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AGO 1992 No. 26 - November 06, 1992
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Ken Eikenberry | 1981-1992 | Attorney General of Washington

LEOFF RETIREMENT SYSTEM---PENSIONS--RETIREMENT--Payment of Interest on Members' Accumulated Contributions

RCW 41.26.060(8) authorizes the Director of Retirement Systems to fix the amount of interest to be credited to members' accumulated contributions at a rate which shall be based upon the net annual earnings of the fund.  This statute permits the Director to credit interest to members' accumulated contributions.  However, it does not require the Director to credit interest to members' accumulated contributions in the amount of the actual net earnings of the invested funds.

                                                                   * * * * * * * * * *

                                                                November 6, 1992

Honorable Larry Vognild
State Senator, District 38
408-A Legislative Building
Post Office Box 40438
Olympia, Washington  98504-0438

                                                                                                                 Cite as:  AGO 1992 No. 26

Dear Senator Vognild:

            By letter previously acknowledged, you have asked the following paraphrased question:

            Does RCW 41.26.060(8) require the Director of the Department of Retirement Systems to credit interest to Law Enforcement Officers' and Fire Fighters' Retirement System members' accumulated contributions in the amount of the actual net earnings of the invested funds?

For the following reasons, the answer is no.

                                                                BACKGROUND

            RCW 41.26 contains the provisions of the Law Enforcement Officers' and Fire Fighters' Retirement System (LEOFF).  LEOFF is divided into two "plans".  Plan I applies to members who entered covered employment before October 1, 1977; Plan II pertains to those who entered covered employment on or after October 1, 1977.  RCW 41.26.030(28), (29). 

            LEOFF pays a monthly retirement allowance to each member who fulfills age and length of service criteria.[1]  RCW 41.26.090, .430.  LEOFF pays a monthly allowance to members who retire due to disability.  RCW 41.26.120-.125, .470.  The amounts of service and disability allowances are determined under formulas using final average salary and years of service.  RCW 41.26.100, .130, .420, .470.  The amount of accumulated contributions has no bearing on the amount of service and disability allowances.  Accordingly, the interest credited by the Department of Retirement Systems (DRS) to members' contributions is significant only to members (or their survivors) who terminate LEOFF covered employment prior to retirement, and who elect to withdraw their contributions.  See RCW 41.26.160(3), (4), .170, .510, .540.

            Soon after LEOFF was created, the Legislature made two separate appropriations to the LEOFF Retirement System Fund.  Laws of 1971, 1st Ex. Sess., ch. 275, §§ 30, 91, pp. 1281, 1315.  The second of these two appropriations carried the following proviso:

            PROVIDED, That the Washington Law Enforcement Officers' and Fire Fighters' Retirement System Retirement Board shall use interest earnings on accumulated contributions and the amount appropriated by this section to pay pensions due for the 1971-73 biennium.  Funds appropriated by this section shall be used only to the extent that interest earnings are not sufficient to make required pension and refund payments under chapter 41.26 RCW.

Laws of 1971, 1st Ex. Sess., ch. 275, § 91, p. 1315 (emphasis supplied).

            The appropriation to the LEOFF fund for the 1973-75 biennium also specified that interest earnings on accumulated contributions were to be used to pay pensions.  See Laws of 1973, 1st Ex. Sess., ch. 137, § 24, p. 912.

            The Office of the State Actuary has prepared actuarial valuations of LEOFF since the late 1970's.  One of the purposes of these valuations is to recommend to the Legislature a state general fund appropriation to LEOFF to systematically achieve an actuarial soundness for the System.[2]  These valuations are based, in part, on an assumption concerning the future investment earnings of the LEOFF funds, and the interest rate credited to members' accumulated contributions.  In none of these valuations did the crediting of interest to members' accumulated contributions match the projected investment earnings.  See, e.g., Office of the State Actuary, Law Enforcement Officers and Fire Fighters Retirement System of the State of Washington, Actuarial Valuation as of December 31, 1978, at 20, 23.

            Consistently, these valuations by the Office of the State Actuary have assumed that the investment earnings rate would exceed the interest credited to members' accumulated contributions.  In essence, it was assumed by the valuations that part of the investment earnings would not be credited to members' accumulated contributions, but would be used to help fund the cost of retirement, disability, and survivors' benefits.

            When first created, LEOFF was administered by a nine-member board.  This board set the interest rate to be credited to members' accumulated contributions.  Initially, the LEOFF Board adopted a 5 percent interest rate, without any apparent reference to the actual net earnings of the LEOFF fund.  See Minutes of the Washington Law Enforcement Officers' and Fire Fighters' Retirement System Retirement Board (Minutes), April 13, 1970, at 4-5.

            In 1973 and 1975, the Board changed the credited interest rate.  In October 1973, the Board resolved not to pay interest on members' accumulated contributions, but instead to use the interest earnings to make benefit payments to retired members.    Minutes, October 15, 1973, at 20-21.[3]  In July 1975, the Board fixed an interest rate of 4.5 percent.  Minutes, July 21, 1975, at 17-18.  At the time of the 1975 change, the Board discussed with its consulting actuary the difference between the 4.5 percent interest rate and the interest rate used by the actuary in his valuations.  The written valuations, while not setting forth the assumed member interest rate, do show an assumed investment earnings of 5.5 percent which is 1 percent higher than the credited rate.  See, e.g., Office of the State Actuary,Washington Law Enforcement Officers and Fire Fighters Retirement System Actuarial Valuation as of December 31, 1973, at 17.

            In 1979, the Director of DRS[4]raised the credited interest rate to 5.5 percent.  It has since remained unchanged, while during this period the investment earnings rate has fluctuated.

            We have not located an official document setting forth the actual annual net earnings of the LEOFF fund since the inception of LEOFF.  But it is apparent that the interest rate credited to LEOFF members' accumulated contributions has not matched the fund's actual net earnings.

                                                                    ANALYSIS

            Members of LEOFF contribute 6 percent of their basic salaries to LEOFF.  RCW 41.26.080(1).  These contributions plus "accrued interest credited thereon" are designated as "accumulated contributions".  RCW 41.26.030(15).

            When the LEOFF System was created in 1969, section 6(11), chapter 209, Laws of 1969, 1st Extraordinary Session, authorized the Board to

            [f]ix the amount of interest to be credited at a rate which shall be based upon the net annual earnings of the fund for the preceding twelve-month period and from time to time make any necessary changes in such rate[.]

RCW 41.26.060(8).[5]  This provision does not expressly state to whom or to what interest is authorized to be credited.  While not explicit, it is reasonable to imply that this language permits crediting interest to members' accumulated contributions.  The contemporaneous construction of this language was that it authorized the Board to credit members' accumulated contributions, but did not mandate such credits.  As we pointed out in our background discussion, from 1971 through 1975 the Legislature directed that interest earnings be used by the System to pay benefits.  In addition, actuarial valuations assumed that part of the investment earnings would be used to help fund the cost of retirement, disability, and survivors' benefits.

            Your question goes further and asks whether RCW 41.26.060(8) requires that interest be paid on members' accumulated contributions and that such interest match the net annual earnings rate of the LEOFF fund.  An affirmative answer would be directly contrary to the contemporaneous construction by the Legislature which enacted that statute, hence we answer in the negative.  An appropriations act can be persuasive evidence of the legislative intent underlying substantive statutes.  See, e.g.,State ex rel. Shuff v. Clausen, 131 Wash. 119, 124-25, 229 P. 5 (1924);Alaska Steamship Co. v. United States, 290 U.S. 256, 78 L. Ed. 302, 54 S. Ct. 159 (1933).  And when an appropriations act is contemporary with the enactment of the substance statute, it is very persuasive of legislative intent.  As earlier noted, the appropriations act providing that interest earnings were to be used for payment of pension obligations was contemporary with the creation of the LEOFF System.

            This legislative construction is consistent with the statement of RCW 41.26.060(8) that the interest rate "shall be based upon the net annual earnings of the fund" (emphasis added).  One definition of "to base" is "to use as a base or basis for:  ESTABLISH, FOUND . . . BASE now usually applies to what underlies a belief, a system of thought, a judgment, a hope, and so on".  Webster's Third New International Dictionary 180-81 (1981).  A "base" is defined as "[a] foundation; a starting point."  Ballentine's Law Dictionary 125 (3d ed. 1969).  "BASED UPON.   Means an initial or starting point for calculations."  Black's Law Dictionary 192 (4th ed. 1968).  The phrase "shall be based" does not require an exact match.  Rather, "shall be based", as contemporaneously construed by the Legislature, means that the net annual earnings merely constitute the starting point for setting an interest rate.

            Furthermore, in a subsequent amendment to the LEOFF System, the Legislature reiterated its construction that interest on accumulated contributions is authorized, but not mandated.  The LEOFF act now defines "regular interest" as "such rate as the director may determine."  RCW 41.26.030(23).[6]  This definition of "regular interest" does not require the director to exactly match the interest rate of the investment earnings.  The Legislature sometimes clarifies its intent through later enactments.  See, e.g.,Anderson v. Seattle, 78 Wn.2d 201, 204, 471 P.2d 87 (1970);Carpenter v. Butler, 32 Wn.2d 371, 379, 201 P.2d 704 (1949).  In light of the facts regarding legislative enactments and actuarial valuations set forth in our background discusion, we view the addition of this "regular interest" definition as such a clarification.

            Finally, neither the LEOFF Board nor the DRS Director interpreted the LEOFF statute as requiring an exact match between earnings and the interest rate.  The interpretation of a statute by those charged with its administration is entitled to weight; legislative approval of an interpretation can be inferred where the Legislature has failed to amend it.  State ex rel. Blume v. Yelle, 52 Wn.2d 158, 164-65, 324 P.2d 247 (1958); Hart v. Peoples Nat'l Bank, 91 Wn.2d 197, 201, 588 P.2d 204 (1978).  This inference is especially strong where, as here, the Legislature's actions so strongly support the interpretation of the LEOFF Board and the DRS Director.

            In summary:  Between 1971 and 1975 the Legislature specifically directed that interest earnings be used to pay benefits.  Actuarial valuations by the Office of the State Actuary, for the purpose of recommending the legislative appropriation for the retirement fund, assumed part of the investment earnings would be used to help fund the cost of retirement, disability, and survivors' benefits.  (This would have the effect of reducing the state general fund appropriation.)  And neither the LEOFF Board nor the DRS Director interpreted RCW 41.26.060(8) as requiring that the actual net earnings of the fund be credited to members' accumulated contributions.  Based on this contemporaneous construction by the Legislature and the agencies responsible for administering the law, we conclude that RCW 41.26.060(8) does not require the DRS Director to credit interest to members' accumulated contributions in the amount of the actual net earnings of the invested funds.

            We trust the foregoing will be of assistance to you.

                                    Very truly yours,

                                    KENNETH O. EIKENBERRY
                                    Attorney General

                                    WILLIAM B. COLLINS
                                    Senior Assistant Attorney General

KOE:WBC:aj


    [1]Members who have five years of LEOFF service, but who terminate LEOFF covered employment prior to meeting age criteria, may leave their contributions in the System and receive a retirement allowance at a later date.  RCW 41.26.090(2), .530.

    [2]See Laws of 1969, 1st Ex. Sess., ch. 209, §§ 2, 8(3), pp. 1552, 1559, formerly RCW 41.26.080(3).

    [3]This decision is consistent with the proviso contained in the 1973 Appropriations Act.  Laws of 1973, 1st Ex. Sess., ch. 137, § 24, p. 912.

    [4]The Board's powers were transferred to the Director of DRS in 1976.  Laws of 1975-76, 2d Ex. Sess., ch. 105, § 5, p. 335.

    [5]RCW 41.26.060(8) has recently been recodified as RCW 41.50.055(8).

    [6]The definition of "regular interest" was added in 1977.  Laws of 1977, 1st Ex. Sess., ch. 294, § 17, p. 1077.  It applies to both LEOFF Plan I and Plan II.  See, id., § 2.  The precise phrase "regular interest" does not appear anywhere in the LEOFF statute, including the section defining "accumulated contributions" (RCW 41.26.030(15)).  Conversely, there is no statutory definition for the phrase "accrued interest" used in defining "accumulated contributions".  "Regular interest" must be given some meaning, however, because legislative enactments must be construed so as to be effective.  SeeState v. Bryan, 93 Wn.2d 177, 183, 606 P.2d 1228 (1980).  The interest rate on contributions is the only interest rate determination mentioned in the LEOFF statue.  We therefore conclude that it refers, if somewhat imprecisely, to interest on employee contributions.

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