Michigan Supreme Court strikes down a county's attempt to redirect inflation equity funds to the county's annual required contribution in retirement system lawsuit

Recently the Michigan Supreme Court struck down a county's ordinance amendment that would have enabled the county to use funds from a county retirement system's Inflation Equity Fund (IEF) to satisfy the county's payment of an "annual required contribution" (ARC) to the retirement system. Wayne Co Employees Ret Sys v Charter Co of Wayne, No 147296, 2014 WL 7202920 (Mich December 18, 2014). The Court determined that the amended ordinance language violated section 38.1133(6) (now section 38.1133(8)) of the Michigan Public Employee Retirement Systems Investment Act (PERSIA) and held that the county had to satisfy its ARC obligation without using IEF funds.

In Wayne County Employees Retirement System v Charter County of Wayne the retirement system consisted of five defined benefits plans, one defined contribution plan, and the IEF. Each year the county was required to make an ARC to the retirement system; the amount of this required contribution was determined by an annual actuarial valuation. The IEF was designed to counteract the effects of inflation and its funding was to be used in accordance with this objective; most years eligible participants received a "13th check" from the IEF. But in 2010 the county had a significant fiscal obligation to satisfy its ARC and looked to the IEF for funds.

As a result, the county passed an ordinance amendment in 2010 that redirected funds ($32 million) from the IEF to the defined benefit plans; the ordinance amendment also would have used the funds from the IEF as an offset to the county's obligation to pay its ARC. The Michigan Supreme Court reviewed this ordinance amendment/transaction and determined that "the $32 million that was offset against the county's ARC violated PERSIA, and the county must satisfy its ARC obligations absent consideration of that $32 million." Affirming the Court of Appeals, in part, the Court agreed that the transaction violated the "exclusive benefit rule" and the "prohibited transaction rule" under section 38.1133(6) (now 38.1133(8)) of PERISA. The Supreme Court did, however, uphold the portion of the ordinance amendment that would have prospectively limited the amount held in the IEF to just $12 million (i.e., the prospective limitation would not apply to the previously existing $44 million (or $32 million excess) in the IEF).

GOVERNMENT JOBS BENEFITS & COMPENSATION EMPLOYMENT LAW