JOHN K. VAN DE KAMP Attorney General
CLAYTON P. ROCHE Deputy Attorney General
AGO 86-707
No. 86-707
California Attorney General Opinion
Office of the Attorney General State of California
January 8, 1987
THE
HONORABLE RICHARD J. MOORE, COUNTY COUNSEL, ALAMEDA COUNTY,
has requested an opinion on the following question:
May the
increased benefits for retirees provided for in section
31681.52 of the Government Code, a provision of the County
Employees Retirement Law of 1937, be funded from the
Supplemental Retiree Benefits Reserve established pursuant to
section 31618 of the Government Code?
CONCLUSION
The
increased benefits for retirees provided for in section
31681.52 of the Government Code may be funded from the
Supplemental Retiree Benefits Reserve established pursuant to
section 31618 of the Government Code.
ANALYSIS
Alameda
County is one of 20 counties which have adopted the County
Employees Retirement Law of 1937, Government Code section
31450 et seq.1 Under that law these 20 counties operate
and fund independent retirement systems for employees in each
county.
In this
request for our opinion we are asked whether a particular
supplemental benefit for individuals who retired on or prior
to June 30, 1971, and which may be provided to them at the
option of the board of supervisors pursuant to section
31681.52, may be funded from the Supplemental Retiree
Benefits Reserve, a fund established pursuant to section
31618. Section 31618.52 provides a permanent increase in
retirement benefits of between 2% and 10% in increments of 2%
to retirees, dependent upon the year in which they retired.
For retirees who retired on or prior to June 30, 1967, the
increased benefit is 10%. For those who retired during the 12
months ending June 30, 1971 the increase benefit is only 2%.
In
resolving this question we will examine the manner in which
retirement benefits under the 1937 Act, both regular and
supplemental, are financed both in counties which have
adopted and which have not adopted the "alternative
financial provisions" of sections 31610 through 31619 of
the Government Code, which were added in 1983 as article 5.5
of the 1937 Act. Counties which have not adopted these
provisions still operate under article 5. The Supplemented
Retiree Benefits Reserve is a fund provided for under these
new alternative financial provisions of article 5.5.
The
County Employees Retirement Law of 1937 provides retirement
benefits for county employees (and participating special
districts) which are funded by employee contributions,
employer contributions, and earnings on monies contained in
the retirement fund. (See generally, §§ 31453,
31580, 31581-31584, 31591-31592.3, 31610-31619, 31620 et
seq.) Regular retirement benefits are funded one-half by the
employees' contributions and one-half by employers'
contributions. In the aggregate they reflect the
employees' annuity (see § 31457) and an equal
employer-provided pension (see § 31471). (See also
generally section 31673 et seq.). The regular retirement
annuity may be the "actuarial equivalent" of the
employees' contributions, or it alternatively may be a
"fixed-formula" retirement annuity, based upon a
certain percentage of the employees final compensation.
Alameda County operates under a "fixed- formula"
retirement system.
In
addition to the regular retirement allowance, the 1937 Act
provides for numerous supplemental benefits which are usually
provided only if the board of supervisors so resolves. These
supplemental benefits include those such as placed in issue
herein, which provide for a permanent addition to previously
retired members' retirement allowance. They also include
permanent cost-of-living adjustments (art. 16.5, § 31870
et seq.); retrospective cost-of-living adjustments (art.
16.6, § 31875 et seq.); non-permanent supplemental
cost-of-living adjustments (§ 31681.8); group life and
medical insurance benefits, (§§ 31691-31692); and a
small death benefit for retirees' beneficiaries
(§§ 31789.1, 31789.2, 31789.12, 31789.13.)
As
noted, in 1983 the Legislature adopted "alternative
financial provisions" for counties which have adopted
the 1937 Act (Stats. 1983, ch. 886) which are themselves
operative only if adopted by both the county board of
retirement and the county board of supervisors.
(§31610.) Thus, the Supplemental Retiree Benefits
Reserve account is established only in counties which have
adopted these new provisions. In order to understand the
issue presented in this request, that is, the possible use of
these reserves to fund the supplemental benefits provided for
in section 31681.52, the financial provisions which these
alternative provisions supplant or modify require discussion.
The discussion will center upon the allocation of so-called
"excess interest" earned on retirement fund
investments, since that "excess interest" is used
to fund the new Supplement Retiree Benefits Reserve.
A.
ARTICLE 5 COUNTIES
Counties
which have not adopted the alternative financial provisions
of article 5.5 are governed by the financial provisions found
in article 5 of the 1937 Act. Under the latter provisions, an
article 5 county is directed to obtain at least every three
years an actuarial evaluation of its retirement system.
"Upon the basis of the investigation, valuation, and
recommendation of the actuary, the board [of retirement]
shall. . . recommend to the board of supervisors such changes
in the rates of interest, in the rates of contributions of
members, and in county and district appropriations as are
necessary" to fund the system. "With respect to the
rates of interest to be credited to members and to the county
or district, the board may, in its sound discretion,
recommend a rate which is higher or lower than the interest
assumption rate established by the actuarial
survey." (§ 31453, as incorporated by
reference in § 31581, emphasis added.)
Employer
and employee contributions to a retirement system such as the
1937 Act system are necessarily dependent upon and a function
of accrued liabilities and assumed income. Accordingly, if
the board decides to credit the employer and employee
contribution accounts with less than the actuarially assumed
interest rate (the assumed projected earnings of the
system's investments), contributions will have to be
increased; and vice versa. If the governing board fails to
credit contributions with the full interest, then such
interest (after certain allocations to reserves) will be
available for the payment of benefits from the "advance
reserves."
Sections
31592 and 31592.2 are the key provisions in this respect in
article 5 counties. Section 31592 provides that interest not
credited to contributions (and reserves) shall remain in the
retirement fund as a reserve for contingencies, except as
provided in sections 31529.5 and 31592.2. Section 31592.2
then permits the establishment of a county "advance
reserves" from excess interest "for the sole
purpose of payment of the cost of the benefits described
in" the 1937 Act.
Accordingly,
it is seen that under the foregoing provisions of the 1937
Act an article 5 county could "divert" all or
virtually all interest income from the retirement system
accounts which generated that income, and then, after
applying the requisite amount of income to insure the minimum
1% of assets for the reserve for contingencies, allocate
all the remaining income to the advance reserves for
the payment of benefits.
In
addition to those benefits set forth in paragraph two of
section 31592.5, supra, at note 3, the 1937 Act in
other provisions specifically permits or requires certain
benefits to be financed from the advance reserves in an
article 5 county (or from the new Supplemented Retiree
Benefits Reserve in an article 5.5 county, to be discussed
infra). These include some, but not all, of
the supplemental benefits already alluded to above. With
respect to the supplemental benefits which specifically
mention the advance reserves as a source of funding, some
benefits are vested and will require continued funding,
whereas others are nonvested and may be withdrawn at any time
by the board of supervisors.
Thus,
group insurance benefits for present or future retirees (or a
like increase in benefits) may be provided and funded either
from employer contributions or from the advance reserves in
article 5 counties. (See §§ 31691, 31691.1.) These
benefits are nonvested. (§ 31692.) Likewise, a small
death benefit for the benefit of retirees' beneficiaries
may be financed either from county contributions or from the
advance reserve, or a combination of both in article 5
counties...
