AGLO 1975 No. 50 - May 12 1975
PENSIONS ‑- RETIREMENT ‑- FUNDING POST-RETIREMENT BENEFIT INCREASES
In the event of their receipt of investment earnings sufficiently in excess of actuarially determined general funding requirements to fully fund the post-retirement cost of living pension increases provided for by RCW 41.40.195(5) and RCW 41.32.499(6), neither the public employees' retirement board nor the board of trustees of the teachers' retirement system, respectively, may, nevertheless, finance such pension increases through increased employers' contributions or, in the case of the teachers' retirement system, by requesting increased state appropriations.
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May 12, 1975
Honorable Frank J. Warnke
State Representative, 30th District
Olympia, Washington 98504 Cite as: AGLO 1975 No. 50
By letter previously acknowledged, you have requested the opinion of this office on a question which we paraphrase as follows:
In the event of their receipt of investment earnings sufficiently in excess of actuarially determined general funding requirements to fully fund the post-retirement cost of living pension increases provided for by RCW 41.40.195(5) and RCW 41.32.499(6), may the public employees' retirement board or the board of trustees of the teachers' retirement system, respectively, nevertheless finance such pension increases through increased employers' contributions or, in the case of the teachers' retirement system, by requesting increased state appropriations?
We answer your question in the negative for the reasons set forth in our analysis.
As the body of the letter which accompanied your opinion request recognizes, any cost-of-living adjustment which may be granted by either the public employees' retirement system (PERS) or the Washington state teachers' retirement system (TRS) has a significant monetary effect. Any such increase causes not only an immediate fiscal impact but also has an impact which extends throughout the lives of those who have been granted the increase. In view of this fact and of the differing funding structures of the public employees' and teachers' retirement systems, it may be helpful to deal with the two systems separately.
I. The Public Employees' Retirement System:
The statutory authority for granting a post-retirement cost-of-living increase to retirees under this system [[Orig. Op. Page 2]] (PERS) is provided by RCW 41.40.195(5) in the following language:
"Each service retirement allowance payable from July 1st of any year after 1973 until any subsequent adjustment pursuant to this subsection shall be adjusted so as to equal the product of the cost-of-living factor for such year and the amount of said retirement allowance on the initial date of payment:Provided, That the board finds, at its sole discretion, that the cost of such adjustments shall have been met by the excess of the growth in the assets of the system over that the required for meeting the actuarial liabilities of the system at that time."
This subsection was enacted as a part of § 11, chapter 190, Laws of 1973, 1st Ex. Sess. In addition, by § 4 of this same law, the legislature added a new paragraph at the end of RCW 41.40.100 which reads as follows:
"The board shall have sole discretion to determine the amount of interest to be credited to the employees' savings fund which will thereupon be credited as regular interest to the individual members' accounts. The board may specifically allocate not more than one percent per annum of the investment earnings for the purpose of making sufficient funds available to facilitate the adjustment in service retirement allowances provided by RCW 41.40.195 as now or hereafter amended."
This language, obviously, makes up to one percent of the total investment earnings of the system available to fund any cost-of-living increase which may be granted. However, there are also factors other than investment earnings which may result in a ". . . growth in the assets of the system over that required . . ." to fund the system's liabilities. To identify those other factors, it is necessary to consider the other aspects of the funding structure of the system.
The basic funding of PERS is provided by employee and employer contributions expressed as percentages of each employee's salary, together with investment income earned thereon. Each employee contributes six percent of his total compensation earnable to the retirement system. See, RCW 41.40.330. In addition, under RCW 41.40.361, each employer contributes a monthly amount which is actuarially computed to [[Orig. Op. Page 3]] be the amount necessary, over a forty-year period, to fund the pension benefits which those who retire during that period will receive. At the present time this rate is seven percent for state agencies and 6.9% for other employers within the system.1/
Each employer's contribution is made up of two portions. As set forth in RCW 41.40.361(2), one portion is the "normal contribution" and the other is the "unfunded liability contribution." As explained by the actuarial firm employed by the PERS retirement board:
"Under this method, an annual 'normal cost' for each member is established. The annual normal cost is the level percentage of salary which, if contributed each year, starting with the date from which benefits initially accrue, will accumulate to an amount sufficient to provide the specified benefits at retirement.
"If the contributions are not started until after the benefits have started accruing, then a supplemental liability, called the 'unfunded liability,' is created at the inception of the system. The initial unfunded liability is essentially the cost of providing benefits for service before the establishment of the system. Thereafter, changes in the unfunded liability occur because of several factors, including benefit improvements, actuarial gains and losses, and changes in actuarial procedures. . . ."2/
[[Orig. Op. Page 4]] A new calculation of the system's total unfunded liability is made on the basis of each periodic actuarial valuation. RCW 41.40.065. As of the date of each such valuation the total unfunded liability is defined by RCW 41.40.361(4) to be
". . . the excess of the fundable employer liability3/ over the sum of the present value of the future normal contributions payable in respect of all members in the retirement system at that date, and the amount of all funds currently standing to the credit of the benefit account fund. . . ."
As you thus will see, each actuarial valuation provides the basis for the retirement board to establish the employers' contribution rate, calculated as a percentage of salary, which, in response to various assumptions as to the future compensation of members of the system, investment earnings on the funds held by the system, retirement experience, etc., will fully fund the ultimate benefits to be paid. However, of course, if one or more of these factors proves in fact to be more favorable to the financial status of the system than was anticipated by the actuary in accordance with his assumptions, the result will be a growth in the assets of the system which is called an "actuarial gain."4/
Insofar as your inquiry is concerned, when presented with such a gain the retirement system is then in a position of either (1) granting a cost-of-living increase under [[Orig. Op. Page 5]] RCW 41.40.195(5), supra, which does not exceed the gain;5/ (2) reducing the employer contribution rate to reflect the amount of the gain; or (3) doing nothing, leaving the gain to offset any future actuarial losses which might occur. Your question assumes that such an actuarial gain has occurred as a result of excess investment earnings and asks whether the retirement board may, nevertheless, provide funding for a cost-of-living increase solely by increasing the employer contribution rate.
As indicated by the statutory language which we have earlier quoted, RCW 41.40.195(5) grants the retirement board the sole discretion to determine whether the growth in the assets of the system, when compared to its actuarial liabilities, will allow an increase to be made.
One must read the whole of any legislative enactment together, and not attach unusual significance to any individual section or paragraph. Eastlake Com. Coun. v. Roanoke Assoc., 82 Wn.2d 475, 513 P.2d 36 (1973). The provisions of chapter 41.40 RCW, read as a whole, evidence an intent to establish a rate structure based upon employee and employer contributions and investment earnings thereon which will fund the liabilities of the system in an orderly fashion. Moreover, unless a contrary intent appears from a statute, words therein are given their usual and ordinary meaning. State ex rel. Etc. Union v. Longview, 65 Wn.2d 568, 399 P.2d 1 (1965);Miller v. Pasco, 50 Wn.2d 229, 310 P.2d 863 (1957). In the case of RCW 41.40.195(5) the word "growth" must be read to mean "a gradual development toward maturity."6/
In the context of the public employees' retirement system, the period by which growth is to be measured is the forty-year period following each valuation. The language of RCW 41.40.195(5) requires the board to make a determination that the costs of any proposed cost-of-living increase ". . .have been met by the excess of the growth in the assets of the system over that required . . ." to meet its liabilities at that time. Obviously, this use of the past tense indicates a legislative intent that the necessary asset growth must have occurred in the past. For this reason, it follows that the board could not properly grant an increase to be funded by an increased contribution rate [[Orig. Op. Page 6]] resulting in a future growth in assets and, for this reason, we answer your question in the negative in the case of this system.
II.The Teachers' Retirement System:
RCW 41.32.499(6), which provides for post-retirement cost-of-living pension increases for retired teachers covered by this system is virtually identical to RCW 41.40.195(5),supra, in that it provides that:
"Each service retirement allowance payable from July 1st of any year after 1973 until any subsequent adjustment pursuant to this subsection shall be adjusted so as to equal the product of the cost-of-living factor for such year and the amount of said retirement allowance on the initial date of payment: Provided, That the board finds, at its sole discretion, that the cost of such adjustments shall have been met by the excess of the growth in the assets of the system over that required for meeting the acutarial liabilities of the system at that time."
Likewise, the laws governing this system contain a provision similar to that contained in RCW 41.40.100(3), supra. See, RCW 41.32.405 which provides:
". . . That from interest and other earnings on the moneys in the annuity fund the board may specifically allocate up to one percent per annum of such interest and other earnings for the purpose of making sufficient funds available to facilitate the adjustment in the retirement allowance provided in RCW 41.32.499." (Emphasis supplied.)
It will be noted, however, that as opposed to the PERS board the TRS board may only "specifically allocate" the interest from its annuity fund for post retirement increases. The annuity fund is that fund to which an employee's contributions are credited (less the minor deductions which are credited to the disability reserve fund and death benefit funds). See, RCW 41.32.350, 41.32.360 and 41.32.366.
Moreover, unlike PERS, the teachers' retirement system does not require employer contributions, as such. Rather the equivalent amount is to be periodically transferred to the teachers' retirement fund by an appropriation from the state general fund pursuant to RCW 41.32.401 which provides, in relevant part, as follows:
[[Orig. Op. Page 7]] "For the purpose of establishing and maintaining an actuarial reserve adequate to meet present and future pension liabilities of the system . . . the board of trustees . . . shall compute the amount necessary to be appropriated during the next legislative session for transfer from the state general fund to the teachers' retirement system, during the next biennium. Such computation shall provide for amortization of unfunded pension liabilities over a period of not more than fifty years from July 1, 1964. The amount thus computed as necessary shall be reported to the governor. . . for inclusion in the budget. The legislature shall make the necessary appropriation from the state general fund to the teachers' retirement system after considering the estimates as prepared and submitted. . . . The transfer of funds from the state general fund to the retirement system shall be at a rate determined by the board of trustees on the basis of the latest valuation prepared by the actuary employed by the board, and shall include a percentage contribution of the total earnable compensation of the members for the biennium for which the appropriation is to be made, to be known as the 'normal contribution,' and an additional percentage contribution of such earnable compensation, to be known as the 'unfunded liability contribution.' . . ."
The concepts of "normal contribution" and "unfunded liability contribution" employed in this statute are, however, essentially identical to those employed by the PERS ‑ although the funding structure as to employers is not described as a percentage of salary.
"The annual contribution by the state consists of two parts, namely, the normal contribution which includes the cost of survivor benefits, and the unfunded liability contribution.
"The normal contribution is the annual contribution payable by the state to spread equally over the years of credited service of each member the cost of his pension at retirement.
[[Orig. Op. Page 8]] "The unfunded liability contribution is the annual payment required to liquidate, over a period of 34 years, the pension liability for all previous service which has not yet been funded. The total unfunded liability is the amount which would be on hand if the state's normal contribution had actually been paid into the fund each year as service credit was established and as additional liability developed through changes in law."7/
Our supreme court has held that statutes relating to pensions may be read inparimateria with other pension statutes to determine intent. Hanson v. Seattle, 80 Wn.2d 242, 493 P.2d 775 (1972). This is particularly true where the language involved is practically identical, as here, in the case of RCW 41.32.499(6), supra, and RCW 41.40.195(5). Therefore, it follows that any cost-of-living increases for TRS retirees must be justified on as nearly as possible the same basis as those for PERS members.
In the case of PERS we reasoned that employers' contributions could not be increased to fund a pension increase under RCW 41.40.195(5), supra, because the "growth" required by that statute must have already occurred in the past before such an increase can be granted ‑ whereas increased contributions would, instead, only producefuture growth.
In relation to the teachers' system we are guided by the direction in RCW 41.32.401 that the legislature's appropriations are to fund the system before the year 2014.8/ Should TRS realize "actuarial gains" by encountering experience more favorable than its actuarial assumptions, we believe its board may properly grant a cost-of-living increase rather than reducing the level of the request for appropriations during a subsequent biennium. However, in the absence of actuarial gains no such increase could be granted since it would require a greater level of appropriations to provide future growth to fund the increase. Such an increase would not be based upon the actual growth of the assets which had occurred but would, instead, have [[Orig. Op. Page 9]] been granted in anticipation of a future growth attributable to the increase in appropriations.
For these reasons we conclude that your question must also be answered in the negative as it relates to the teachers' retirement system.
We trust we have been of assistance.
Very truly yours,
WAYNE L. WILLIAMS
Assistant Attorney General
*** FOOTNOTES ***
1/The rate for state agency employers is limited to a maximum of 7% by RCW 41.40.361(2). Such employers currently pay a higher rate than the others to amortize the increased liability created by the state's failure to make unfunded liability contributions during the 1971-73 biennium. See, RCW 41.40.361(6).
2/Public Employees' Retirement System of the State of Washington, Actuarial Valuation as of December 31, 1973, p. 3 (Ninth Valuation, 1975).
3/Which is defined by RCW 41.40.361(1) to be:
". . . the present value of
"(a) all future pension benefits payable in respect of all members in the retirement system at that date, and
"(b) all future benefits in respect of beneficiaries then receiving retirement allowances or pensions."
4/T. Bleakney, Retirement Systems for Public Employees, pp. 122-127 (1972).
5/Assuming an increase in the cost-of-living has occurred.
6/Webster's New World Dictionary of the American Language, p. 641 (College Ed. 1966).
7/Board of Trustees' Twenty-Fifth Annual Report, p. 19 (1962-1963), (Wash. Pub. Documents, vol. 3) cited with approval in Weaver v. Evans, 80 Wn.2d 461, 471 footnote 1, 495 P.2d 639 (1972).
8/I.e., fifty years from July 1, 1964.