terms of the Act, the 103,000
"inactive participants" in the WRS--that is, the former
participating employees who have not yet become annuitants--
are not eligible for either the increase in the multiplier for
creditable service "performed before January 1, 2000” or the
benefit cap increase made available for two categories of
employees. Active participating employees who begin work
after January 1, 2000, are ineligible for the increase in the
multiplier.
FN127. 1999 Wis. Act 11, § 28(2).
B. Accelerated Distribution of Money from the TAA
445 Two of the components of the public employee trust
fund are the variable retirement investment trust and the fixed
retirement investment trust. [FN128] As noted above, the
transaction amortization account is one of the 12 accounts and
reserves within the fixed trust. The TAA is maintained and
used to smooth out fluctuations in unrecognized gains and
losses in the value of fixed trust assets. [FN129] "The balance
of the TAA closely parallels the difference between market
value and the adjusted book value of the assets." [FN130]
Each year, 20 percent of the balance of the TAA is distributed
to participating accounts in the fixed trust. [FN131]
FN128. Wis. Stat. § 40.04(3); Stipulation of Facts at
q12.
FN129. Wisconsin Retirement System, supra, at 28;
29
Stipulation of Facts at 4919-20.
FN130. Legislative Reference Bureau Drafting File for
1999 Wis. Act 11, Legislative History for 1999
Assembly Bill 495.
FN131. Wis. Stat. § 40.04(3)(a); Stipulation of Facts at
q21.
146 ~=Act 11 provides that on December 31, 1999, $4 billion
is to be distributed from the TAA to the reserves and accounts
in the fixed trust in amounts equal to the percentage of the total
distribution determined by dividing each reserve’s and account's
balance on January 1, 1999, by the total balance of the fixed
trust on January 1, 1999. [FN132] Most of the $4 billion
distribution is to be sent arithmetically into the employee,
employer, and annuity reserves. [FN133]
FN132. 1999 Wis. Act 11, § 27(1){a).
FN133. These three reserves constitute the vast majority
of the fixed trust balance and therefore the pro rata
distribution language in § 27(1)(a) of Act 11 will cause
most of the $4 billion to enter these three accounts.
Stipulation of Facts at $12.
147 A portion of the $4 billion distribution will fund the
benefit improvements created by Act 11. Hence, the $4 billion
distribution helps both employers and participating employees.
Money distributed to the employee reserve will enhance the
individual accounts of some of the inactive participants in the
reserve. Money distributed to the annuity reserve will produce
a substantial increase in annual annuity payments.
C. $200 Million Credit
148 Act 11 also provides that $200 million of the increase in
the employer reserve resulting from the $4 billion distribution
will be used to establish employer contribution credits to help
satisfy required payments that employers have for unfunded
liabilities. [FN134] These credits have the effect of reducing
30
employer debt for unfunded liabilities, thereby permitting a
suspension of payments for unfunded liability. [FN135]
Employers who have already paid off their unfunded liability or
who have credits in excess of such unfunded liability can
suspend payment of the employer required contributions until
their respective credits are exhausted. [FN136] All employers
who are part of the WRS will benefit from the contribution
credits. [FN137] After an employer's credits have been
exhausted, the employer is required to resume payments to
satisfy required contributions and any remaining
liability. [FN138]
FN134. 1999 Wis. Act 11, § 27(1)(b)1; Stipulation of
Facts at 457.
FN135. 1999 Wis. Act 11, § 27(1)(b)1; Stipulation of
Facts at 457.
FN136. 1999 Wis. Act 11, § 27(1)(b)1; Stipulation of
Facts at 957. The estimated suspension period for
payments ranges from 19.6 months on average for
school districts to 58.2 months on average for special
districts. The estimated payment suspension period for
the State is 22.1 months.
FN137. 1999 Wis. Act 11, § 27(1)(b)1; Stipulation of
Facts at 457.
FN138. 1999 Wis. Act 11, § 27(1)(b)1; Stipulation of
Facts at 457.
D. Actuarial Assumptions
449 As noted above, employer required contribution rates,
expressed as a percentage of payroll, are determined as part of
each annual actuarial evaluation of the WRS. One of the
actuarial assumptions considered is the "assumed rate,” defined
in Wis. Stat. § 40.02(7). [FN139] The statutory assumed rate
was initially set at 7.5 percent, although, as authorized, the ETF
Board changed the assumed rate to 8 percent in 1992. [FN140]
Act 11 amends § 40.02(7) so that the new statutory assumed
3]
rate is 8 percent. [FN141] Another actuarial assumption is the
assumption for across-the-board salary increases. [FN142] This
assumption, also set out in § 40.02(7), has been Statutorily set
at 1.9 percent less than the assumed rate. [FN143] However, as
authorized, the ETF Board has revised the across- the-board
salary assumption several times, moving it to 4.8 percent in
1998. [FN144] Act 11 amends the 1.9 percent in § 40.02(7) to
3.4 percent. [FN145] This produces a statutory assumption for
across-the-board salary increases of 4.6 percent (8 percent less
3.4 percent). [FN146]
FN139. Stipulation of Facts at 429.
FN140. Stipulation of Facts at 429; see also Wisconsin
Retirement System, supra, at 32.
FN141. 1999 Wis. Act 11, § 5.
FN142. Stipulation of Facts at 430.
FN143. Wis. Stat. § 40.02(7); Stipulation of Facts at
430.
FN144. Stipulation of Facts at 430.
FN145. 1999 Wis. Act 11, § 5.
FN146. 1999 Wis. Act 11, § 5.
$50 Bothofthese actuarial changes may affect employer and
employee required contributions. [FN147] Nonetheless, the
ETF Board retains the authority in Wis. Stat. § 40.02(7) to
change the rates "due to changed economic circumstances"
when the actuary so recommends. Moreover, Act 11 provides,
in a non-statutory provision (Section 27(3)) that:
"Notwithstanding any provision in this act, the employee trust
funds board shall retain the authority to maintain proper
actuarial funding of the Wisconsin retirement system.”
FN147. Wisconsin Retirement System, supra, at 38 43.
32
951 For purposes of this litigation, the present unfunded
liability for all —— totals a thes Be reve $2.2 billion.
[FN148] In the past, the iability of employers has
been recalculated following adjustments to the actuarial
assumptions that govern overall ing requirements for the
WRS. [FN149 In 19 1989, when the actuary recommended (and
the ETF approved) changing the assumed rate from 7.5
percent to 7.8 percent, the DETF recalculated the remaining
unfunded liability using the new assumed rate. [FN150] As a
result, the aggregate unfunded liability of all employers as
carried on DETF's books, was reduced by $90,589,521.
[FN151] In 1991 , when the actuary recommended (and the ETF
Board a pproved): changing the assumed rate from 7.8 percent to
8.0 percent, the DETF recalculated the remaining unfunded
liability using the new assumed rate. [FN152] As a result, the
aggregate unfunded liability of all employers as carried on
DETF's books, was reduced by $59,477,500. [FN153] No legal
challenge to these actions was made. [FN154] In 1994, when
the actuary recommended (and the ETF Board approved)
changing the across-the-board salary increase assumption from
5.6 percent to 5 -3 percent, the DETF recalculated the remaining
unfunded liability of employers, using the new salary increase
assumption. [FN155] As a result, the aggregate unfunded
liability of all employers as carried on DETF’s books was
reduced by $85,117,420. [FN156] No legal challenge to this
action was made. [FNI 57]
FN 148. Stipulation of Facts at 432.
FN149. Stipulation of Facts at 33;__ Wisconsin
Retirement System, supra, at 31-32, 40.
FN150. Stipulation of Facts at 433.
FN151. Stipulation of Facts at 433.
FN152. Stipulation of Facts at 433.
FN153. Stipulation of Facts at 933.
33
FN154. Stipulation of Facts at 433.
FN155. Stipu.ution of Facts at 433.
FN156. Stipulation of Facts at 433.
FN157. Stipulation of Facts at 933.
452 In February 1998, however, the Secretary of DETF
asked the Attorney General whether the ETF Board had
authority to adjust unfunded liability, to reflect later adjustment
to actuarial assumptions. [FN158] On January 15, 1999,
Assistant Attorney General Jane Hamblen replied on behalf of
the Attorney General, stating that there was no statutory
authority for the ETF Board to adjust the unfunded liability
balance of employers even when the WRS actuary subsequently
recommended changes in the actuarial assumptions that were
used when the initial unfunded liability balance was determined
. [FN159] Since receipt of this reply, the ETF Board has not
made any recalculations of the unfunded liability balance.
[FN160]
FN158. Stipulation of Facts at 434.
FN159. Stipulation of Facts at 934.
FN160. Stipulation of Facts at 934.
153 Act11 authorizes DETF to adjust the unfunded liability
balance of the WRS and of each employer to reflect changes in
certain assumptions used to value the liabilities of the WRS, if
the actuary recommends and the ETF Board approves the
changes. [FN161]
FN161. 1999 Wis. Act 11, § 15 (creating Wis. Stat. §
40.05(2)(cm)).
If. PROCEDURAL HISTORY
154 Seven days after Governor Tommy Thompson signed
Assembly Bill 495 into law, the Employee Trust Funds Board,
34
the Department of Employee Trust Funds, and Eric O.
Stanchfield, Secretary of the Department of Employee Trust
Funds, filed in this court a petition for preliminary injunction,
or, alternatively, a writ of prohibition, to block implementation
of Act 11. The three petitioners also filed a petition for leave
to commence an original action and to have their petition stand
as a complaint seeking declaratory judgment. named as
respondents Secretary Lightbourn and State Treasurer Voight.
Five days later, on December 28, 1999, WEAC moved to
intervene as a respondent. On December 29, 1999, we
preliminarily enjoined implementation of the Act, which was
scheduled to take effect the following day. In our order, we
directed the Wisconsin Department of Administration to
respond to the Board's petition.
955 On January 12, 2000, the court modified its order and
required, among other things, memoranda on whether the
petitioners had standing to question the constitutionality of the
Act and whether realignment of the parties would be required
to provide for parties with proper standing to challenge and
defend the constitutionality of the Act.
456 OnJanuary 28,2000, WPPA and SEA separately moved
to intervene as petitioners, also asking for leave to commence
an original action.
457 On February 10, 2000, we ruled that the ETF Board's
petition was not proper because the Board had no authority as
a state agency to challenge the constitutionality of Act 11. See
Columbia County v. Bd. of Trustees of Wis. Ret. Fund, 17
Wis.2d 310, 317-19, 116 N.W.2d 142 (1962). At the same
time, we granted all motions to intervene, ordered the proposed
complaint of WPPA to serve as the complaint in this action, and
designated WPPA and SEA as petitioners. Lightbourn, Voight,
and WEAC were designated as respondents. We ordered the
parties to prepare a stipulation of facts and appointed Reserve
Circuit Judge Michael J. Barron to oversee the process of
preparing the stipulation. Ultimately, Judge Barron's findings
of fact, based upon the stipulation, were filed with the court on
April 10, 2000. In the meantime, we granted SEA permission
to supplement the WPPA complaint with its own claims.
35
458 On May 25, 2000, we accepted original jurisdiction of
this case.
{59 WPPA and SEA make the following claims:
1. WPPA contends that the $4 billion distribution from the
TAA violates Wis. Stat. § 40.19(1) and is an unconstitutional
taking of property and an unconstitutional impairment of
contract.
2. WPPA and SEA contend that the $200 million portion of
the total funds distributed to the employer reserve and
earmarked as a credit for employers against unfunded liability,
violates Wis. Stat. § 40.19(1) and is an unconstitutional taking
of property and an unconstitutional impairment of contract.
3. WPPA and SEA contend that the legislative modifications
to the statutory assumed rate and the statutory across-the-
board salary increase rate usurp the ETF Board's authority,
thereby impairing their contract rights under Wis. Stat. §
40.19(1), and that the rate changes are otherwise
unconstitutional.
4. WPPA contends that raising the 65 percent benefit cap by
5 percent for all employees except protective occupation
employees violates the equal protection clause of the United
States Constitution and Article I, Section 1 of the Wisconsin
Constitution.
5. SEA contends that Act 11 is unconstitutional because it
failed to pass the Wisconsin legislature by a three-fourths vote
of all the members elected to both houses of the legislature
and it fails to provide sufficient state funds to cover the cost
of increased benefits as required by Article IV, Section 26 of
the Wisconsin Constitution.
IV. ANALYSIS
{60 Before we examine each of the claims presented to this
court, we reaffirm the legal standards guiding our decision.
36
961 The court entertains this original action pursuant to our
authority under Article VII, Section 3(2) of the Wisconsin
Constitution. The petitioners ask this court to issue a declaratory
judgment that certain portions of Act 11 are unconstitutional.
(FN162]
FN162. None of the parties has argued that this matter
is not sufficiently justiciable for declaratory relief. We
need not address in detail, therefore, the four-part
justiciability test this court has developed to measure the
appropriateness of declaratory relief. See Miller
Brands-Milwaukee, Inc. v. Case, 162 Wis.2d 684, 694,
470 N.W.2d 290 (1991). Nevertheless, we find that
this matter is rightly before the court as an action for
declaratory judgment.
462 Tosucceed ina challenge to the constitutionality of Act
11, the petitioners must show that the Act is unconstitutional
beyond a reasonable doubt. Retired Teachers, 207 Wis.2d at
18, 558 N.W.2d 83; State ex rel. Hammermill Paper Co. v. La
Plante, 58 Wis.2d 32, 46, 205 N.W.2d 784 (1973).
463 | Whenacourt examines the constitutionality of a statute,
it is not concerned with the wisdom of the legislative
enactment. Hammermill Paper Co., 58 Wis.2d at 47, 205
N.W.2d 784. A court is "judicially concerned only when the
statute clearly contravenes some constitutional provision."
Gottlieb v. City of Milwaukee, 33 Wis. 2d 408, 415-16, 147
N.W.2d 633 (1967) (citing Chicago & N.W. Ry. Co. v. La
Follette, 27 Wis.2d 505, 521, 135 N.W.2d 269 (1965)). When
a court reviews the constitutionality ofa statute, it scrutinizes an
exercise of power by a separate branch of state government.
Our review is independent but deferential. Our duty is to
uphold a legislative act if at all possible. Hammermill Paper
Co., 58 Wis.2d at 47, 205 N.W.2d 784; Gottlieb, 33 Wis.2d at
415, 147 N.W.2d 633.
464 Our duty to uphold legislation whenever possible is
embodied in the principle that every legislative act is presumed
constitutional. Hammermill Paper Co., 58 Wis.2d at 47, 205
37
N.W.2d 784 (citing Gottlieb, 33 Wis.2d at 415, 147 N.W.2d
633). Thus, "wherever doubt exists as to a legislative
enactment's constitutionality, it must be resolved in favor of
constitutionality.” Id. at 46, 205 N.W.2d 784. "If there is any
reasonable basis upon which the legislation may constitutionally
rest, the court must assume that the legislature had such fact in
mind...." State ex rel. Carnation Milk Prods. Co. v. Emery, 178
Wis. 147, 160, 189 N.W. 564 (1922).
A. Three-Fourths Vote
{65 SEA contends that Act 11 is unconstitutional because it
failed to pass the Wisconsin legislature by a three-fourths vote
of all the members elected to both houses of legislature.
166 SEA raises what we regard as a threshold issue:
whether 1999 Assembly Bill 495 failed to pass the Wisconsin
legislature by a three-fourths vote of all the members elected to
both houses of the legislature, contrary to Article IV, Section 26
of the Wisconsin Constitution. SEA's challenge threatens the
validity of the entire Act and, consequently, it must be
addressed first.
{67 Article IV, Section 26 of the Wisconsin Constitution
provides in relevant part as follows:
(1) The legislature may not grant any extra
compensation to a public officer, agent, servant or
contractor after the services have been rendered or
the contract has been entered into.
(3) Subsection (1) shall not apply to increased
benefits for persons who have been or shall be:
granted benefits of any kind under a retirement
system when such increased benefits are provided
by a legislative act passed on a call of ayes and noes
by a three-fourths vote of all the members elected
to both houses of the legislature and such act
provides for sufficient state funds to cover the costs
of the increased benefits.
38
768 The text of Article IV, Section 26 raises several
questions of int tation that require us to review the history
of the section, which has been amended five times since its
inclusion as part of the original constitution.
469 Atthe beginning of the last century, Article IV, Section
26 consisted of a single sentence:
Extra compensation. Section 26. The
legislature shall never grant any extra
compensation to any public officer, agent,
servant or contractor, after the services shall
have been rendered or the contract entered into;
nor shall the compensation of any public officer
be increased or diminished during his term of
office.
770 In1921, the legislature approved a Teachers’ Retirement
Act that contained several features of the present retirement
system. Ch. 459, Laws of 1921. The act provided pensions for
teachers already in service and computed the pensions to reflect
the teachers’ entire service before and after enactment of the
law. When the act was challenged in our couit, the question
presented was whether the credit for past service for teachers
still employed was "extra compensation" in violation of Section
26. This court concluded that the purpose of the law was to
promote a higher efficiency in the state's educational system by
retaining seasoned and experienced teachers.
Dudgeon v. Levitan, 18! Wis. 326, 339, 193 N.W. 499 (1923).
The court explained that enactment of a pension system would
attract future entrants into the teaching profession, but failure of
that pension system to consider past service by teachers already
working would generate dissatisfaction, "causing the older
teachers either to drop out of the service or to continue in
service with abated interest and devotion.” Id. at 341, 193 N.W.
499. The court observed:
We do not think it necessarily follows that
because the legislature, in its attempt to
construct an enduring and efficient pension
39
system, saw fit to base the annuity which
teachers already in service are to be awarded in
part upon the service rendered prior to the
enactment of the law, it was its dominant
purpose or intent to award such teachers extra
compensation for services already rendered.
Id. at 342, 193 N.W. 499. The court went on:
As we view it, the annuity based on past service is
not intended to be, or operate as, compensation for
past service. It was rather intended to be, and in
fact is, an inducement to the seasoned and
experienced teacher to remain in the service and
give the public the benefit of his experience. We
think there was plenty of room for the legislature
to determine that the ultimate success of the
pension system itself required special
consideration of those constituting the educational
forces of the state at the time of the enactment of
the law, not as compensation for prior service but
rather as an inducement to them to remain in the
service, to the great benefit of our educational
institutions.
Id. at 343, 193 N.W. 499.
{71 Three decades after Dudgeon, the court was confronted
with a more difficult question: whether the legislature could
appropriate funds to increase retirement benefits for teachers
"who had retired before June 30, 1951." State ex rel. Thomson
v. Giessel, 262 Wis. 51, 65, 53 N.W.2d 726 (1952) (Giessel I).
This legislative plan was retroactive; no future service was
required of the retired teachers to qualify for the pension
increase. The court concluded that the plan was
unconstitutional, stating that the effect of the law was "to grant
extra compensation to public servants after the services are
rendered ... in violation of sec. 26, art. IV of the state
constitution."_Id. The court added:
It has not escaped the attention of the court that
40
a decision sustaining an increase of benefits for
already retired teachers would clear the way for
legislation increasing benefits for all public
employees, including judges, granted by the
legislature from time to time after their
retirement, and such a decision would be
consonant with the selfish interests of the court.
Nevertheless, as we read sec. 26, art. IV,
Const., this would involve an exception to a
clear and unmistakable command. Ifexceptions
are to be made, they should not come from the
legislature or the court but from those whose
proper function it is to amend the constitution.
Id. at 64, 53 N.W.2d 726 (emphasis added).
{72 Justice George Currie dissented from the decision,
writing:
In my opinion the time has come when this court should take
one further forward step ... and declare that sec. 26, art. IV of
the constitution, has no application to pension or annuity benefit
pay to retired public servants pursuant to a genuine retirement
system embodying an otherwise valid statute or ordinance
serving a public purpose.
To hold, as the majority does, that the state is
powerless to increase retirement benefits to
retired public servants ... is to place all
retirement systems for public servants in a strait
jacket, thus rendering it impossible that such
retirement benefits shall serve the original
purpose intended.
Id. at 66, 53 N.W.2d 726 (Currie, J., dissenting).
{73 The legislature responded to the Giesse/ J decision by
passing a law directed to "emergency substitute teachers,” that
is, retired teachers who signed up for potential service as
substitutes. See § 2, ch. 434, Laws of 1953. The law
compensated retired teachers for making themselves available
for service as substitutes, whether or not they actually served,
«4d
and the compensation for that potential service was essentially
the same as the compensation struck down in Giessel I. In State
ex rel. Thomson v. Giessel, 265 Wis. 558, 61 N.W.2d 903
(1953) (Giessel II), the court upheld the legislature's plan,
dismissing the contention that the new law was a subterfuge.
The law required retired teachers to sign up for future service as
a prerequisite for the "compensation." This tie to future service
saved the legislation. "The act must be construed as authorizing
a contract by which the state rehires retired teachers.... The
payments provided by the act are not intended to be
_ compensation for past services.”_Giessel II, 265 Wis. at 565-66,
61 N.W.2d 903.
{74 Before the second Giessel decision was issued, the
legislature commenced work ona constitutional amendment, as
suggested in Giessel I. The amendment eventually added the
following sentence to Article IV, Section 26 of the Constitution:
This section shall not apply to increased benefits
for teachers under a teachers’ retirement system
when such increased benefits are provided by a
legislative act passed on a call of the yeas and
nays by a three-fourths vote of all the members
elected to both houses of the legislature.
175 This 1956 amendment introduced two new concepts to
Section 26. One was the concept of "increased benefits ... under
a ... retirement system." The second was "a legislative act"
passed "by a three-fourths vote of all the members elected to
both houses of the legislature.”
{76 Teachers were not the only object of legislative concern.
For instance, beginning in 1945, the legislature made counties
with a population of less than 500,000 eligible to join the
Wisconsin Retirement Fund. Columbia County, 17 Wis.2d at
313-14, 116 N.W.2d 142; Wis. Stat. § 66.90(4) (1945). By
1961, more than 40 counties had done so. Columbia County, 17
Wis.2d at 314, 116 N.W.2d 142. In 1961, the legislature
mandated that all remaining counties with a population of less
than 500,000 be brought into the system. § 2, ch. 459, Laws of
42
1961. Inevitably, this meant recognition of prior service by
continuing employees. Because of the cost this would entail,
state aids were provided to all counties participating in the fund
that had heavy property tax levies for contributions to the fund.
Columbia County, 17 Wis.2d at 314, 116 N.W.2d 142:
{77 Eight counties resisted the new legislation, and some of
their taxpayers challenged the law. Id. at 313, 116 N.W.2d 142.
They argued in part that the 1961 law constituted a grant of
extra compensation to public officers, agents, or servants after
their services had been rendered. Id. at 326, 116 N.W.2d 142.
The taxpayers objected to the legislature's mandatory
subjection of the counties to the fund, requiring contributions
from taxes to support retirement benefits. They said that
withholding state aids if contributions were not paid as well as
providing reimbursement aids to assist certain counties in
making payment amounted to "a legislative grant of extra
compensation.” Id.
78 Thecourt declared that "sec. 26, art. IV, does not apply
to counties.” Id. It ruled that state aids for contributions to the
fund were not extra compensation by the state. Id. at 327, 116
N.W.2d 142. It rejected the argument that "some future service
is necessary in consideration for the payment of past-service
credits.” The court said>
The basic answer lies in the concept that
contributions made to the pension fund are not
compensation, much less extra compensation
paid to public officers, agents, or servants. The
payment of contributions may ultimately under
some conditions inure to the benefit of the
employee in the form of a pension benefit but
this is not absolute or necessarily so and does
not amount to compensation as that term is used
in sec. 26, art. IV of the constitution.
_Id. at 327-28, 116 N.W.2d 142.
{79 The 1962 Columbia County decision, written by Justice
E. Harold Hallows, was unanimous. In effect, it embraced the
43
argument that Justice George Currie had made iii Giessel I ten
years earlier. .
480 In 1974, however, Article IV, Section 26 was amended
again. The sentence added in 1956 was modified to read:
This section shall not apply to increased benefits
for persons who have been or shall be granted
benefits of any kind under a retirement system
when such increased benefits are provided by a
legislative act passed on a call of yeas and nays
by a three-fourths vote of all the members
elected to both houses of the legislature, which
act shall provide for sufficient state funds to
cover the costs of the increased benefits.
{81 The 1974 amendment made several changes to Section
26. First, it struck out the word "teachers" and replaced it with
the phrase "persons who have been or shall be granted benefits.”
Second, it modified the word "benefits" with the additional
phrase "of any kind.” Third, it struck out the word "teachers' "
before the term "retirement system" so that "retirement system”
thereafter appeared in the text without qualification. Fourth, it
added the clause "which act shall provide for sufficient state
funds to cover the costs of the increased benefits." The fourth
change was added as a floor amendment; it was not part of the
original proposal. See Senate Amendment 1 to 1971 Senate
Joint Resolution 3. |
82 Although Section 26 has been amended on three other
occasions--in 1967, 1977, and 1992--the other amendments are
not relevant to the current litigation.
983 SEA contends that Act 11, by providing increased
benefits, "including" the increase in benefit multipliers and the
cap increase for the initial formula-based annuity for most
active participants, violates Section 26 because it did not pass
the legislature on a call of ayes and noes by "a three-fourths
vote of all the members elected to both houses of the
legislature." [FN163] Wis. Const. art. IV, § 26. Another
relevant provision is the $4 billion recognition from the TAA
44 ;
because it has the effect of sending approximately $1.064
billion into the employee accumulation reserve account to
increase the accounts of both active and inactive participants
who are not annuitants, and about $1.608 billion into the
annuity reserve to increase annuities for annuitants. [FN164]
This latter increase is treated as a permanent increase in the
annual annuity payment unless the system experiences such
serious difficulty at some point that it is unable to continue to
pay the increment. [FN165] This increase is not guaranteed by
the state, but it is not expected to decline unless the system
becomes troubled.
FN163. Petitioner SEA's brief at 46.
FN164. Gabriel, Roeder, Smith & Company, Wisconsin
Retirement System Actuarial Valuations of Benefit and
Financing Provisions of Assembly Bill 495 8
(Nov.1999) (prepared for the Joint Survey Committee
on Retirement Systems).
FN165. Wisconsin Retirement System, supra, at 68-69;
see also Wis. Stat. § 40.27(2)(c).
184 Respondents argue that Article IV, Section 26 is
inapplicable to Act 11. [FN166] Respondents Lightbourn and
Voight argue that subsection (1) of the section does not serve as
a bar to increased benefits for persons currently employed.
FN166. Respondents Lightbourn and Voight's brief at
88. pas
The benefits about which SEA complains are not
constitutionally infirm. They are granted only to those
currently employed. As such, they are not subject to
the provisions of Wis. Const. art. IV, § 26, which is
limited in its application to benefits for those no longer
in government employment. [FN167]
FN167. Respondents Lightbourn and Voight's brief
185 Respondent WEAC adds that: "If the benefit
45
improvements enacted by the legislature do not violate
subsection (1), the exception in subsection (3) does not come
into play. Act 11 does not violate subsection (1) as it only
provides benefits to those who remain in covered employment
after the passage of Act 11." [FN168]
FN168. Respondent WEAC's brief at 69.
186 _WEAC relies on Dudgeon, 181 Wis. 326, 193 N.W.
499, Giessel I, 262 Wis. 51, 53 N.W.2d 726, Giessel II, 265
Wis. 558, 61 N.W.2d 903, and Columbia County, 17 Wis.2d
310, 116 N.W.2d 142, in reaching the same conclusion as
Lightbourn and Voight. [FN169]
FN169. Respondent WEAC's brief at 70-74.
187 The difficulty with this analysis is that the cases cited
predate the 1974 constitutional amendment. Moreover, there
is minimal discussion in the WEAC brief of de facto benefit
increases for annuitants--persons who have already retired--and
for some non-annuitants who are no longer active participating
employees. It is not self-evident that a constitutional provision
that addresses "increased benefits for persons who have been or
shall be granted benefits of any kind under a retirement system
when such increased benefits are provided by a legislative act”
has no application whatever to Act 11. Considering the history
of pension litigation in the last century, it is at least arguable
that the 1956 and 1974 amendments to Article IV, Section 26
have caused Section 26(3) to apply to both prospective and
retroactive benefit increases for participants in the WRS.
188 This court is being invited to hold (1) that Section 26
has no application to future benefit increases voted by the
legislature, regardless of the unfunded liability created by the
increases, and (2) that Section 26 has no application to annuity
increases voted by the legislature so long as the money to pay
for the annuity increases comes out of trust funds. if we so
rule, we necessarily determine that these species of benefit
increases require only a majority vote in each house of the
legislature.
46
189 Inthe case at hand, we are not required to determine the
scope of Section 26 coverage if 1999 Assembly Bill 495
"passed on a call of ayes and noes by a three-fourths vote of all
the members elected to both houses of the legislature.”
790 The State Assembly now has 99 elected members.
[FN170] The State Senate has 33 elected members. The
parties have stipulated that Assembly Bill 495 passed the
Assembly on October 6, 1999, by a vote of 79 ayes and 20 noes,
and it passed the Senate the same day by a vote of 23 ayes and
10 noes. The parties stipulate that "AB 495 did not pass the
Senate by a three-fourths vote.” [FN171]
FN170. In 1956, at the time the three-fourths vote
amendment passed, the Assembly had 100 members.
See Wis. Stat. § 4.01 (1957).
FN171. Stipulation of Facts at 452.
4791 The legislature has approved Joint Rules covering
procedural matters of interest to both houses. Joint Rule 12
provides in part:
JOINT RULE 12. Required vote total. (1)
Unless a different and higher total vote is
required by the state constitution for a specific
action, all questions are decided by a majority of
a quorum.
2) As required by the state constitution,
each of the following bills requires such higher
affirmative vote total for passage (or
concurrence) in either house. The vote shall be
taken by ayes and noes and shall be so recorded
in the journal.
(a) Three-fourths of all members
elected to each house are necessary to approve
any bill to grant increased retirement fund
benefits under section 26 of article IV of the
constitution.
47
State of Wisconsin Joint Rules 8 (1999) (as last affected by
1999 A.J.R. 18) [hereinafter Joint Rule 12].
492 The language in Section 26 under scrutiny is "three-
fourths vote of all the members elected to both houses of the
legislature.” Joint Rule 12 interprets this language to mean a
vote of "[t}hree-fourths of all members elected to each house.”
Joint Rule 12(2)(a).
#93 Joint Rule 12 serves as a valuable interpretation of the
constitution by the legislative branch. Ultimately, however, the
judiciary must determine what the law is. We note that the
language in Section 26 is different from at least one other
provision of the constitution requiring an extraordinary vote.
Article VII, Section 13 provides that a "justice or judge may be
removed from office by address of both houses of the
‘2gislature, if two-thirds of all the members elected to each
house concur therein" (emphasis added). See also Wis. Const.
art. VIII, §§ 6 and 7(2)(e), and art. XII, § 1 (provisions that
refer to "each house"). Thus, the issue before us is whether a
bill subject to Article IV, Section 26(3) requires passage by a
vote of three-fourths of all members elected to each house, or
whether the requisite total may be obtained by adding the votes
in each house to equal three-fourths of the total membership of
both houses.
94 The 1956 constitutional amendment that included the
three-fourths vote provision began as Senate Joint Resolution
21 in the 1953 session. The Joint Resolution was introduced
on March 1, 1953, at the request of Senator Charles Brees. The
resolution described the proposed amendment as an amendment
"relating to extra compensation of public officers and
employees." [FN172] The original resolution contained the
following clause: "unless such extra compensation or increase
or decrease in compensation is agreed to, on a call of yeas and
nays, by three-fourths of all the members elected to each house
of the legislature.” 1953 S.J.R. 21 (emphasis added). A
subsequent Senate amendment changed the text to: "This
section shall not apply to increased benefits for teachers under
a teachers’ retirement system when such increased benefits are
provided by a legislative act passed on a call of yeas and nays
48
by a three-fourths vote of all the members elected to both
houses of the legislature." Senate Substitute Amendment 1 to
1953 S.J.R. 21 (emphasis added).
FN172. The relating clause of the joint resolution
remained intact throughout the legislative process.
195 We think the language change is significant. Inasmuch
as the resolution began with language referring to "three-fourths
vote of all the members elected to each house” and ended with
language referring to "three- fourths vote of all the members
elected to both houses," we conclude that the legislature
intended to permit passage of a bill increasing benefits under a
retirement system when the bill has received the votes of three-
fourths of the entire elected membership of the legislature.
This three-fourths vote does not, however, replace the
requirement elsewhere in the constitution that a bill must =
each house before it may be sent to the governor to become law.
It adds to that requirement.
496 Given our interpretation of Section 26, if each house of
the legislature were to comply with Joint Rule 12, there would
not be a dispute about whether a retirement bill had received the
isite number of votes. [FN173] However, if either house
did not comply with Joint Rule 12, it would prevent the other
house from passing the bill unless the other house were able to
muster the difference between 99 total votes and the majority
vote in the first house ... even though three-fourths of the
members of the second house had approved the bill.
FN173. By its terms, Joint Rule 12 requires 75 votes in
the Assembly and 25 votes in the Senate to approve a
bill to grant "increased retirement fund benefits under
section 26 of article IV of the constitution."
727 In this case, we conclude that because Assembly Bill
495 received 79 votes in the Assembly and 23 votes in the
Senate, the bill received a total of 102 votes from the members
elected to both houses of the legislature, and that number is
more than the three-fourths vote required by Section 26 of the
constitution.
49
498 Before examining each of the petitioner's substantive
challenges, we turn to a discussion of participant interests and
the rights that flow from them.
B. Participant Rights
199 The WRS has approximately 460,000 participants. A
participant is defined as "any person included within the
provisions of the Wisconsin retirement system by virtue of
being or having been a participating employee whose account
has not been closed." Wis. Stat. § 40.02(45).
{100 Every participant has interests and rights in the
Wisconsin retirement system. Every participant is either an
annuitant or a potential annuitant (with an individual account in
the employee reserve). Thus, each participant has a property
interest in his or her annuity or individual account, and a right
to protect that interest. Beyond this narrow individual interest,
each participant has a broad property interest in the WRS as a
whole. [FN174]
FN174. Retired Teachers, 207 Wis.2d at 19, 558
N.W.2d 83 (citing Ass'n of State Prosecutors, 199
Wis.2d at 558, 544 N.W.2d 888).
{101 Participants fall into several categories and multiple
subcategories. Asa result of their status, different participants
have different interests. Active participating employees share
many interests in common with annuitants and "inactive
participants” who are not yet eligible to receive an annuity. But
participants in one category might strongly oppose a proposalin
the legislature or an action by the ETF Board that participants
in another category would find quite satisfactory. As an
example, annuitants might be pleased if the legislature
distributed all money in the TAA to the various accounts and
reserves in the fixed trust because such a distribution would
produce a short-term bonanza for them from the money sent to
the annuity reserve. However, many active participating
employees would view such a move as destructive to their
position for the future. Correspondingly, some active
50
participating employees might prefer to limit or stop
distributions from the TAA ... until they were ready to retire.
Locking up the TAA would not please current annuitants,
however, especially when investments are doing well.
{102 Participants have different property interests. An active
participating employee has a clear property interest in his or her
own account, but that same employee has no property interest
in a retiree's annuity. Each annuity belongs to the annuitant.
{103 The principle that different participants have different
property interests is illustrated in two recent cases. In
Association of State Prosecutors v. Milwaukee County, 199
Wis.2d 549, 552, 544 N.W.2d 888 (1996), this court said: "We
hold that vested employees and retirees have protectable
property interests in their retirement trust funds which the
legislature cannot simply confiscate under the circumstances of
this case."
{104 The court's choice of language was careful and
deliberate. It implied that res and former employees who
are part of the same system do not all have the same interests or
the same rights. The court held that 42 former assistant district
attorneys of Milwaukee County who chose to become part of
the WRS after assistant district attorneys became state
employees did not have a property interest that would permit
them to remove money from the Milwaukee County employee
retirement system to fund past service credit in the WRS. The
court said they did not have a pro interest because they
were not vested in the Milwaukee County system. If they had -
been vested, they might have remained in the Milwaukee
_ System. By contrast, Milwaukee County employees who were
vested in the Milwaukee system had a right to prevent money
from being taken out of that system for non-trust purposes.
[FN175]
FN175. We never suggested that the 42 former assistant
district —— would not have rights in the future if
they rejoined the county's work force. We never said
that the attorneys would have no standing to protect the
Milwaukee system if it were being grossly mismanaged.
51
{!05 A second example of diverse legal interests in property
appeared in Retired Teachers, 207 Wis.2d 1, 558 N.W.2d 83.
The 1987 legislature approved a_ special investment
performance dividend (SIPD) as part of a $230 million
distribution from the TAA.1987 Wis. Act 27. The targeted
recipients of the dividend were pre-1974 annuitants who were
included in the annuity reserve. These pre-1974 annuitants
received less benefits than post-1974 annuitants because their
base annuities were not improved as a result of post-1974
formula enhancements. Because of the discrepancy in benefits
among annuitants, the legislature attempted to use money in the
TAA to enhance the annuities of roughly 25 percent of the
entire class of annuitants--at the expense of 75 percent of the
same class. We held unanimously that this legislative action
constituted a taking from the annuitants who received no
benefits. The court said: "[W]e must determine whether the
SIPD legislation 'takes' the plaintiff annuitants ' property
interest in having annuity reserve account surpluses distributed
in the manner prescribed by § 40.27(2). To the extent that the
legislation violates the plaintiffs’ § 40.27(2) rights, it effectively
takes those rights." Retired Teachers, 207 Wis.2d at 20, 558
N.W.2d 83 (emphasis added).
4106 Ourcourt found the 1987 legislation deficient in several
respects, but we did not state or me that any participant other
than a post-1974 annuitant could claim a "taking." No
participant other than an annuitant had any property interest in
the annuity reserve.
4107 Four decades ago, this court said that teachers have "a
contractual relationship with the state and a vested right in the
State teachers’ retirement system." State Teachers’ Ret. Bd. v.
Giessel, 12 Wis.2d 5, 9, 106 N.W.2d 301 (1960) (Giessel II).
These general principles are sound. Our task is to restate them
in a contemporary context, attempting to articulate a more
complete statement of the property interests and rights enjoyed
by participants.
1. Wisconsin Stat. § 40.19(1)
"Se
4108 The first source of property interests and rights is Wis.
Stat. § 40.19, which is entitled "Rights preserved.” This
section applies not only to the WRS but also to the entire public
a trust fund. Wisconsin Stat. § 40.19(1) reads as
follows:
40.19 Rights preserved. (1) Rights exercised
and benefits accrued to an employee under this
chapter for service rendered shall be due as a
contractual right and shall not be abrogated by
any subsequent legislative act. The right of the
State to amend or repeal, by enactment of
statutory changes, all or any part of this chapter
at any time, however, is reserved by the state
and there shall be no right to further accrual of
benefits nor to future exercise of rights for
service rendered after the effective date of any
amendment or repeal deleting the statutory
authorization for the benefits or rights. This
section shall not be int ted as preventing the
State from requiring forfeiture of specific rights
and benefits as a condition for receiving
subsequently enacted rights and benefits of
equal or greater value to the participant.
4109 Wenote that the first sentence of subsection (1) uses the
word "employee." The last sentence uses the word
"participant." We do not think the word "employee" in the
subsection limits the scope of rights preserved to active
participating employees. Rather, it covers all participants in
the WRS because all participants have been employees at one
time or another. For this proposition, we point to Retired
Teachers, where this court said: "The parties do not dispute,
and we agree, that WRS annuitants have a property interest in
the WRS. The annuitants ' interest finds its genesis both in
chapter 40 and in prior decisions of this court." 207 Wis.2d at
18, 558 N.W.2d 83 (emphasis added). We then cited Wis. Stat.
§ 40.19(1) and quoted from it as authority for these statements.
{110 Wisconsin Stat. § 40.19(1) requires a balancing of
i ee eee ee
53
interests. An employee has certain contractual rights that may
not be abrogated by any subsequent legislative act. However,
the state retains the right to amend or repeal, by enactment of
statutory changes, any part of the entire chapter "and there shal!
be no right to further accrual of benefits nor to future exercise
of rights for service rendered after the effective date of any
amendment or repeal deleting the statutory authorization for the
benefit or rights." Wis. Stat. § 40.19(1) (emphasis added).
Moreover, the state is not prevented by the first sentence in the
subsection from "requiring forfeiture of specific rights and
benefits as a condition for receiving subsequently enacted rights
and benefits of equal or greater value to the participant,” as
provided in the last sentence. /d.
q111 All participants who have "benefits accrued" are
protected by § 40.19(1) from the abrogation of those benefits
unless the benefits are replaced by benefits of equal or greater
value. Determining what "rights exercised" or "rights" may not
be abrogated is less clear. We agree with respondents
Lightbourn and Voight, however, that "Section 40.19 provides
a limited contractual right that does not extend to every
provision of ch. 40 or every procedural or substantive aspect of
the WRS--it extends only to 'rights exercised and benefits
accrued’ which are ‘due’ for 'service rendered.’ " [FN176]
FN176. Respondents Lightbourn and Voight's brief at
14.
{112 We would understand a contention that a participating
employee had a right to exercise one of several monetary
options at retirement if those options had existed during the
period when the participating employee was rendering service
but were then eliminated before the employee's retirement. Such
a claim would be different from a contention that a participant
had a right to maintain some operating procedure in the WRS
that had existed during a period that the participant was
rendering service.
_ 2. Wisconsin Stat. § 40.01
{113 A second source of participant property interests and
54
rights is Wis. Stat. § 40.01. This section sets out the nature and
purpose of the public employee trust fund:
40.01 Creation and purpose. (1) CREATION.
A "public employee trust fund” is created to aid
public employees in protecting themselves and
their beneficiaries against the financial
hardships of old age, disability, death, illness
and accident, thereby promoting economy and
efficiency in public service by facilitating the
attraction and retention of competent employees,
by enhancing employee morale, by providing for
the orderly and humane departure from service
of employees no longer able to perform their
duties effectively, by establishing equitable
benefit standards throughout public
employment, by achieving administrative
expense savings and by facilitating transfer of
personnel between public employers.
(2) PURPOSE. The public employee trust fund is a
public trust and shall be managed, administered,
invested and otherwise dealt with solely for the
purpose of ensuring the fulfillment at the lowest
possible cost of the benefit commitments to |
participants, as set forth in this chapter, and shall not |
be used for any other purpose. Revenues collected |
for and balances in the accounts of a specific benefit |
plan shall be used only for the ses of that ,
benefit plan, including amounts allocated under s.
20.515(1)(um) or (ut) or 40.04(2), and shall not be .
used for the purposes of any other benefit plan. Each
member of the employee trust funds board shall be
a trustee of the fund and the fund shall be
administered by the department of employee trust
funds. All statutes relating to the fund shall be
construed liberally in furtherance of the purposes set
forth in this section.
4114 Subsection (1) explains the policy objectives of the trust
fund. The fund is created, in part, "to aid public employees in
55
protecting themselves and their beneficiaries against the
financial hardships of old age” and death. Subsection (2)
declares that the trust fund "is a public trust and shall be
managed, administered, invested and otherwise dealt with solely
for the purpose of insuring the fulfillment at the lowest possible
cost of the benefit commitments to participants ... and shall not
be used for any other purpose."
qi15 Like the previously discussed section, Wis. Stat. §
40.01(2) reveals a certain internal tension. Subsection (2)
States explicitly that the fund shall be managed and otherwise
dealt with solely for the purpose of insuring the fulfillment of
benefit commitments to participants ... but "at the lowest
possible cost.” Insuring the fulfillment of benefit commitments
"at the lowest possible cost" is different from maximizing
benefits irrespective of cost. The subsection requires some
balancing of competing interests.
4116 Wisconsin Stat. § 40.01 provides specific safeguards to
participants. First, trust fund money must be used for proper
trust purposes. This principle is illustrated in several cases. In
Giessel Ill, the Board resisted paying for a study of retirement
systems from retirement fund assets, as required in legislation.
The court agreed:
The question ... is whether the expense for the
governor's study commission ... is a proper
expense of the retirement system.... The cost of
adequately informing the legislature and the
governor so that they may intelligently perform
their duties is not a proper expense of the
teachers’ retirement fund.
12 Wis.2d at 10-11, 106 N.W.2d 301.
117 In the_Retired Teachers case, the court rejected a
legislative directive that the annuity reserve reimburse the
state's general fund for certain supplemental benefits paid to
pre-1974 annuitants. We said:
Section 40.27(2) governs the distribution of
56
investment earnings of the annuity reserve, and it
anticipates payments only to annuitants. The
section is utterly devoid of any authority for using
annuity reserve funds to reimburse a governmental
entity for non-trust obligations. We therefore
conclude that the Act further violated § 40.27(2)
by mandating a reimbursement for interim GPR
supplemental benefits, a non-trust obligation.
207 Wis.2d at 23, 558 N.W.2d 83.
4118 A similar principle was set out in Association of State
Prosecutors with respect to payments from the Milwaukee
retirement system to the WRS. 199 Wis.2d at 562-63, 544
N.W.2d 888. We said: "[T]he state cannot simply 'reach’ into
the County Plan to pay for obligations [the state] has incurred.”
Id. at 563, 544 N.W.2d 888. Transferring funds to the WRS
was labeled a non-trust purpose.
4119 Second, legislative action affecting the WRS must be
consistent with the stated objectives of the trust. We
recognized in ati 199 Wis.2d at
563, 544 N.W.2d 888, that the legislature retains power to
adjust or amend a retirement ars in certain situations, and in
Wis. Stat. § 40.19(1), the legislature explicitly reserves the right
to make statutory changes. But participants in the WRS are
empowered to challenge legislative actions that deviate from
trust objectives or cause injury to the trust.
{120 Third, the ETF Board must deal with the Wisconsin
retirement system in the same faithful manner as trustees would
administer any trust, that is, they must exercise diligence,
prudence, and absolute fidelity in managing trust assets.
76 Wis.2d oo 635, a
N.W.2d 47 1977); Estate of Allis, 191 Wis. 23, 2 , 209 N.W.
945, (1926). Act 11 does not undercut the powers and duties
of the ETF Board. Rather, it reaffirms the position of the
Board. See 1999 Wis. Act 11, § 27(3). Wisconsin Stat. §
40.01 gives participants in the system the right to test whether
members of the ETF Board have upheld their fiduciary duties.
Cf Retired Teachers, 207 Wis.2d at 26-27, 558 N.W.2d 83.
57
The inability of the ETF Board to challenge the constitutionality
of a legislative act affecting the WRS in court does not relieve
board members of their duties as trustees.
3. Integrity and Security of Trust Fund
{121 A third source of property interests and rights relates to
"the integrity and security" of retirement funds. This interest
is articulated in Association of State Prosecutors, 199 Wis.2d at
563, 544 N.W.2d 888, but is inherent in Wis. Stat. §§ 40.01 and
40.19. Respondents Lightbourn and Voight suggest that a
decrease in contributions that would threaten the actuarial
soundness of the retirement fund (with no accompanying
provision to provide adequate funding at an appropriate future
date) and would likely result in nonpayment of or decrease in
accrued benefits would violate both §§ 40.01(1) and 40.01(2).
[FN177] Wisconsin Stat. § 40.19(1) surely confers upon
participants the right to protect their accounts from either
abrogation or dissipation.
FN177. Respondents Lightbourn and Voight's brief at
20.
9122 We now turn to the petitioners’ substantive challenges,
applying the above-stated principles to petitioners’ claims.
C. $4 Billion Distribution
4123 WPPA contends that the $4 billion distribution from the
TAA violates Wis. Stat. § 40.19(1) and is an unconstitutional
taking of property and an unconstitutional impairment of
contract.
4124 Act 11 directs that $4 billion be distributed from the
TAA to the other reserves and accounts in the fixed trust after
the 1999 annual distribution of 20 percent. This directive is
embodied in Section 27, a nonstatutory section of the Act.
[FN178]
FN178. 1999 Wis. Act 11, § 27 reads in part:
58
(1) TRANSFER OF FUNDS FROM THE
TRANSACTION AMORTIZATION ACCOUNT OF
THE FIXED RETIREMENT INVESTMENT TRUST.
(a) On December 31, 1999, after the annual
distribution required under section 40.04(3)(a) of the
statutes for the 1999 calendar year is made,
$4,000,000,000 shall be distributed from the transaction
amortization account of the fixed retirement investment
trust to the reserves and accounts of the fixed retirement
investment trust in an amount equal to a percentage of
the total distribution determined by dividing each
reserve's and account's balance on the prior January | by
the total balance of the fixed retirement investment trust
on the prior January 1.
{125 Most of the $4 billion distribution is sent into the
employee, employer, and annuity reserves to fund present or
future retirement benefits for participants in the WRS. The $4
billion distribution follows in lock step the earlier 20 percent
distribution.
{126 WPPA's claims that the $4 billion distribution is
unlawful should be put in historical context. Prior to 1975, all
gains and losses of the fixed retirement investment trust were
fully distributed in the year the gain or loss was realized. The
immediate recognition of gains and losses led to fluctuations or
potential fluctuations in contribution and benefit rates from year
to year. In 1973, the legislature created the TAA, to be
effective in 1975, as an accounting mechanism to hold the
investment gains and losses of the fixed trust, and it regulated
the recognition of those gains or losses over time as a means of
bringing stability to the system. In its early years, the TAA
recorded paper deficits. Nonetheless, from 1975 through 1988,
the law provided for an annual TAA distribution of 7 percent.
From 1989 to the present, the statutes have ided for an
annual TAA distribution of 20 percent. In 1989, the legislature
changed the law to increase the percentage of distribution from
A to 20 percent--and it did so without challenge.
59
FN179. 1989 Wis. Act 13; Stipulation of Facts at 421.
4127 In 1987, the legislature authorized a one-time
distribution of $230 million from the TAA. In 1989, the
legislature authorized a one-time distribution of $500 million
from the TAA. In each case, the distribution moved money
proportionately to other accounts within the fixed trust, such as
the employee, employer, and annuity reserves; and these one-
time recognitions were not seriously challenged.
{128 Act 11 eliminates the TAA over a five-year period and
creates, in its place, a market recognition account (MRA) that
is to be used for distributing the total market value investment
return earned by the fixed trust. Beginning on December 31,
2000, the balance of the TAA is to be determined and then 20
percent of the balance established is to be distributed annually
to the accounts in the fixed trust. After the entire balance has
been distributed, DETF is directed to close the account.
4129 WPPA asserts that participants in the WRS have a
property right to have the investment earnings of the fixed trust
distributed in the manner set by the pre-Act 11 statute. They
suggest that a statutory change deviating from the established
mechanism violates participant property rights under Wis. Stat.
§ 40.19(1) and is unconstitutional.
4130 During the last quarter century, as noted above, the TAA
has been changed several times. These changes serve as
precedent for the $4 billion distribution. The creation of the
TAA resulting in curtailed distributions, the changes in the
TAA since 1975 resulting in increased distributions, and the
pending closure of the TAA all conflict with the proposition
that participants in the WRS have a property right in a particular
distribution mechanism frozen in time. If we approved
WPPA's position, we would be concluding that past special
distributions from the TAA were unlawful. If we accepted
WPPA's argument, we would be holding that only 20 percent of
the TAA could be distributed each year, regardless of
investment performance. This position is untenable.
Wisconsin Stat. § 40.19(1) specifically recognizes the authority
of the legislature to enact statutory changes to Chapter 40, so
60
long as accrued benefits are not abrogated.
9131 WPPA contends that there has been a taking of property
[FN180] because the $4 billion distribution will fund benefit
improvements that not all participants will enjoy equally.
They point in particular to 51,000 inactive participants who (1)
are credited with interest at the assumed rate of 5 percent
annually, rather than the effective rate, and (2) are expected to
retire and take a WRS annuity instead of electing to take a
ree benefit or dying before they reach retirement age.
PA asserts that these particular inactive employees do not
receive credit for past service (as active participating employees
do) and do not receive the full benefit of a distribution because
the distribution to them is capped at 5 percent. This argument
requires a conventional takings analysis.
FN180. WPPA relies on the state and federal
constitution for its taking claims:
the Fifth Amendment to the United States Constitution
provides:
No person shall be held to answer for a
capital, or otherwise infamous crime,
unless on a presentment or indictment of
a Grand Jury, a in cases arising in
the land or naval forces, or in the
Militia, when in actual service in time of
War or public danger; nor shall any
penne Se ecpenew Ge same offence to
twice put in jeopardy of life or limb;
nor shall be compelled in any criminal
ap het ah ag inst himself, nor
deprived of life, liberty, or property,
without due process of law; nor shall
private property be taken for public use,
without just compensation.
Article I, Section 13 of the Wisconsin Constitution
provides:
61
The property of no person shall be taken
for public use without just compensation
therefor.
1. Taking of Property
94132 Our first step in analyzing an alleged taking is to
determine whether a property interest exists. Retired Teachers,
207 Wis.2d at 18, 558 N.W.2d 83. There is no dispute that
participants have a general property interest in all the money in
the TAA. Ass'n of State Prosecutors, 199 Wis.2d at 558-59, 544
N.W.2d 888; Retired Teachers, 207 Wis.2d at 19, 558 N.W.2d
83 (acknowledging Ass'n of State Prosecutors). This broad
interest in the TAA as a whole provides participants with
standing to protect the whole. It does not, however, afford
participants an accrued property interest in every part of the
whole. For instance, an annuitant cannot claim earnings from
the employee accumulation reserve, and an active participating
employee cannot claim earnings from the annuity reserve, even
though both kinds of earnings are recorded in the TAA.
Nonetheless, participants in the WRS do have a general
property interest in the $4 billion transferred from the TAA.
4133 Our second inquiry in a takings analysis is to determine
whether the pro reg oe been taken. Retired Teachers, 207
Wis.2d at 20, PBN N.W.2d 83 (citing Zinn v. State, 112 Wis.2d
417, 424, 334 N.W.2d 67 (1983)). To determine whether the
property has been taken, we must examine the nature of the
distributions and how Act 11 changes the way funds are
distributed from the TAA.
7134 Wisconsin Stat. § 40.04(3)(a) compels a yearly
distribution of 20 percent from the TAA to the accounts of the
fixed trust:
(a) All earnings, profits or losses of the fixed
retirement investment trust and the net gain or
loss of the variable retirement investment trust
shall be distributed annually on December 31 to
each participating account in the same ratio as
each account's average daily balance within the
62
respective trust bears to the total average daily
balance of all participating accounts in that trust.
For the fixed retirement investment trust the
amount to be distributed shall be the then
balance of the current income account plus 20%
of the then balance of the transaction
amortization account.
Wis. Stat. § 40.04(3)(a).
135 On December 31, 1999, the TAA was valued at
17.3877 billion before 20 percent of that balance ($3.4775
billion) was distributed to the other accounts and reserves in the
fixed trust. [FN181] When WPPA objects that the additional
$4 billion distribution will fund benefit improvements that not
all participants will enjoy equally, it is making an attack that
could be leveled at the 20 percent annual distribution as well.
FN181. Stipulation of Facts at 424.
$136 To illustrate, the 20 percent annual distribution always
has the potential of treating some "inactive participants”
different from other "inactive participants." [FN182] The 20
percent annual distribution will treat participants unequally
whenever the amount of money being distributed is large
enough to give effective rate inactive participants a higher
payment than 5 percent rate inactive participants.
FN182. As § 42 of the Stipulation of Facts explains:
There are two categories of "inactive participants” .... In
one group are those who first became covered by the
WRS ... on or before January 1, 1982 or who first
became covered by the WRS after January 1, 1982 but
left participating employment before March 9, 1984 (...
the "effective rate inactive participants"). The effective
rate inactive participants’ accounts in the employee
reserve are credited each year with interest at the
"effective rate" as defined in § 40.02(23). The other
group of inactive participants are those who first
became covered by the WRS on or after January 1, 1982
63
and who were still participating employes on March 9,
1984 (... the "5% rate inactive participants"). The 5%
rate inactive participants’ accounts in the employee
reserve are credited each with interest at the rate of 5%.
§§ 40.04(4)(a)(2) and 40.02(6).
4137 An estimated 60,000 inactive WRS participants are
credited with interest at the capped rate of 5 percent annually
rather than at the effective rate. [FN183] This means that the
remaining 44,000 inactive participants are credited with interest
at the effective rate. The fact that 60,000 participants may be
comparatively disadvantaged in the annual distribution from the
TAA and in any other large distribution from the TAA does not
make these distributions unconstitutional.
FN183. Wis. Stat. § 40.02(23). The "effective rate” is
not statutorily capped. | Consequently, it reflects
investment earnings more closely than the fixed 5
percent rate.
4138 There are subcategories within each of the two classes
of non- annuitants. Both active participants and inactive
participants include persons who are receiving interest from the
TAA at the assumed rate of 5 percent. There is no
discrimination by class.
4139 Benefit disparities and disparities in treatment reflect the
complexity of the WRS. [FN184] They speak to a condition that
is endemic in this large pension system, with many categories
and subcategories of participants who have worked for nearly
1,200 different employers at different times in different places
for different benefits. Participant interests are not identical.
It would be nearly impossible for policymakers to accommodate
and satisfy all participant interests at the same time.
FN184. Stipulation of Facts at 4945-48.
$140 The issue in this taking claim is whether a participant
has been deprived of some accrued benefit. Here, all active
and inactive employees eligible to receive part of the $4 billion
distribution, including the estimated 51,000 inactive employees,
64
received interest in the employee reserve according to a pre-
existing statutory formula. They were not deprived of any
accrued benefit. Moreover, inactive employees have no right
toa formula enhancement for past service simply because active
employees received such an enhancement. The formula
enhancement for the past service of current employees must be
viewed as an encouragement to these employees to remain in
public service. That objective does not apply to inactive
employees who have left WRS-covered employment. [FN185]
FN185. Providing improvements in the formula
multiplier and interest rate or increases in the benefit
caps to inactive employees who have left WRS-covered
employment would trigger the provisions of Article IV,
Section 26 of the Wisconsin Constitution.
141 WPPA quotes WRS actuaries to the effect that
"[cJhanging the flow of funds from the TAA to the various
fixed reserves affects the distribution of WRS benefits among
individual participants.” [FN186] This statement is true. But
it does not establish that the $4 billion distribution "takes" any
accrued benefit "due" for service rendered. To block the $4
billion distribution on grounds that not all participants enjoy the
distribution equally would paralyze the TAA and prevent the
legislature from adjusting the draw from the TAA to reflect
successful investment performance.
FN186. Petitioner WPPA's brief at 40.
{142 The $4 billion distribution is a legitimate recognition of
gains in the TAA, properly dispersed to those who are entitled
to receive them. The annuity reserve receives its full share of
the TAA distribution. The employee reserve receives its full
share of the TAA distribution. The employer reserve receives
its full share of the TAA distribution. No participant's accrued
benefits are abrogated, damaged, or threatened. Most
participants will receive substantial benefit improvements.
4143 We conclude that WPPA has failed to show beyond a
reasonable doubt any taking of property because of the $4
billion distribution from the TAA.
2. Impairment of Contract
4144 WPPAalso asserts that the $4 billion distribution in Act
11 constitutes an impairment of contract, in violation of Article
I, Section 10 of the United States Constitution and Article I,
Section 12 of the Wisconsin Constitution. [FN187] Here again,
petitioners must prove beyond a reasonable doubt that Act 11 is
an unconstitutional impairment of contract.
FN187. Article I, Section 10 of the United States
Constitution reads:
‘No state shall enter into any treaty,
alliance, or confederation; grant letters
of marque and reprisal; coin money;
emit bills of credit; make any thing but
gold and silver coin a tender in payment
of debts; pass any bill of attainder, ex
post facto law, or law impairing the
obligation of contracts, or grant any title
of nobility.
Article I, Section 12 of the Wisconsin Constitution
reads:
No bill of attainder, ex post facto law,
nor any law impairing the obligation of
contracts, shall ever be passed, and no
conviction shall work corruption of
blood or forfeiture of estate.
4145 WPPA argues that participants have a contract for
retirement benefits and that the terms of that contract are
embodied in Chapter 40 of the statutes. [FN188] Wisconsin
Stat. § 40.19(1) provides in part that "[rlights exercised and
benefits accrued to an employee under [Wis. Stat. ch. 40] for
service rendered shall be due as a contractual right and shall
not be abrogated by any subsequent legislative act" (emphasis
added).
66
FN188. In general, a statute is itself treated as a contract
when the language and circumstances evince a
legislative intent to create private rights of a contractual
nature enforceable against the State... In addition,
statutes governing the interpretation and enforcement of
contracts may be regarded as forming part of the
obligation of contracts made under their aegis.
United States Trust Co. v. New Jersey, 431 U.S. 1,17 n.
14, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977).
4146 The United States Supreme Court has developed a three-
step methodology for analyzing impairment-of-contract claims.
Chappy v. LIRC, 136 Wis.2d 172, 187, 401 N.W.2d 568 (1987)
(citing Energy Reserves Group, Inc. v. Kansas Power & Light
Co., 459 U.S. 400, 411, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983)).
This court usually follows these steps in evaluating such
claims.
4147 "The first step is to inquire whether the challenged
statute has ‘operated as a substantial impairment of a contractual
relationship.’ " Id. (quoting Allied Structural Steel Co. v.
Spannaus, 438 U.S. 234, 244, 98 S.Ct. 2716, 57 L.Ed.2d 727
(1978); Energy Reserves Group, 459 U.S. at 411, 103 S.Ct.
697). "Minimal alteration of contractual obligations may end
the inquiry at its first stage."_Allied Structural Steel, 438 U.S.
at 245, 98 S.Ct. 2716. Hence, if we determine that there has
been no impairment or only minimal impairment, that is the end
of the analysis.
4148 If the legislation substantially impairs a contractual
relationship, "there must exist a significant and legitimate
public purpose behind the legislation.” Chappy, 136 Wis.2d at
187, 401 N.W.2d 568 (citing Energy Reserves Group, 459 U.S.
at 411, 103 S.Ct. 697). If such a purpose exists for the
legislation, "the inquiry is whether the challenged legislation is
based upon reasonable conditions and is of a character
appropriate to the public purpose justifying the legislations
adoption.” Id. at 188, 401 N.W.2d 568 (quoting in part Allied
Structural Steel, 438 U.S. at 244, 98 S.Ct. 2716) (quotation
67
marks and brackets omitted).
4149 Both the state and federal contracts clauses limit the
power of a state to modify its own contracts. United States
Trust Co. v. New Jersey, 431 U.S. 1, 17, 97 S.Ct. 1505, 52
L.Ed.2d 92 (1977). But these clauses are not an absolute bar to
subsequent modification of a state's financial obligations.
When a state is accused of impairing the obligations of its own
contract, courts will scrutinize "the ability of the State to enter
into an agreement that limits its power to act in the future.” Id.
at 23, 97 S.Ct. 1505. Ifthe legislative contract is not invalid ab
initio under the reserved powers doctrine, id., the question
becomes whether the legislature's impairment of the contract is
reasonable and necessary to serve an important public purpose.
Id. at 25., 97 S.Ct. 1505 In reviewing that question, courts do
not give the legislature the same deference they would give it if
it were acting on a subject at arm's length. Rather, they factor in
the state's self-interest in acting as it did.
4150 Weconclude that WPPA is unable to complete the first
step in an impairment analysis, because the $4 billion
distribution does not operate as an impairment of any property
right or benefit in Chapter 40. It does not impair the
contractual relationship between the state and participants.
4151 . According to WPPA, the $4 billion transfer deprives
participants of the contractual right to have the gains of the trust
fund distributed in a manner consistent with the TAA's primary
purpose--smoothing the losses and gains of the fixed trust.
WPPA complains that transferring $4 billion from the TAA for
the alternative purpose of funding "new benefits” is not lawful
unless all participants, including inactives, receive "equitable"
benefit increases. "The purpose of the TAA [is] not to create a
fund to hold investment earnings until the legislature [decides]
how to use them," WPPA declares. [FN189] "Ifthe legislature
wants to create new benefits for some, but not all, participants,
it can do so by funding those benefits with state funds or
through increased contributions--not with Fund earnings.”
[FN190]
FN189. Petitioner WPPA's brief at 45.
68
FN190. Petitioner WPPA's brief at 44-45.
4152 This argument misses the point. The TAA is an
accounting mechanism, holding the investment gains of the
various accounts in the fixed trust. The TAA, like every
mechanism and procedure in Chapter 40, is designed to
facilitate the primary purpose of the trust set out in Wis. Stat. §
40.01. Reducing annual fluctuations in contribution and benefit
rates is a worthy purpose, but this purpose does not supersede
the purpose articulated in § 40.01. Funding benefit increases by
recognizing gains in the TAA is fully consistent with Wis. Stat.
§ 40.01.
9153 Chapter 40 creates a hybrid plan with characteristics of
both a defined benefit plan and a defined contribution plan.
[FN191] The $4 billion distribution funds the increases in
benefits for most active participating employees. It increases
annuities for 103,000 annuitants. It provides substantial
account enhancements for "effective rate inactive participants."
Other inactives receive precisely what the pre-Act 11 statute
requires. No accrued benefits are put in jeopardy.
FN191. Stipulation of Facts at 47.
4154 WPPA tries to suggest otherwise. It contends that "the
WRS's ability to meet its obligations [is] likely to be
jeopardized where Trust Fund earnings are used for a purpose
other than what is intended under Wis. Stat. Chap. 40,” |
referring to the smoothing mechanism of the TAA. [FN192]
This contention is not supported in the record. WPPA
stipulated that Act 11 will not put the trust fund in financial
trouble. [FN193]
FN192. Petitioner WPPA's brief at 42.
FN193. Stipulation of Facts at 454.
7155 We have said that legislation that alters the "contractual
expectations of the parties impairs the obligation of contract.”
State ex rel. Cannon v. Moran, 111 Wis.2d 544, 555, 331
69
N.W.2d 369 (1983) (citing Allied Structural Steel, 438 U.S. at
245-46, 98 S.Ct. 2716).
4156 InCannon, the legislature reduced-the salaries of certain
Milwaukee County circuit judges by the amount of pension
benefits they received from the Milwaukee County Employees’
Retirement System. Although the legislation did not take the
judges’ pension benefits per se, it nullified them by depriving
them of their full judicial salary. We struck down the
legislation as an impairment of contract. Cannon, 111 Wis.2d
at 563, 331 N.W.2d
369. The legislature had authorized the judges to terminate
irrevocably their membership in the Milwaukee retirement
system in order to join the state system, then "pulled the rug
out" from under them by passing a law that reduced their
salaries. Id. at 559, 331 N.W.2d 369. The legislation was
"completely unexpected" and thus altered the judges’
contractual expectations. Id.
4157 InRetired Teachers, the legislature authorized a special
investment performance dividend as part of a $230 million
distribution from the TAA. Only 25 percent of annuitants
received the dividend. The court analyzed the SIPD as a
"taking" from the 75 percent of annuitants who received no
dividends, not as an impairment of contract. Retired Teachers
207 Wis.2d at 17, 558 N.W.2d 83. Nevertheless, it would be
hard to deny that the SIPD had altered the "contractual
expectations” of the 75 percent who received nothing. Id. at 19-
20, 23-24, 558 N.W.2d 83.
4158 These cases offer a sharp contrast to the facts here.
Chapter 40 provides no basis for the 5 percent rate inactive
participants to expect dividends of more than 5 percent from the
TAA. It provides no basis for participants to expect that all
benefit caps will be raised if any benefit caps are raised. It
provides no basis for participants to expect that periodic benefit
improvements will satisfy all participants equally.
{159 Participants do expect that benefits will be improved
when investment gains justify and permit increases. They do
understand that the legislature has reserved the right to amend
70
or repeal "all or any part of this chapter at any time” so long as
the legislature does not abrogate "benefits accrued to an
employee ... for service rendered." Wis. Stat. § 40.19(1).
They understand that amending the statutes is the only way the
formula multiplier can be improved or the TAA distributions
can be increased, and they likely consider such legislation as
having a significant and legitimate public purpose. The $4
billion distribution does not constitute an impairment of
contract.
4160 Weconclude that the $4 billion distribution is consistent
with the purpose of Chapter 40, the provisions of Wis. Stat. §
40.19(1), and the integrity and solvency of the trust fund. The
parties have stipulated that the trust fund is not financially
troubled and the $4 billion distribution will not make it so.
[FN194] We conclude that the $4 billion distribution does not
constitute a taking of property or an impairment of contract and
is not unconstitutional beyond a reasonable doubt.
FN194. Stipulation of Facts at $54.
D. $200 Million Credit
9161 WPPA and SEA contend that the $200 million portion
of the total funds distributed to the employer reserve and
earmarked as a credit for employers against unfunded liability
violates Wis. Stat. § 40.19(1) and is an unconstitutional taking
of property and an unconstitutional impairment of contract.
4162 The $4 billion distribution from the TAA will send an
estimated $1.064 billion into the employee reserve, $1.236
billion into the employer reserve, and $1.608 billion into the
annuity reserve. [FN195]
FN195. Joint Survey Committee on Retirement
Systems, Wisconsin Retirement System Actuarial
Valuations of Benefit and Financing Provisions 8
(Nov.1999).
4163 Section 27(1)(b) of Act 11 [FN196] directs that $200
million of the estimated $1.236 billion sent to the employer
ee ee Ts ne
71
reserve be used as employer contribution credits. These credits
will serve in lieu of payments for employers that have unfunded
liability under the WRS. Employers that do not have unfunded
liability will receive credits for payments of employer required
contributions. The employer contribution credits will permit
each employer to suspend actual cash payments to the employer
reserve until the individual employer's share of the credits has
been exhausted. [FN197]
FN196. 1999 Wis. Act 11, § 27(1)(b)1 provides:
The employee trust funds board shall determine each
participating employer's share of the increase in the
employer accumulation reserve that results from the
distribution under paragraph (a) and shall establish for
each employer a credit balance in the employer
accumulation reserve that equals the employer's share of
the increase in the employer accumulation reserve that
results from the distribution under paragraph (a), based
on each employer's share of covered payroll in 1998.
The total amount that shall be reserved for credit
balances under this subdivision shall be $200,000,000.
In lieu of requiring that an employer make required
employer contributions under section 40.05(2)(b) of the
statutes, the employee trust funds board, beginning no
later than March 1, 2000, shall deduct from the
employer's credit balance in the employer accumulation
reserve, on a monthly basis, an amount that the
employer would otherwise have been required to
contribute under section 40.05(2)(b) of the statutes had
there been no establishment of the credit balance from
the distribution under paragraph (a). For any employer
that is not required to make contributions under section
40.05(2)(b) of the statutes, the employee trust funds
board, beginning no later than March 1, 2000, shall
deduct from the employer's credit balance in the
employer accumulation reserve, on a monthly basis, an
amount that the employer would otherwise have been
required to contribute under section 40.05(2)(a) of the
statutes had there been no establishment of the credit
balance from the distribution under paragraph (a). The
72
employee trust funds board shall make such deductions
until the credit balance is exhausted, at which time the
employer shall resume making all required employer
contributions.
FN197. Currently, contribution rates for the payment of
unfunded prior service liability are amortized over 40
years and the unfunded prior service liability balance
may not be adjusted to reflect any change in the
actuarial assumptions that are used to evaluate the
liabilities of the WRS. Stipulation of Facts at Jf 32-34.
Consequently, the unfunded prior service liability
balance may exceed or be less than the amount that is
actuarially required to fund the prior service incurred by
employers under the WRS. /d. at $32.
4164 WPPA and SEA contend that section 27(1)(b) is
unconstitutional as an unlawful taking and an impairment of
contract. They also argue that it violates Wis. Stat. § 40.19(1)
and trust principles. On the facts presented, we disagree.
4165 The sole purpose of the employer reserve is to ensure
the fulfillment of benefit commitments to participants at the
lowest possible cost. Put differently, the sole purpose of the
employer reserve is to fund the future payment of accrued
benefits through a reasonable and prudent contribution system.
4166 To achieve this objective, each year every employer is
required to make contributions sufficient to the net costs
of the current discounted value of future retirement benefits
likely to be paid for employees’ service rendered in the current
year. [FN198] Each employer also is required to make steady
contributions to erase any unfunded liability thatthe employer
has for employees’ prior service. [FN199]
FN198. Wis. Stat. § 40.05(2)(a); Wisconsin Retirement
System, supra, at 38.
FN199, Wis. Stat. § 40.05(2)(b) and (bm).
4167 These employer required contributions are credited to
73
the employer reserve. [FN200] Benefit adjustment
contributions are treated as employer contributions, and they too
are credited to the employer reserve, even though they are
classified as employee contributions. In addition, Wis. Stat. §
40.04(5) provides that the employer reserve shall be:
FN200. Wis. Stat. § 40.04(5)(a).
(b) Credited, as of each December 31, all fixed annuity
division interest not credited to other accounts and reserves
under this section.
(d) Credited as of the date of termination of any annuity
under s. 40.26 or 40.63(9)(c) with the excess of the then
—° present value of the terminated annuity over the aggregate
amount of credits reestablished in the accounts of the
participant.
(e) Credited all amounts waived, released or forfeited
under any provision of this chapter.
4168 The other source of funds for the employer reserve is
earnings. Some of the money in the employer reserve is
invested. The gains and losses from these investments are
reflected in the TAA.
4169 Whenearnings in the TAA are distributed to the various
reserves and accounts in the fixed trust, the amount distributed
to each account is a close approximation of the earnings derived
from that account. There may not be a perfect correlation
between the distribution of earnings in the TAA and the original
source of investment funds because of the dynamic, ever-
changing nature of each reserve; but the correlation is close.
For the most part, the employer reserve is not receiving earnings
on money derived from other accounts.
4170 To summarize, most of the non-earnings dollars going
into the employer reserve come directly from employers; and
most of the earnings distributed to the employer reserve are
earnings on employer reserve funds. To the extent that any
non-employer money ends up in the employer reserve, it is
directed there by longstanding provisions of Chapter 40 to help
74
underwrite the ultimate payment of benefits, without impairing
the property interests of any participant.
4171 Some of the money in the employer reserve is not
invested. It is held so that it can be paid over to the annuity
reserve when active participating employees retire or when
inactive employees become eligible to receive a benefit.
Whenever an active participating employee retires or an inactive
employee becomes eligible to receive a benefit, the provisions
of Chapter 40 dictate exactly how much money is transferred
out of the employer reserve. [FN201]
FN201. Wis. Stat. § 40.04(6).
4172 The balance in the employer reserve is not relevant to a
participant's accrued retirement benefit. The size of the
employer reserve balance does not increase or in any way
determine the contractual benefit to be received by participants.
[FN202] At best, the balance in the employer reserve may
heighten the possibility of an increase in the formula multiplier
or the benefit caps in a future vote by the state legislature.
FN202. Respondent WEAC's brief at 54.
4173 Respondents postulate that the employer reserve
functions as a "sum sufficient” to fund accrued benefits.
[FN203] WEAC observes that the employer reserve "is tapped
to pay whatever amount is necessary, in addition to the
individual account balance, to fund the annuity.” [FN204] We
agree.
FN203. Respondents Lightbourn and Voight's brief at
42, 45, 55; Respondent WEAC’s brief at 54.
FN204. Respondent WEAC's brief at 54.
4174 Theestimated unfunded liability in the employer reserve
on December 31, 1998, was $2.2 billion. [FN205] Even if
employers were to completely pay off every penny of this
liability, they would still be responsible for future unfunded
liability resulting from (1) future benefit increases voted by the
75
legislature, (2) new recognitions of past service, and (3)
actuarially-based recalculations of liability by the ETF Board.
[FN206] Even if employers were to pay off every penny of this
liability, they would not be assuring increased employee
benefits.
FN205. Stipulation of Facts at $932, 58.
FN206. See 1999 Wis. Act 11, § 27; Stipulation of
Facts at 933. ;
4175 No one in this litigation suggests that Act 11 abrogates
the statutory and constitutional obligation of employers to fulfill
benefit commitments to participants. These "benefits accrued”
for "service rendered" are the essence of the property right
enjoyed by participants. There is no taking of property or
impairment of contract when everyone concedes that accrued
benefits must be paid.
4176 Nothing in Act 11 permits employers to back away from
their obligation to pay accrued benefits. What SEA and WPPA
claim instead is that participants in the WRS have a property
right in the employer reserve and a contract right in a particular
regimen of employer funding that entitles them to block
legislation that affects the amount of employee required
contributions, or timing of employer required contributions,
even though they do not allege that Act 11 threatens the security
of the trust fund. Alternatively, petitioners claim that it is
unconstitutional for the legislature to provide 1,200 government
employers (and the taxpayers who support them) respite from
employer required contributions--even though the money is not
needed now, may not be needed in the future, and absolutely
will have to be paid if ever it is needed--because, they claim,
contribution relief for employers is a non-trust purpose.
4177 In making these arguments, WPPA and SEA shift the
discussion from the fulfillment of accrued benefits--the
participant property interest--to the relative security of accrued
benefits. They also claim a right to maximize the chance for
additional benefits in the future.
76
9178 SEA reasons that the trust fund "is more secure with
cash reserves than it is when such reserves are replaced or a
mise of repayment.” [FN207] This may be true. The fact
ba, owowen Chapter 40 explicitly izes "unfunded prior
service liability.” Wis. Stat. § 40.05(2)(b). It a izes the
gradual liquidation of that liability over a 40-year period. Jd.
It allows advance payment of the liability, permitting employers
to avoid annual interest on their debt, Wis. Stat. § 40.05(2)(b)
and (bg), but it does not require advance payment. Chapter 40
creates absolute liability for accrued benefits. It does not
demand absolute security for that liability. There is no property
right in absolute security because that would require cash in
advance.
FN207. Petitioner SEA's brief at 37.
4179 Chapter 40 does not give active participating employees
a property right to determine exactly how employers fulfill their
benefit commitments. It gives them a property right in having
their benefit commitments fulfilled. Participants do not have
a legal right to veto legislative decisions about benefit funding
a showing some tangible injury. In this, petitioners have
failed.
{180 Petitioners argue that there could be a shortfall in the
employer reserve at some point in the future. Such a shortfall
is more likely, they say, because $200 million will not be
contributed to the reserve as a result of the contribution credits.
They note that if a shortfall were to occur and it required an
increase in et rates, ow rate increase would be
apportioned equally between employer required contributions
and benefit adjustment contributions ostensibly paid by
employees. Even if employers were to pick up all employee
contributions associated with such a rate increase, they argue,
the additional employer burden would leave less money for
employee wage increases.
7181 The court is not —_ with these facts. We note that a
temporary respite in employer contributions may make
additional money available 2 the short term for employee wage
increases. For some employees, such increases could affect
77
"final average earnings ." Should employees as a class ever have
to make contributions to the employer reserve, they may renew
the argument that the balance in the fund would have been
greater if there had been no employer credits.
7182 Finally, petitioners argue that they are entitled to all
money in the employer reserve. WPPA asserts that when the
legislature authorized the $200 million in employer credits, it
took money "owned by the participants and put [it] into the
pockets of employers." [FN208] "[T]he $200,000,000 transfer
from the TAA is tantamount to theft.” [FN209] "After Act 11's
compelled gift [to employers], $200,000,000 is gone from the
Trust Fund. It is no longer available to beneficiaries of the
trust." [FN210] "There is no legitimate trust purpose being
served by the employer credit account." [FN211]
FN208. Petitioner WPPA's brief at 15.
FN209. Petitioner WPPA's brief at 16.
FN210. Petitioner WPPA's brief at 24.
FN211. Petitioner SEA's brief at 28.
4183 In fact, no money is removed from the employer reserve.
The $200 million credit reduces the amount of unfunded
liability in the employer reserve without requiring employers to
make equivalent cash contributions, but this is different from
removing money from the reserve for a non-trust purpose.
Money cannot be removed from the employer reserve for a non-
trust purpose.
7184 Every distribution from the TAA to the employer
reserve has the potential to affect employer required
contribution rates. When the balance in the employer reserve
is large, the chances are good that the ETF Board will respond
by reducing employer required contributions under Wis. Stat. §
40.05(2)(a). In the ser because of good investment
performance and other factors, the ETF Board has reduced
employer required contributions on several occasions. These
rate adjustments have influenced the balance in the employer
78
reserve.
4185 The $200 million employer credit is a new departure
because it will reduce employer required contributions under §
40.05(2)(b) instead of § 40.05(2)(a), although it will reduce
contributions under § 40.05(2)(a) for employers who have no
unfunded liability.
4186 Wesee no legal reason why slowing the stream of funds
into the employer reserve under § 40.05(2)(a) does not violate
the participants’ property interests but temporarily suspending
the flow of funds into the employer reserve under § 40.05(2)(b) _
does. The former action assists employers with liabilities for
current service while the latter action assists employers with
liabilities for past service. Neither action relieves employers of
their absolute obligation to fulfill all benefit commitments as
they come due. Both actions hold down costs. The legitimacy
of this objective is specifically acknowledged in Wis. Stat. §
40.01(2) ("fulfillment at the lowest possible cost"). This
objective is reaffirmed in Wis. Stat. § 40.04(5)(e), which credits
the employer reserve with "all amounts waived, released or
forfeited under any provision of this chapter" to help employers
fulfill benefit commitments.
4187 In maintaining that employees are entitled to all money
in the employer reserve, WPPA and SEA are really claiming a
contractual right to benefit increases that might be, but have not
yet been, approved. They reason that the greater the balance in
the employer reserve, the more likely it is that the legislature
will vote to increase retirement benefits, inasmuch as the
legislature will be able to fund most or all of the increases out
of the earnings of the fixed trust.
4188 This court cannot invalidate a legislative act on grounds
that it may reduce the ibilities for an increase in retirement
benefits sometime in the future. Our responsibility is to Id
legislation whenever we reasonably can. These speculative
clams do not provide a basis for finding Act 11
unconstitutional beyond a reasonable doubt.
1. Taking of Property
79
4189 Both WPPA and SEA view the $200 million credit as a
taking. This requires us to determine, first, whether a property
interest exists, and, second, whether the property has been
taken.
{190 Non-annuitant participants in the WRS have a general
property interest in the employer reserve because it is one of the
funding sources for their future benefits. Once contributions
enter the employer reserve, they no longer belong to employers
and may not be reclaimed by employers. They are assigned to
participants. Non-annuitant participants have the right to block
improper diversions from the employer reserve and to protect
the integrity and security of the employer reserve so that benefit
commitments will be fulfilled. | Non-annuitants have an
individual property interest to the full extent of their benefit
commitments.
4191 Conversely, participants do not have a right to require a
balance in the employer reserve that is greater than an amount
prudently necessary to fulfill statutorily-determined benefit
commitments over an actuarially-determined period of time.
The ETF Board has long had the authority to set contribution
rates to achieve this objective. Wis. Stat. § 40.03(1)(e). The
legislature buttresses this authority in Act 11: "the employee
trust funds board shall retain authority to maintain proper
actuarial funding of the Wisconsin retirement system." 1999
Wis. Act 11, § 27(3). This affirmation of the ETF Board's
authority represents a fail-safe for the WRS that overrides all
other provisions of Act 11.
{192 While the $200 million employer credit is likely to
affect the balance in the employer reserve, we see no evidence
that the credit here will damage the property interests of non-
annuitant participants. It does not "take" their property. All
money in the employer reserve remains in the reserve and will
go toward funding future benefits. No non-annuitant
participant will receive less from the employer reserve than
Chapter 40 requires. Speculation about how benefits might be
increased in the future does not outweigh the legislature's right
to amend the provisions of Chapter 40 to reduce employer costs
on a temporary basis, provided the WRS remains secure.
80
2. Impairment of Contract
7193 WPPA and SEA also contend that the $200 million
credit constitutes an impairment of contract. This claim fails
because petitioners cannot show an impairment of the
contractual relationship. Chappy, 136 Wis.2d at 187, 401
N.W.2d 568.
4194 WPPA suggests that the employer credit here is
analogous to the transfer of funds from one retirement fund to
another. The credit, it argues, "permanently reduces the dollars
available to participants from the Fund.” [FN212] It quotes
Association of State Prosecutors to the effect that: "Any
pension plan's ability to meet its obligations can be jeopardized
when funds are taken from it, since every dime is arguably part
of a management strategy dependent upon spreading the fund's
monies as broadly as possible....". [FN213]
FN212. Petitioner WPPA's brief at 28.
FN213. Petitioner WPPA's brief at 29 (quoting Ass'n of
State Prosecutors, 199 Wis.2d at 560, 544 N.W.2d 888).
4195 That nt overlooks the distinction between taking
money out a a fund held in trust for participants, and
suspending payment of money into a fund before the employers’
property interest has transferred. Moreover, in iati
State Prosecutors, the money leaving the Milwaukee County
fund was never going to be replaced by the WRS. Here the
money not sent into the employer reserve must be replaced if it
is ever needed.
7196 Petitioners’ contract claim also skirts the fact that
Chapter 40 preserves the state's right "to amend or repeal, by
enactment of statutory —. all or any part of this chapter at
any time ... and there shall be no right to further accrual of
benefits nor to future exercise of rights for service rendered
after the effective date of any amendment or repeal.” Wis. Stat.
§ 40.19(1). This language is just as much a part of the contract
as any other provision in Chapter 40. When the legislature acts
to amend the chapter to hold down employer costs, it is acting
81
in conformity with Wis. Stat. § 40.01(2), so long as it is not
attempting to abrogate benefit commitments or compromise the
security of the fund.
{197 SEA admits that the provisions of Act 11, in and of
themselves, do not leave the trust fund in a financially troubled
condition. It suggests instead that Act 11 poses a "systematic
threat to the Trust Fund" that will serve as a dangerous
precedent "for future legislative conversions that could threaten
the solvency and actuarial soundness of the Trust Fund.”
[FN214]
FN214. Petitioner SEA's brief at 42.
4198 During oral argument, the court explored the question
whether the legislature could recognize sufficient money from
the TAA to wipe out all unfunded liability in the employer
reserve. This hypothetical would present a very different set of
facts and circumstances from the present case. We think the
checks and balances within the legislative process, bolstered by
the requirements of Article IV, Section 26, and Joint Rule 12,
make it unlikely such a scenario will develop. Moreover, the
ETF Board would stand as a bulwark of fiduciary responsibility
to protect the security of the fund. Critics of such a move would
focus on the cumulative effect of liability reductions in relation
to other legitimate objectives of the employer reserve and
Suggest an impermissible loss of balance. In any event, the
specter of an extreme situation is no substitute for the facts at
hand.
4199 We conclude that the $200 million employer
contribution credit is not an unconstitutional taking or an
impairment of contract. It does not conflict with Wis. Stat. §
40.19(1) or trust principles. The $200 million credit is not
unconstitutional beyond a reasonable doubt.
E. Amendments Changing the Assumed Rate and the
Across-the-Board Salary Increase Rate
7200 WPPA and SEA contend that the legislative
modifications to the statutory assumed rate and the statutory
82
across-the-board salary increase rate usurp the ETF Board's
authority, thereby impairing their contract rights under Wis.
Stat. § 40.19(1), and that the rate changes are otherwise
unconstitutional.
q201 Employer required contribution rates are not set by
statute. They are set by the ETF Board upon recommendation
of the actuary as part of an annual actuarial evaluation of the
WRS. [FN215] Each year the WRS consulting actuary evaluates
the funding requirements of the system, then makes
recommendations of the contributions necessary to pay the costs
of future retirement benefits. [FN216]
FN215. Stipulation of Facts at 428.
FN216. Stipulation of Facts at 428.
4202 As noted above, the actuary incorporates two key
actuarial assumptions into the recommendations for employer
required contributions. One is the "assumed rate,” defined as
"the probable average effective rate expected to be earned for
the fixed annuity division on a long-term basis.” Wis. Stat. §
40.02(7). Another is the across-the-board salary increase rate.
Id.
4203 Prior to Act 11, Wis. Stat. § 40.02(7) read as follows:
"Assumed rate” means the probable average
effective rate expected to be earned for the fixed
annuity division on a long-term basis. The
assumed rate shall be a rate of 7.5% and the
actuarial assumption for across-the-board salary
increases for the purpose of valuing the liabilities
of the Wisconsin retirement system shall be 1.9%
less than the assumed rate unless due to changed
economic circumstances the actuary recommends
and the board approves a different rate. The
assumed rate for a calendar year shall be used for
all calculations of required contributions and
reserves for participants, except as provided in s.
40.04(4)(a)2. and 2m., and the amount of any
83
lump sum benefit paid instead of an annuity,
except it shall not be used for any purpose for
which the assumed benefit rate is to be used under
sub. (6).
9204 Act 11 amended Wis. Stat. § 40.02(7), changing the
assumed rate in the statute from 7.5 percent to 8 percent.
[FN217] It also changed the across-the-board salary increase
rate from 1.9 percent less than the statutory assumed rate to 3.4
percent less than the statutory assumed rate. [FN218]
FN217. 1999 Wis. Act 11, § 4.
FN218. 1999 Wis. Act 11, § 4.
205 The impact of these statutory changes is somewhat
illusory. The ETF Board exercised its authority to revise the
assumed rate twice, including 1992 (when it set the rate at 8
percent for 1993). The Board exercised its authority to revise
the across-the-board salary increase rate in 1988, 1994, and
1997 (when the rate was set at 4.8 percent, that is, 8 percent less
3.2 percent). Hence, the real effect of Act 11 is to change the
across-the-board salary increase rate from 4.8 percent to 4.6
percent.
206 Act 11 maintains the authority of the Board to alter the
actuarial rates "due to changed economic circumstances” when
the actuary recommends different rates. Wis. Stat. § 40.02(7);
1999 Wis. Act 11, § 4. It also vests the ETF Board with clear
“authority to maintain proper actuarial funding of the Wisconsin
retirement system ." 1999 Wis. Act 11, § 27(3).
{207 WPPA and SEA challenge the legality of the changed
statutory assumptions. They argue that the changes usurp the
exclusive authority of the ETF Board to set these two actuarial
rates. According to WPPA, "the legislature unilaterally
imposes a new ‘assumed rate’ on WRS participants. This
interferes with the statutory and fiduciary responsibility of the
DETF and the Board." [FN219] The rate changes, SEA
declares, "were not recommended by the actuary, were not
based on changed economic circumstances, and were not
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approved by the ETF Board.” [FN220]
FN219. Petitioner WPPA's brief at 30-31. The
assumed rate is also the rate of interest on unfunded
liability. Wis. Stat. § 40.05(2)(b).
FN220. Petitioner SEA's brief at 44.
4208 This argument would be compelling if the legislature
had stripped the ETF Board ofits broad discretion to change the
rates, irrespective of the statute. It did just the opposite.
Hence, the ETF Board may change actuarial rates in response
to changed economic conditions upon recommendation of the
actuary, or if necessary to maintain proper actuarial funding of
the system.
4209 The changes in the assumed rate and the across-the-
board salary increase rate do not violate Wis. Stat. § 40.19(1).
WPPA insists that "one of the contract rights of the participants
in the WRS is that it be insulated from politics, and that the
Board acting as fiduciary, not the legislature acting like
PN} be in charge of the day-to-day decision-making."
221]
FN221. Petitioner WPPA's brief at 36.
4210 WPPA ignores the fact that benefit increases must be
approved by the legislature, acting in a policy-making capacity.
Wisconsin Stat. § 40.19(1) gives that same legislature the right
to change the terms of the WRS contract, so long as
modifications do not abrogate benefits accrued to participants
for service rendered.
4211 In the past, the ETF Board has repeatedly adjusted
employer required contributions and unfunded liability after
maki g adjustments in the assumed rate and the across-the-
board salary increase rate. We do not understand why the
legislature may not also make adjustments in statutory rates,
provided the ETF Board has the final word so that the WRS is
always protected.
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212 No point would be served by further analysis of the
contention that the changes to the actuarial assumptions are a
‘taking of property and an impairment of contract, as these
contentions have already been discussed twice. The same
reasoning applied in our constitutional discussion of the$4
billion transfer and the $200 million credit applies here.
Nothing the legislature has done relieves employers of their
absolute liability to fulfill the benefit commitments
contemplated in Wis. Stat. § 40.19(1). These accrued benefits
are the essence of the participants’ property interest. There is
no taking of that interest. Farticipants do not have a property
interest in a particular actuarial assumption set in the statute.
They have an interest in the integrity and security of the trust
fund, and this legislation does not put that in jeopardy.
F. Benefit Caps
{213 WPPA contends that raising the 65 percent benefit cap
by 5 percent for all employees except protective occupation
employees violates the equal protection clause of the United
States Constitution and Article 1, Section 1 of the Wisconsin
Constitution.
{214 Active participating employees who retire when they are
entitled to receive a benefit and inactive participating employees
who become eligible to receive a benefit may choose between
a "normal form annuity" (the formula benefit) or the money
purchase annuity provided in Wis. Stat. § 40.23(3). The
money purchase annuity is based upon "the sum of the
participant's accumulated additional and required contributions
plus an amount from the employer accumulation reserve equal
to the participant's accumulated required contributions." Wis.
Stat. § 40.23(3).
$215 A normal form annuity or formula benefit is capped. A
money purchase annuity is not.
{216 Prior to Act 11, the maximum amount of the initial
annuity for a participant in the WRS (including a protective
occupation participant with social security) who receives a
formula benefit, was an amount equal to 65 percent of the
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participant's final average earnings. Wis. Stat. § 40.23(2m)\b).
The notable exception to the 65 percent cap was for protectives
without social security whose formula benefit was capped at 85
percent of final average earnings.
{217 Act 11 raises the benefit cap for all active participating
employees wh
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