AGLO 1978 No. 27 - Sep 8 1978
OFFICES AND OFFICERS ‑- STATE ‑- PUBLIC EMPLOYEES' RETIREMENT BOARD ‑- LAW ENFORCEMENT OFFICERS' AND FIRE FIGHTERS' RETIREMENT BOARD ‑- POTENTIAL PERSONAL LIABILITY ARISING FROM INVESTMENT OF FUNDS
(1) The members of the Public Employees' or Law Enforcement Officers' and Firefighters' Retirement Boards may be held personally liable for their actions relating to the investment or reinvestment of the funds of the Public Employees' or Law Enforcement Officers' and Fire Fighters' Retirement Systems.
(2) Identification and discussion of conditions or circumstances under which such liability could be found to exist.
(3) Although the respective retirement boards do not, themselves, have the authority to purchase insurance to provide protection to the board members from such liability, the state budget director's office, in conjunction with the State Employees' Insurance Board, has the ability to authorize the procurement of such insurance.
(4) If an action is brought alleging personal liability against retirement board members, the members thus sued would not be required to defend such an action at their own expense if (but only if) the attorney general determines that the acts or omissions giving rise to the claim ". . . were or purported to be in good faith, within the scope of . . . official duties."
(5) Where the attorney general provides such a defense as is qualifiedly authorized by RCW 4.92.060 and 4.92.070, any judgment would then be paid out of the special fund created for this purpose pursuant to RCW 4.92.130.
- - - - - - - - - - - - -
September 8, 1978
Honorable Robert L. Hollister, Jr.
Department of Retirement Systems
Capital Plaza Building
Olympia, Washington 98504 Cite as: AGLO 1978 No. 27
By letter previously acknowledged you have asked for our opinion on the following questions:
[[Orig. Op. Page 2]] "1. May the members of the Public Employees' or Law Enforcement Officers' and Fire Fighters' Retirement Boards be held personally liable for their actions relating the the investment or reinvestment of the funds of the Public Employees' or LEOFF Retirement Systems?
"2. If your answer to question (1) is in the affirmative, under what conditions could such liability be found to exist?
"3. If your answer to question (1) is in the affirmative, do the boards have the authority to purchase insurance which would provide protection to the board members from such liability?
"4. If an action is brought alleging personal liability against board members, must the board members defend such an action at their own expense?
"5. If your answer to question (1) is in the affirmative, to what extent can or does the state indemnify them?"
We answer question (1) in the affirmative and respond to your remaining questions as set forth below.
Your request involves certain of the duties and responsibilities of the Public Employees' and Law Enforcement Officers' and Fire Fighters' Retirement Boards. The membership of both boards is identical (see RCW 41.26.050) and the members of both boards have responsibilities relating to the investment of the funds of both systems. See, RCW 41.26.060(6), RCW 41.40.072 and RCW 41.50.080.
The members of the retirement boards are statutorily made trustees of the funds of both systems. In the case of the Public Employees' Retirement System (PERS) this is so pursuant to RCW 41.40.072; see also, State ex rel. State Ret. Bd. v. Yelle, 31 Wn.2d 87, 195 P.2d 646, 201 P.2d 172 (1948). With [[Orig. Op. Page 3]] respect to the Washington Law Enforcement Officers' and Fire Fighters' Retirement System (LEOFF) the statute is RCW 41.26.070. In addition, it is now clear that the members of both boards are held to the so-called "prudent man" standard regarding investments. Accord, §§ 8 and 9, chapter 251, Laws of 1977, 1st Ex.Sess., which added the following identical provisions to chapters 41.26 and 41.40 RCW.
"Any investments under RCW 43.84.150 shall be made with the exercise of that degree of judgment and care, under circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation but for investment, considering the probable safety of their capital as well as the probable income to be derived." 1/
In Monroe v. Winn, 16 Wn.2d 497, 508, 133 P.2d 952 (1943) our state supreme court described the common law duties and responsibilities of a trustee as follows:
". . . In administering the trust, the trustee must exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property and, in meeting this standard, the circumstances as they reasonably appear to him at the time of doing an act, and not at some subsequent time when his conduct is called in question, should be considered. The trustee owes to the beneficiaries of the trust the highest degree of good faith, diligence, fidelity, loyalty, and integrity, and the duty to deal fairly and justly with them and solely in their interests. . . ."
Likewise, the legislature has statutorily established general standards governing the duties and responsibilities of trustees. These standards appear in RCW 30.24.020 as follows:
"In acquiring, investing, reinvesting, exchanging, selling and managing property for the benefit of another, a fiduciary shall exercise the judgment and care under the circumstances then prevailing, which men of prudence, discretion [[Orig. Op. Page 4]] and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital. Within the limitations of the foregoing standard, and subject to any express provisions or limitations contained in any particular trust instrument, a fiduciary is authorized to acquire and retain every kind of property, real, personal or mixed, and every kind of investment specifically including but not by way of limitation, debentures and other corporate obligations, and stocks, preferred or common, which men of prudence, discretion and intelligence acquire for their own account."
The court has held that these statutory criteria do not differ significantly from the common law criteria established by it in the Monroe case, supra. See, In re Parks' Trust, 39 Wn.2d 763, 238 P.2d 1205 (1951). Likewise, we see no particular difference in the thrust of the specific statutes governing the retirement boards; the general statutory standard; and that above described by the supreme court. They are essentially the same criteria described in different language. Therefore, we will assume that all three standards are the same for the purposes of this opinion.
As trustees, it is clear that the members of the PERS and the LEOFF retirement boards may be held personally liable for their failure properly to administer the trust which has been entrusted to them. Kincaid v. Hensel, 185 Wash. 503, 55 P.2d 1050 (1936). In determining whether or not they have properly administered that trust, their performance will be weighed against the standard set forth in RCW 41.26.330 and RCW 41.40.077, supra, all in the light of the judicial gloss given this common law standard by the court. There exists, however, no statutory or other general immunity which could be invoked in their defense in the event of a lawsuit seeking damages against them on the basis of the foregoing. We therefore answer your first question in the affirmative.
Your second question asks us to outline the circumstances under which the board members might be held personally liable [[Orig. Op. Page 5]] for their failure to properly perform their duties as trustees. As you can see from the standard set forth above, however, a listing of the situations in which such liability could attach is impossible. As we said in a previous opinion
". . . The standard is not so much a legal standard which can be set forth in black and white, as it is a 'common sense' standard which is measured factually against the situation that existed at the time the questioned investment was made." 2/
This point should, perhaps, be reemphasized. A court, in measuring the performance of a trustee, would not look at the trustee's actions with the 20/20 vision of hindsight. Rather, the trustee's performance is measured by the circumstances and conditions which existed at the time the questioned investment was made, with allowances for the trustee's own myopic failure correctly to see the future. The test has thus been described as follows:
"Whether the trustee is prudent in the doing of an act depends upon the circumstances as they reasonably appear to him at the time when he does the act and not at some subsequent time when his conduct is called in question." Restatement (Second) of Trusts, § 174, Comment b, page 379 (1959).
This same text then proceeds to discuss many of the considerations which should govern trustees while making investments. For illustrative purposes we have here excerpted several such comments which appear particularly cogent. First,
"In making investments, . . . a loss is always possible, since in any investment there is always some risk. The question of the amount of risk, however, is a question of degree. No man of intelligence would make a disposition of property where in view of the price the risk of loss is out of proportion to the opportunity for gain. Where, however, the risk is not out of proportion, a man of intelligence may make a disposition which is speculative in character [[Orig. Op. Page 6]] with a view to increasing his property instead of merely preserving it. Such a disposition is not a proper trust investment, because it is not a disposition which makes the preservation of the fund a primary consideration.
"It is not ordinarily the duty of a trustee to invest only in the very safest and most conservative securities available. Thus, assuming that United States government bonds are the safest and most conservative securities available but that the income yield thereon is lower than on other securities, it is not necessarily the duty of the trustee to invest the whole trust property, or even any part of it, in such bonds, even when no question of favoring one beneficiary over another is involved. The reason for this is that by the use of care, skill and caution, an investment can ordinarily be made which will yield a higher income and as to which there is no reason to anticipate a loss of principal." Restatement, supra, at p. 531.
Similarly, in selecting a particular investment from the myriad available a trustee will be governed by the following principles:
". . . Among the matters which the trustee should consider in selecting a given investment, in addition to those relating to the safety of the fund invested and the amount and regularity of the income, are: (1) the marketability of the particular investment; (2) the length of the term of the investment, for example, the maturity date, if any, the callability or redeemability, if any; (3) the probable duration of the trust; (4) the probable condition of the market with respect to the value of the particular investment at the termination of the trust especially if at the termination of the trust the investment must be converted into money for the purpose of distribution; (5) the probable condition of the market with respect to reinvestment at the time when the particular investment matures; (6) the aggregate value of the trust estate and the nature of the other investments;
[[Orig. Op. Page 7]] (7) the requirements of the beneficiary or beneficiaries, particularly with respect to the amount of the income; (8) the other assets of the beneficiary or beneficiaries including earning capacity; (9) the effect of the investment in increasing or diminishing liability for taxes; (10) the likelihood of inflation." Restatement, supra, at p. 535.
A trustee may also very well wish to seek the advice of others. The wisdom of this course of action has been described as follows:
"The trustee does not use due care in making an investment unless he makes an investigation as to the safety of the investment and the probable income to be derived therefrom. Ordinarily this involves securing information from sources on which prudent men in the community customarily rely. He may take into consideration advice given to him by attorneys, bankers, brokers and others whom prudent men in the community regard as qualified to give advice, but he is not ordinarily justified in relying solely on such advice, but must exercise his own judgment." Restatement, supra, at p. 530.
In the instant case the retirement boards, in making their investment decisions, are statutorily required to work closely with the director of the Department of Retirement Systems as well as the State Finance Committee. In turn, RCW 41.50.080 provides as follows:
"The director and the state finance committee, with the approval of the respective boards, shall provide for the investment of all funds of the Washington public employees' retirement system, the teachers' retirement system, the Washington law enforcement officers' and fire fighters' retirement system, the Washington state patrol retirement system, the Washington judicial retirement system, and the judges' retirement fund, pursuant to RCW 43.84.150, and may sell or exchange investments acquired in the exercise of that authority: PROVIDED, That the method of granting approval shall be determined by each board, respectively, in its sole discretion. The state finance committee [[Orig. Op. Page 8]] shall execute all such transactions. Nothing in this section or any other provision of law shall be construed to grant the director any investment powers other than as to funds of those retirement systems designated in this section."
Both the director and the finance committee also may have the benefit of recommendations made by the State Investment Advisory Committee. See RCW 43.33.070 which provides as follows:
"In addition to its other powers and duties as may be prescribed by law, the investment advisory committee shall:
"(1) Make recommendations as to general investment policies, practices, and procedures to the state finance committee and the director of retirement systems regarding those retirement funds for which the various retirement boards are designated trustees;
"(2) Make recommendations as to general investment policies, practices, and procedures regarding all other investment funds to the state finance committee.
"The director of retirement systems and the state finance committee shall make the final decision regarding the advice and recommendations submitted by the investment advisory committee."
This statute apparently contemplates that the director and the finance committee will weigh the advice and recommendations of the Investment Advisory Committee and pass those they feel wise along to the respective retirement boards.
In the case of investments in stocks, shares, convertible bonds or debentures of corporations, the finance committee and the director have further been granted the following authority by RCW 43.84.150(12)(a):
"(a) The state finance committee and the director of retirement systems may, with the approval of the respective boards, either have the finance [[Orig. Op. Page 9]] committee's staff manage the classes of investments defined by subsection (12) of this section or they may contract with an investment counseling firm or firms or the trust department of a national or state chartered commercial bank having its principal office or a branch in this state. The state finance committee and the director of retirement systems shall receive advice which shall become part of the official minutes of the next succeeding meeting of the committee and respective boards. No investment counseling firm shall be engaged in buying, selling or otherwise marketing securities in which commissions or profit credits arising from these activities accrue to the firm during the time of its employment by the boards. . . ."
It is our understanding that both the director and the finance committee have chosen the second of these two options and that outside counsel have been employed to render advice to the director, the finance committee and the various boards.
Finally (in addition to the general guidelines we have set forth above) you are well aware that RCW 43.84.150 sets forth the specific types of securities in which the funds of the various retirement systems can be invested and reinvested. The boards have no authority to invest or reinvest in other types of investments. 3/ And, of course, strict adherence to these statutorily defined classes of investments is required.
Your third question involves the availability of insurance to protect against the risk of claims relating to the board members' performance of their duties.
[[Orig. Op. Page 10]] The boards themselves do not have any express nor implied statutory authority to purchase such insurance. Therefore, your precise question must technically be answered in the negative. 4/ At the same time, however, there now exists a vehicle under which the boards could administratively obtain such authority. We have reference to RCW 4.92.170 which provides, in relevant part, as follows:
". . .
"The budget director may authorize agencies, in accordance with chapter 41.05 RCW to the extent that it is applicable, to purchase insurance to protect and hold personally harmless any officer or employee of the state, or any classes of such officers or employees or for other persons performing services for the state, whether by contract or otherwise, from any action, claim or proceeding for damages arising out of the performance of duties for, employment with, or the performance of services on behalf of the state and to hold him harmless from any expenses connected with the defense, settlement or monetary judgment from such actions.
". . ."
Chapter 41.05 RCW, in turn, vests the State Employees' Insurance Board with the following authority, as set forth in RCW 41.05.025(2):
"(2) The board shall study all matters connected with the providing of adequate health care coverage, life insurance, liability insurance, accidental death and dismemberment insurance, and disability income insurance or any one of, or a combination of, the enumerated types of insurance and health care plans for employees and their dependents on the best basis possible with relation both [[Orig. Op. Page 11]] to the welfare of the employees and to the state: PROVIDED, That liability insurance shall not be made available to dependents. The board shall design benefits, devise specifications, analyze carrier responses to advertisements for bids, determine the terms and conditions of employee participation and coverage, and decide on the award of contracts which shall be signed by the trustee on behalf of the board: . . ." (Emphasis supplied) 5/
You will note, however, that the budget director's authority under RCW 4.92.170, supra, is limited to authorizing agencies to purchase insurance in accordance with chapter 41.05 RCW. Since that is the chapter which gives the State Employees' Insurance Board the authority to provide liability insurance, and since the latter agency has not yet acted to provide such insurance, we do not believe that the budget director has independent power to authorize the purchase of liability insurance. In our view the budget director may only authorize the purchase of liability insurance which has been provided or approved by the State Employees' Insurance Board.
Your fourth question asks whether board members must defend, at their own expense, actions brought against them [[Orig. Op. Page 12]] alleging that they have improperly performed their duties as trustees.
RCW 4.92.060 and 4.92.070 allow the attorney general to defend such actions at the expense of the state. Those statutes provide, respectively, as follows:
"Whenever an action or proceeding for damages shall be instituted against any state officer, including state elected officials, or employee, arising from his acts or omissions while performing, or in good faith purporting to perform, his official duties, such officer or employee may request the attorney general to authorize the defense of said action or proceeding at the expense of the state." RCW 4.92.060.
"If the attorney general shall find that said officer or employee's acts or omissions were, or purported to be in good faith, within the scope of his official duties, said request shall be granted, in which event the necessary expenses of the defense of said action or proceeding shall be paid from the appropriations made for the support of the department to which such officer or employee is attached. In such cases the attorney general shall appear and defend such officer or employee, who shall assist and cooperate in the defense of such suit." RCW 4.92.070.
The attorney general, however, is the sole judge under these statutes with regard to whether an employee or officer acted or purported to act in good faith within the scope of his duties. State v. Herrmann, 89 Wn.2d 349, P.2d (1977). Therefore, our direct answer to your fourth question is qualifiedly in the negative; i.e., a board member would not be required to defend such an action at his own expense if the attorney general determines that the acts or omissions giving rise to the claim ". . . were or purported to be in good faith, within the scope of his official duties."
Your final question relates to the extent to which the state may indemnify a board member for any judgment which might be rendered against him.
[[Orig. Op. Page 13]] Where the attorney general provides such a defense as is qualifiedly authorized in RCW 4.92.060 and 4.92.070, any judgment would then be paid out of a special fund created for this purpose. See RCW 4.92.130 which provides, in relevant part, as follows:
"A tort claims revolving fund in the custody of the treasurer is hereby created to be used solely and exclusively for the payment of claims against the state arising out of tortious conduct and against its officers and employees for whom the defense of the claim was authorized under RCW 4.92.070. . . ."
We trust that the foregoing will be of assistance to you.
Very truly yours,
WAYNE L. WILLIAMS
Assistant Attorney General
*** FOOTNOTES ***
1/See, RCW 41.26.330 and RCW 41.40.077. Moreover, this same standard is also applicable to both the director of the Department of Retirement Systems and the State Finance Committee. See RCW 41.50.085 and RCW 43.33.120.
2/Letter opinion dated May 1, 1972, to the Honorable Lloyd G. Baker, then Director of the Public Employees' Retirement System, copy enclosed.
3/But see, however, RCW 41.40.075 authorizing the investment of PERS funds in soil and water conservation loans guaranteed under the Bankhead ‑ Jones Farm Tenant Act.
4/State agencies such as the retirement boards, of course, may only exercise those powers expressly conferred or necessarily implied. Cole v. Washington Utilities and Transportation Comm'n., 79 Wn.2d 302, 485 P.2d 71 (1971); Wishkah Boom Co. v. Greenwood Timber Co., 88 Wash. 568, 153 Pac. 367 (1915).
5/The retirement board members are apparently encompassed within the term state employee by RCW 41.05.010(2) which contains the following definition:
"(2) 'Employee' shall include all full time and career seasonal employees of the state, a county, a municipality, or other political subdivision of the state, whether or not covered by civil service; elected and appointed officials of the executive branch of government, including full time members of boards, commissions, or committees; and shall include any or all part time and temporary employees under the terms and conditions established by the board; justices of the supreme court and judges of the court of appeals and the superior courts; and members of the state legislature or of the legislative authority of any county, city, or town who are elected to office after February 20, 1970."