Amicus Curiae Brief of. Michigan State Employee Retirees Association Coordinating Council,

Transcription

1 STATE OF MICHIGAN IN THE SUPREME COURT In re Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38 Docket No Amicus Curiae Brief of Michigan State Employee Retirees Association Coordinating Council, Michigan Federation of Chapters of National Active and Retired Federal Employees Association, and AARP ORAL ARGUMENT REQUESTED D. Daniel McLellan (P24639) Attorney for Amici Curiae 511 Wildwood Dr East Lansing, MI Stuart R. Cohen AARP Foundation Litigation Melvin Radowitz AARP 601 E Street, NW Washington, DC

2 Table of Contents INDEX OF AUTHORITIES... III JURISDICTIONAL BASIS... VII STATEMENTS OF QUESTIONS INVOLVED... VIII INTERESTS OF AMICI CURIAE... IX ARGUMENT... 1 I. Introduction... 1 A. Summary of Argument SERA Income Tax Act Federal Retirees B. History State Employees Retirement Act (SERA), Tier 1 Plan Constitution Income Tax Act SERA, Tier 2 Plan Federal Civilian Retirees PA 41 (Act 41): Amendments to the SERA PA 38 (Act 38): Amendments to the Income Tax Act... 6 II. QUESTION 1: Does reducing or eliminating the statutory exemption for public-pension incomes as described in MCL , as amended, impair accrued financial benefits of a pension plan [or] retirement system of the state [or] its political subdivisions under Const 1963, art 9, 24?... 7 A. Standards of Review... 7 B. The Tax Exemption for State Retirees is Governed by the SERA... 8 C. Creation of Constitutional Contract SERA Const 1963, art 9, i

3 D. Public Pension Payments are Accrued Financial Benefits Definition of Accrued Financial Benefits SERA Retirement Plans E. SERA Tax Exemptions are Components of Accrued Financial Benefits F. SERA Tax Exemptions are Permanent Permanence Conflicting Constitutional Provisions G. Act 41 Diminishes the Accrued Financial Benefits of State Employees H. Conclusion III. QUESTION 2: Does reducing or eliminating the statutory tax exemption for pension incomes, as described in MCL , as amended, impair a contract obligation in violation of Const 1963, art 1, 10, or US Const, art I, 10? A. Standards of Review B. Standard Contract Clause Analysis C. Analyzing Public Retirement Benefits under Contract Clause D. Conclusion IV. Other Public Employees and Retirees V. Federal Employees and Retirees VI. Prayer for Relief EXHIBIT A... A ii

4 INDEX OF AUTHORITIES CASES Advisory Opinion re Constitutionality of 1972 PA 258, 389 Mich 659; 209 NW2d 200 (1973) Ass n of Professional and Technical Employees v City of Detroit, 154 Mich App 440; 398 NW2d 436 (1986) Blue Cross & Blue Shield of Mich v Governor, 422 Mich 1; 367 NW2d 1 (1985)... 35, 36 Brown v Highland Park, 320 Mich 108; 30 NW2d 798 (1948) Bullinger v Gremore, 343 Mich 516; 72 NW2d 777 (1955) Campbell v Michigan Judges Retirement Board, 378 Mich 169; 143 NW2d 755 (1966)... 39, 41, 43 Caterpillar, Inc v Dep t of Treasury, 440 Mich 400; 488 NW2d 182 (1992)... 7 Civil Service Comm v Auditor General, 302 Mich 673; 5 NW2d 536 (1942) Colbert v State, 86 Miss 769; 39 So Davis v Mich Dep t of Treasury (on remand), 179 Mich App 683; 446 NW2d 531 (1989)... x, 5, 46 Davis v Mich Dep t of Treasury I, 160 Mich App 98; 408 NW2d 433 (1987)... 23, 46 Davis v Mich Dep t of Treasury II, 489 US 803; 109 S Ct 1500; 103 L Ed 2d 891 (1989)... x, 4, 24, 46 Detroit v Walker, 445 Mich 682; 520 NW2d 135 (1994) Dunn v Board of Trustees of Wayne Co Retirement System, 160 Mich App 384; 407 NW2d 657 (1987) Energy Reserves Group, Inc v Kansas City Power & Light Co, 459 US 400; 103 S Ct 697; 74 L Ed 2d 569 (1983) Fonger v Dep t of Treasury, 193 Mich App 71; 483 NW2d 920 (1992) Hamilton v Vaughn, 212 Mich 31; 179 NW 553 (1920)... 7, 26 Hart v Wayne Co, 396 Mich 259; 240 NW2d 697 (1976) iii

5 In re Advisory Opinion on Constitutionality of 1978 PA 426, 403 Mich 631; 272 NW2d 495 (1978) In re Probert, 411 Mich 210; 308 NW2d 773 (1981)... 27, 28 Kosa v Michigan Treasurer, 408 Mich 356; 292 NW2d 452 (1980)... 17, 22 Le Roux v Secretary of State, 465 Mich 594; 640 NW2d 849 (2002) Lucking v People, 320 Mich 495; 31 NW2d 707 (1948) Ludka v Dep t of Treasury, 155 Mich App 250; 399 NW2d 490 (1986)... 7 McDonald v Schnipke, 380 Mich 14; 155 NW2d 169 (1968) Murray v Charleston, 96 US 432; 24 L Ed 760 (1878) O Reilly v Wayne Co, 116 Mich App 582; 323 NW2d 493 (1982)... 7 People v Blachura, 390 Mich 326; 212 NW2d 182 (1973) Peoples Savings Bank v Stoddard, 359 Mich 297; 102 NW2d 777 (1960)... 9 Rockwell Spring & Axel Co v Romulus Twp, 365 Mich 632; 114 NW2d 166 (1962) Seitz v Michigan, 189 Mich App 445; 474 NW2d 125 (1991)... 42, 43 Shelby Twp Police and Fire Retirement Bd v Shelby Twp, 438 Mich 247; 475 NW2d 249 (1991) Studier v Mich Public School Employees Retirement Bd, 472 Mich 642; 698 NW2d 350 (2005)... passim Thoman v Lansing, 315 Mich 566; 24 NW2d 213 (1946)... 7 United States Cold Storage Corp v Detroit Bd of Assessors, 349 Mich 81; 84 NW2d 487 (1957) United States Trust Co of NY v New Jersey, 431 US 1 (1977) US v Winstar Corp, 518 US 839; 116 S Ct 2432; 135 L Ed 2d 964 (1996)... 26, 38 Wayne Co Bd of Comm v Wayne Co Airport Authority, 253 Mich App 144; 658 NW2d 804 (2002) Wayne Co Prosecutor v Dep t of Corrections, 451 Mich 569; 548 NW2d 900 (1996)... 9 iv

6 Wayne Co v Hathcock, 471 Mich 445; 684 NW2d 765 (2004) Wise v Michigan, 159 Mich App 446; 407 NW2d 29 (1987) STATUTES MCL 206.1, et seq... 1, 4 MCL passim MCL (1)(f)(i)... 5, 46 MCL (9)(A)... 6 MCL (9)(B)... 6 MCL (9)(C)... 7 MCL 38.1, et seq... ix, 1, 3 MCL MCL MCL MCL MCL , 19 MCL MCL 63(2) MCL 63(3) MCL 63(4) OTHER AUTHORITIES Official Record, Constitutional Convention, , 18, 28, 29 CONSTITUTIONAL PROVISIONS 1908 Constitution, art X, Const 1963, art 1, passim v

7 Const 1963, art 9, passim Const 1963, art 9, 7... viii US Const, art I, viii, x, 2, 34 PUBLIC ACTS 1969 PA , PA PA PA PA passim 2011 PA passim 2011 PA PA PA PA ATTORNEY GENERAL OPINIONS OAG , No 4604, p 269, 273 (July 26, 1968)... 9, 10 OAG , No 4660, p 39 (February 20, 1969)... 9 OAG , No 5484, p 145 (April 19, 1979) OAG , No 6697, p 116 (December 18, 1991) vi

8 JURISDICTIONAL BASIS On May 31, 2011, Governor Rick Snyder requested that this Court issue an advisory opinion under the authority of Const 1963, art 3, 8. On June 15, 2011, this Court granted the Governor s request and requested amicus curiae briefs from groups interested in the determination of questions presented. vii

9 STATEMENTS OF QUESTIONS INVOLVED 1. Does reducing or eliminating the statutory exemption for public-pension incomes as described in MCL , as amended, impair accrued financial benefits of a pension plan [or] retirement system of the state [or] its political subdivisions under Const 1963, art 9, 24? Amici curiae answer yes. 2. Does reducing or eliminating the statutory tax exemption for pension incomes, as described in MCL , as amended, impair a contract obligation in violation of Const 1963, art 1, 10, or US Const, art I, 10? Amici curiae answer yes. [Amici curiae do not address the following questions 3 and 4 in this brief] 3. Whether determining eligibility for income-tax exemptions on the basis of total household resources, or age and total household resources, as described in MCL (7) and (9), as amended, creates a graduated income tax in violation of Const 1963, art 9, Whether determining eligibility for income-tax exemptions on the basis of date of birth, as described in MCL (9), as amended, violates equal protection of the law under Const 1963, art 1, 2 or the Fourteenth Amendment of the United States Constitution. viii

10 INTERESTS OF AMICI CURIAE The amici curiae are (1) the Michigan State Employee Retirees Association Coordinating Council (MI-SERACC), a Michigan not-for-profit corporation, (2) the Michigan Federation of Chapters of National Active and Retired Federal Employees Association (MI-NARFE), a Michigan not-for-profit corporation, and (3) AARP, a national nonpartisan, nonprofit organization. The Michigan legislature s revision of the state s income tax scheme and the manner in which it impacts state, federal, and private sector retirees will have a significant detrimental effect on the retirement lifestyles and financial security of those retirees. 1. MI-SERACC is an association of active, deferred, and retired state employees (and spouses and surviving spouses) who are or will be eligible to receive retirement benefits under the State Employees Retirement Act (SERA). The SERA provides two retirement plans for state employees, the Tier 1 defined benefit plan and the Tier 2 defined contribution plan. As of September 30, 2010, there were 108,799 active and retired members in the two SERA retirement plans. The retirement benefits of these 108,799 employees and retirees are exempt from state income tax under both the SERA and the Income Tax Act, MCL 206.1, et seq. In Tier 1, there are 82,190 members (50,462 retired and 31,728 active and deferred members not yet retired). In 2011 PA 41 (Act 41), the legislature has amended the SERA to repeal the tax exemption for Tier 1 state retiree pensions, effective January 1, In 2011 PA 38 (Act 38), the legislature has also amended the Income Tax Act to partially repeal the public pension tax exemptions for taxpayers born after MI-SERACC contends that the SERA tax exemptions are accrued financial benefits contractually guaranteed by Const 1963, art 9, 24. Under Act 38 and Act 41, Tier 1 state ix

11 retirees born after 1945 will pay an estimated $20 million annually in additional income taxes. Therefore, Act 41 and Act 38 diminish the vested contractual rights of all state employees and retirees born after 1945, and violate Const 1963, art 9, 24; Const 1963, art 1, 10; and US Const, art I, MI-NARFE is an association of active and retired civilian federal employees (including spouses and surviving spouses) who reside in Michigan and who are or will be eligible to receive civilian retirement benefits from any U.S. agency. Currently, there are about 127,100 federal civilian employees and retirees (about 47,000 retirees and 80,100 active employees) in the State of Michigan. Under the authority of Davis v Mich Dep t of Treasury II, 489 US 803; 109 S Ct 1500; 103 L Ed 2d 891 (1989) and Davis v Mich Dep t of Treasury (on remand), 179 Mich App 683; 446 NW2d 531 (1989), retired federal employees living in Michigan are entitled to the same favorable income tax treatment under the Income Tax Act as received by retired state employees. As a result, federal retirement benefits are currently totally exempt under the Income Tax Act. Under Act 41 and Act 38, retirement benefits for federal retirees born after 1945 who live in Michigan will be subject to taxation under the Income Tax Act in the same manner as retirement benefits for state employees. MI-NARFE contends that Act 41 and Act 38 diminish the vested contractual rights of state employees and retirees and therefore violate the Michigan and US Constitutions. As a result, Act 38 and Act 41 impermissibly subject federal civilian retirement payments to the Income Tax Act and will cost federal retirees born after 1945 who live in Michigan an estimated $20 million annually in additional Michigan income tax. 3. AARP is a nonpartisan, nonprofit organization constituted of members age 50 or older, working or retired, that is dedicated to addressing the needs and interests of older x

12 Americans. Dr. Ethel Percy Andrus the first female public school principal in California founded AARP (as the American Association of Retired Persons). Dr. Andrus initially founded the National Retired Teachers Association ( NRTA ) in 1947 because she was concerned that teachers did not have adequate retirement income. Now a division of AARP, NRTA (known as NRTA: AARP s Educator Community) is the largest national organization that represents the interests of retired educators including many living in Michigan. It is important to AARP members and other employee benefit plan participants to be able to rely upon the benefits and the purchasing power conferred by their respective plans. AARP advocates on behalf of individuals throughout the country to protect the rights of participants in their employee benefit plans. As part of AARP s advocacy efforts to ensure, to the greatest extent possible, that participants and beneficiaries receive the maximum value of their retirement pension plans and the full extent of benefits for which they toiled in their working lives, AARP has participated as amicus curiae in numerous cases, including those involving state pension plans, to protect the rights of retirees in general and pension plan members in particular. The resolution of the issues before this Court will have a direct and vital bearing on the economic value and market power of public employee retirement pensions throughout the State of Michigan. xi

13 ARGUMENT I. Introduction Amici curiae address the first two questions certified by this Court. Our arguments primarily address the questions in the context of the statutory retirement plan for state employees, 1 the State Employees Retirement Act ( SERA ), 1943 PA 240, MCL 38.1, et seq. There are two pension components governed by SERA, a defined benefit plan (Tier 1) and a defined contribution plan (Tier 2). A. Summary of Argument 1. SERA. State employees are provided retirement benefits under the SERA. The SERA retirement benefits are accrued financial benefits contractually guaranteed by Const 1963, art 9, 24. These accrued financial benefits include two exemptions from state taxes: SERA 40 for Tier 1 retirees and SERA 69 for Tier 2 retirees. As a result, accrued financial benefits are not taxable under the Income Tax Act, 1967 PA 281, MCL 206.1, et seq PA 41 (Act 41) repeals the SERA tax exemption effective, January 1, 2012, for all Tier 1 state employees and retirees. As a result, beginning in 2012, Tier 1 retirees born after 1945 will pay an estimated $20 million annually in additional income tax on all components of 1 In this brief, state employees and state retirees refer to the (largely) executive branch employees and retirees covered by the SERA retirement plans. Unless the context clearly so indicates, these terms do not refer to persons covered by other state retirement plans, university employees, school teachers, or county, township, or municipal employees or retirees. This more expansive group of public employees is generally referred to as public employees. 1

14 their retirement benefits that the state contractually promised would be tax-free. The legislature did not repeal the tax exemption for Tier 2 retirees in SERA 69. Act 41 is unconstitutional because it violates Const 1963, art 9, 24, by diminishing the accrued retirement benefits of state employees. Act 41 also violates Const 1963, art 1, 10 and US Const, art I, 10, because it impairs the state employees constitutional contract with the state for tax-free retirement benefits. 2. Income Tax Act. The Income Tax Act has tax exemptions for all state and federal public retirement benefits, including tax exemptions for state employees and retirees that overlap the tax exemptions in the SERA. Act 38 partially repeals the Income Tax Act exemption for public retirement benefits, effective January 1, It replaces the public pension tax exemption with a partial tax exemption based on the age of the taxpayer. Beginning in 2012, Tier 1 retirees born after 1945 will pay an estimated $20 million annually in additional income tax on all of their retirement benefits that are currently tax-free under the SERA. However, the SERA tax exemption for Tier 2 retirees which the legislature has not repealed continues to provide a tax exemption for Tier 2 retirees notwithstanding the amendments to the Income Tax Act in Act 38. Act 38 is unconstitutional because it violates Const 1963, art 9, 24, by diminishing the accrued retirement benefits of state employees and retirees. Act 38 also violates Const 1963, art 1, 10, and US Const, art I, 10, because it impairs the state employees and retirees constitutional contract with the state for tax-free retirement benefits. 3. Federal Retirees. Under federal law, retired federal civilian employees subject to the Michigan Income Tax Act are entitled to the same exemptions as retired state employees. If Act 41 and Act 38 are unconstitutional and state retirees are entitled to continued complete 2

15 exemption of state pension benefits, then federal retirees are also entitled to continued complete exemption of federal pension benefits. B. History Before we address the Governor s questions, we first set out the relevant legislative and constitutional history: 1. State Employees Retirement Act (SERA), Tier 1 Plan a. The SERA creates the defined benefit retirement plan ( Tier 1 ) for state employees. 2 b. When originally adopted in 1943, SERA 40, MCL 38.40, exempted state retiree pensions from all state taxes. The SERA has contained this tax exemption (with a few minor textual changes) continuously since its adoption in Constitution The following Const 1963, art 9, 24, was adopted, effective January 1, 1964: The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities. 2 Tier 1 is now found in SERA 1-49, MCL

16 3. Income Tax Act a. The Income Tax Act, 1967 PA 281, MCL 206.1, et seq., was first adopted in As originally adopted, the Income Tax Act had no specific provision permitting public retirees to deduct public retirement benefits from taxable income. b. Subsequently, 1969 PA 332 amended 30 of the Income Tax Act, MCL , to provide for complete exemption of all public retirement pensions. At that point, the SERA and the Income Tax Act became consistent in that both acts totally exempted from the income tax all Tier 1 state employee pension payments. 4. SERA, Tier 2 Plan a. In 1996 PA 486, the legislature amended the SERA to create a new defined contribution retirement plan for new state employees hired after March 31, 1997 ( Tier 2 ). SERA 50-69, MCL The original Tier 1 defined benefit retirement plan for employees hired before March 31, 1997, was retained essentially unchanged (except it was closed to new members). b. Under SERA 69, MCL 38.69, a portion of the distributions to state retirees from a Tier 2 account, including earnings, are exempt from state tax. [This provision has not been repealed in Act 41.] 5. Federal Civilian Retirees a. In 1989, the U.S. Supreme Court, in Davis v Mich Dep t of Treasury II, 489 US 803; 109 S Ct 1500; 103 L Ed 2d 891 (1989), held that retired federal employees living in Michigan could not be taxed under the Income Tax Act at a rate different than retired state employees. On remand from the US Supreme Court, the Court of Appeals ordered that 4

17 retired federal employees living in Michigan be given the same favorable income tax treatment as received by retired state employees. Davis v Mich Dep t of Treasury (on remand), 179 Mich App 683; 446 NW2d 531 (1989). As a result, federal civilian retirement benefits are currently completely exempt under the Income Tax Act. b. Consistent with the decision in Davis (on remand), the legislature amended the Income Tax Act to expressly exempt federal public retirement income. Sec 30(1)(f)(i), MCL (1)(f)(i) PA 41 (Act 41): Amendments to the SERA a. Act 41 amends SERA 40, effective January 1, Act 41 adds a new subsection to 40 to effectively repeal the state and local tax exemptions for Tier 1 state employee pensions. The relevant changes made by Act 41 in 40 are the following in legislative format: (1) The EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, THE right of a person to a pension, an annuity, a retirement allowance, AND any optional benefit, AND any other right accrued or accruing to any person under the provisions of this act, the various funds created by this act, and all money and investments and income of the funds, are exempt from any state, county, municipal, or other local tax. (2) BEGINNING JANUARY 1, 2012, THE RIGHT OF A PERSON TO A PENSION, AN ANNUITY, A RETIREMENT ALLOWANCE, AND ANY OPTIONAL BENEFIT, AND ANY OTHER RIGHT ACCRUED OR ACCRUING TO ANY PERSON UNDER THE PROVISIONS OF THIS ACT, IS SUBJECT TO STATE TAX UPON DISTRIBUTION TO THE PERSON FROM THE VARIOUS FUNDS CREATED BY THIS ACT. * * * b. Act 41 did not repeal the Tier 2 tax exemption in SERA 69. 5

18 PA 38 (Act 38): Amendments to the Income Tax Act Act 38 amends the Income Tax Act. Beginning January 1, 2012, Act 38 eliminates the total exemption of public retirement pensions in 30 and replaces it with a new three-tier tax with the following major features: a. Taxpayers born before January 1, 1946: For this group, Act 38 does not change the tax treatment of public employment retirement income from the current law. As a result, as of January 1, 2012, all public pensions for state and federal retirees born before January 1, 1946, will remain totally tax exempt. [Income Tax Act 30(9)(A), MCL (9)(A).] b. Taxpayers born between January 1, 1946, and December 31, 1952: For this group, Act 38 eliminates the current total exemption for public retirement income for both retired state and federal employees and replaces it with an exemption of $20,000 (single filer) or $40,000 (joint filers). Before age 67, this exemption is limited to public and private retirement pensions. After age 67, this exemption is available on all retirement and nonretirement income. However, irrespective of age, if the taxpayer s total household resources exceed $75,000 (single filer) or $150,000 (joint filer) or the taxpayer claims an exemption for armed forces compensation or railroad retirement, the $20,000/$40,000 exemption is inapplicable. [Income Tax Act 30(9)(B), MCL (9)(B).] c. Taxpayers born after December 31, 1952: For taxpayers born after December 31, 1952, who are under age 67, Act 38 eliminates all exemptions for public and private retirement pensions. That means that all state or federal public retirement benefits are subject to the income tax. After the taxpayer turns age 67, the taxpayer has a choice between two different exemptions: either (1) a $20,000/$40,000 deduction for any income or (2) a deduction for all social security income plus the personal deduction. However, 6

19 irrespective of age, if the taxpayer s total household resources exceed $75,000 (single filer) or $150,000 (joint filers) or the taxpayer claims an exemption for armed forces compensation or railroad retirement, the $20,000/$40,000 exemption is inapplicable (but not the deduction for social security plus the personal deduction). [Income Tax Act 30(9)(C), MCL (9)(C).] II. QUESTION 1: Does reducing or eliminating the statutory exemption for public-pension incomes as described in MCL , as amended, impair accrued financial benefits of a pension plan [or] retirement system of the state [or] its political subdivisions under Const 1963, art 9, 24? A. Standards of Review Legislation challenged on constitutional grounds is presumed constitutional absent a clear showing to the contrary. Caterpillar, Inc v Dep t of Treasury, 440 Mich 400, 413; 488 NW2d 182 (1992). The presumption is particularly strong with respect to tax statutes. Ludka v Dep t of Treasury, 155 Mich App 250, 264; 399 NW2d 490 (1986), citing O Reilly v Wayne Co, 116 Mich App 582, 591; 323 NW2d 493 (1982). A taxing statute must be shown to clearly and palpably violate[ ] the fundamental law before it will be declared unconstitutional. O Reilly, at 592, citing Thoman v Lansing, 315 Mich 566, 576; 24 NW2d 213 (1946). Nonetheless, a statute, even a tax statute, must conform to constitutional requirements: When, in the exercise of its judicial functions and required to decide a controversy in conformity with existing law, the court, as sometimes occurs, may find itself confronted with the necessity of choosing between two applicable, but conflicting laws, one a constitutional provision adopted by the people, in whom rests the sovereign power, and the other an enactment of the legislative body, which owes its existence to the Constitution, one must be set aside. Such a situation necessitates and authorizes the court to reject the secondary law emanating from the Legislature if in conflict with limitations imposed by the Constitution adopted by the people. [Hamilton v Vaughn, 212 Mich 31, 37-38; 179 NW 553 (1920), Sharpe, J, concurring.] 7

20 B. The Tax Exemption for State Retirees is Governed by the SERA There is a preliminary issue to address that is critical to the constitutional questions raised by the Governor: although state retiree pensions are currently exempt from the state income tax in both the SERA and the Income Tax Act, the Governor s questions only address the tax exemption in the Income Tax Act. The Governor s questions do not address the SERA tax exemptions (or the similar standalone tax exemptions in four other public employee retirement plans 3 ). Act 38 and Acts are overlapping companion acts that address the field of retirement benefit income tax exemptions. It is impossible to analyze the effects of Act 38 without also considering the effects of Acts As we will argue below, the tax exemptions in SERA 40 and SERA 69 are integral components of the accrued financial benefits earned by state employees and thus contractually guaranteed by Const 1963, art 9, 24. Therefore, the repeal of the corollary tax exemptions in the Income Tax Act does not have the intended consequence of exposing state retirement benefits to the Income Tax Act. The SERA Tier 1 tax exemption was first adopted in When the Income Tax Act was first adopted in 1967, it did not contain any exemption for state employee retirement 3 Each of the following four retirement statutes, like the SERA, contains its own state tax exemption for its members: 1. Public School Employees Retirement Act, 1980 PA 300, 46; MCL Michigan Legislative Retirement System Act, 1957 PA 261, 57; MCL City library employees retirement system act, 1927 PA 339, 5; MCL Judges Retirement Act, 1992 PA 234, 720; MCL The legislature also repealed these standalone tax exemptions, effective January 1, See 2011 PA 42, 43, 44, and 45 (Acts 42, 43, 44, and 45), respectively. 8

21 benefits. As a result, the Attorney General was asked whether the pension tax exemption in SERA 40 had been impliedly modified or repealed by the absence of any compatible pension tax exemption in the Income Tax Act. 4 The Attorney General opined that the adoption of the Income Tax Act did not have the effect of modifying or repealing the exemption from state taxation of the State Employees Retirement Act. OAG , No 4604, p 269, 273 (July 26, 1968). 5 We agree with the Attorney General. His opinion is correctly based on the principle that repeal by implication may be found only where there is a clear conflict between the two statutes that precludes their harmonious application. Wayne Co Prosecutor v Dep t of Corrections, 451 Mich 569, 577; 548 NW2d 900 (1996). In 1967, the pension tax exemptions in the SERA simply supplemented the Income Tax Act; nothing in the SERA tax exemption was inconsistent with the Income Tax Act or prevented the Income Tax Act from operating. The Attorney General s opinion also relied on two additional subsidiary rules of construction. The first is that repeals by implication are not favored. Peoples Savings Bank v Stoddard, 359 Mich 297, 333; 102 NW2d 777 (1960), and cases cited therein. The second subsidiary rule is where a general statute conflicts with a specific statute, the specific statute 4 Note that the current circumstance for Tier 2 retirees is nearly the same as it was for Tier 1 retirees in The SERA 69 gives Tier 2 retirees a tax exemption for their 401(k) disbursements; the Income Tax Act has a different, less generous tax exemption for public retirement 401(k) distributions. Which tax exemption will apply to the 401(k) disbursements for Tier 2 retirees after January 1, 2012? Amici contend that the SERA 69 tax exemption will continue to apply to Tier 2 retirees since it has not been repealed and is guaranteed by Const 1963, art 9, Also see, OAG , No 4660, p 39 (February 20, 1969), in which the Attorney General similarly opined that Chapter I teacher retirement benefits under the Public School Employees Retirement Act, 1945 PA 136, were tax exempt under 25 of the retirement act. 9

22 controls. Bullinger v Gremore, 343 Mich 516, ; 72 NW2d 777 (1955). Here, the SERA provides a specific, targeted tax exemption for state retirees while the Income Tax Act is a general tax statute. Thus, even in the absence of a public pension tax exemption in the Income Tax Act, the specific pension tax exemption in the SERA applied. If the SERA and the Income Tax Act did not work together harmoniously, the legislature could have repealed the SERA tax exemption. Indeed, the legislature was on notice in 1968 that there was a difference between the tax exemption in the SERA and the new Income Tax Act. OAG No Had the legislature disagreed with the Attorney General s opinion, it could have ended the standalone tax exemption in the SERA at any time after To the contrary, the legislature s behavior after the publication of OAG No 4604 supports the contention that the SERA, not the Income Tax Act, governs the tax exemption for state employee retirement benefits: In 1969, the legislature adopted amendments 6 to the Income Tax Act that simply mirrored the complete tax exemption already found in the SERA and other statewide public retirement plans. The legislature amended the SERA more than 17 times between 1968 and 2010, but never opted to repeal the SERA tax exemption (at least until now). In 1997, when the legislature added the Tier 2 401(k) retirement plan to the SERA, it included its own standalone tax exemption 7 even though the Income Tax Act also had a 401(k) pension exemption. If the legislature intended 401(k) tax exemptions PA SERA 69, MCL

23 to be regulated by the Income Tax Act, it would not have approved a standalone tax exemption in the SERA, especially knowing that the SERA tax exemption was guaranteed by Const 1963, art 9, 24. On two other occasions, the legislature clarified that accrued Civil Service sick leave payments were not public pension payments and therefore not tax exempt as retirement benefits under the SERA. 8 This history of legislative acquiescence in the Tier 1 tax exemption and the creation of the Tier 2 tax exemption demonstrate that the legislature understands that the SERA tax exemptions control the income tax exemption for state retirees, not the Income Tax Act. Why does this matter? It matters because state retirees do not rely on the public pension tax exemption in the Income Tax Act to exclude their retirement benefits from taxation; they rely on the tax exemption in the SERA because it is constitutionally guaranteed. Of course, in Act 41, the legislature also repealed the SERA tax exemption for Tier 1 state retirees, effective January 1, This repeal of the SERA tax exemption potentially opens state retirees to taxation of their previously tax-free retirement benefits under the Income Tax Act. Thus, the first two questions asked by the Governor need to be expanded to recognize that it is not, in the first instance, the amendments to the Income Tax Act in Act 38 that violate the constitution. 9 Rather, it is the amendments to SERA 40 in Act 41 that represent the critical PA 93 and 2002 PA See, for example, OAG , No 6697, p 116, 119 (December 18, 1991): It is my opinion, therefore, that section 30(1)(f) of the Income Tax Act of 1967 concerning retirement benefits received from a Michigan public retirement system may be prospectively limited or repealed by the Legislature {Footnote cont d on next page} 11

24 constitutional issue. The correct first question, we believe, is whether the repeal or reduction of the state retiree tax exemption in amendments to the SERA in Act 41, rather than in the amendments to the Income Tax Act in Act 38, diminishes or impairs the accrued financial benefits of state retirees. C. Creation of Constitutional Contract 1. SERA Since 1943, Tier 1 (defined benefit) retirement benefits paid to state employees under the SERA have been exempt from state and local taxation. SERA 40 provides in language nearly identical to the original 1943 version as follows: The right of a person to a pension, an annuity, a retirement allowance, any optional benefit, any other right accrued or accruing to any person under the provisions of this act, the various funds created by this act, and all money and investments and income of the funds, are exempt from any state, county, municipal, or other local tax.... [Emphasis added] 2. Const 1963, art 9, 24 Before the adoption of the 1963 Michigan Constitution, retirement benefits for most public employees, including SERA benefits, were not contractually guaranteed. Retirement payments were considered gratuitous payments that could be stopped or reduced by the granting public body at any time. Brown v Highland Park, 320 Mich 108; 30 NW2d 798 (1948). In 1963, the voters ratified the new Constitution, including Const 1963, art 9, 24: pursuant to Const 1963, art 9, 1. However, such limitation or repeal would not in and of itself affect similar statutory tax exemptions presently found in four retirement statutes [including the SERA]. 12

25 The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities. Thus, by the time of the ratification of Const 1963, art 9, 24, state retiree pensions had been tax exempt for two decades. After two decades, the ratifiers understood that the tax exemption was a financial benefit of public service and would have clearly anticipated that the pension and retirement systems established by Const 1963, art 9, 24 included the tax exemption. Studier v. Mich Public School Employees Retirement Bd, 472 Mich. 642, 672; 698 NW2d 350 (2005) (Weaver, J., concurring). Not surprisingly, one of the two principal purposes of Const 1963, art 9, 24, was to guarantee public pension payments to retired public employees, including state employees. 10 The 1961 constitutional convention delegates discussed the purpose for the proposal: 11 [p 770] Mr. VAN DUSEN [speaking for the committee on finance and taxation]: [T]his proposal by the committee is designed to... give to the employees participating in these plans a security which they do not now enjoy, by making the accrued financial benefits of the plans contractual rights. This, you might think, would go without saying, but several judicial 10 The other principal purpose, evident in the second sentence, was to require annual funding of the accrued pension liabilities. We do not further discuss this second purpose. 11 This Court has repeatedly emphasized that the proper standard for interpreting a constitutional provision is to determine the text s original meaning to the ratifiers, the people, at the time of ratification. Studier, at 652, quoting Wayne Co v Hathcock, 471 Mich 445, 468; 684 NW2d 765 (2004). Consequently, the interpretation that should be given it is that which reasonable minds, the great mass of the people themselves, would give it. Studier, at 652. One way to decide the ratifiers intent is to consult[] the constitutional convention debates. Studier, at 656. Of course, the proper objective in consulting the constitutional convention debates is not to discern the intent of the framers in proposing or supporting a specific provision, but to determine the intent of the ratifiers in adopting the provision. Studier, at

26 determinations have been made to the effect that participants in pension plans for public employees have no vested interest in the benefits which they believe they have earned; that the municipalities and the state authorities which provide these plans provide them as a gratuity, and therefore it is within the province of the municipality or the other public employer to [p 771] terminate the plan at will without regard to the benefits which have been in the judgment of the employees, earned. Now, it is the belief of the committee that the benefits of pension plans are in a sense deferred compensation for work performed. And with respect to work performed, it is the opinion of the committee that the public employee should have a contractual right to benefits of the pension plan, which should not be diminished by the employing unit after the service has been performed. Now, this does not mean that a municipality or other public employing unit could not change the benefit structure of its pension plan so far as future employment is concerned. But what it does mean is that once an employee has performed the service in reliance upon the then prescribed level of benefits, the employee has the contractual right to receive those benefits under the terms of the statute or ordinance prescribing the plan. This is the first section. It confers the contractual right. It should confer upon public employees a considerably greater degree of security with respect to the knowledge that they will receive the benefits when the time comes. * * * [p 773] Mr. IVERSON: Mr. Chairman, I would like to ask Mr. Van Dusen a question, and I don t believe it has been answered. In the case of a municipality which presently has a pension plan, if the people of that municipality finally decided they no longer wanted it, would this language in the first paragraph be sufficient to permit them to dispense with the future operation of a pension plan? Mr. VAN DUSEN: Mr. Iverson, there s no question but that a municipality could in the future dispense with its pension plan, so long as it did not in so doing diminish or impair the benefits which had accrued to employees who had performed service in the past. Mr. IVERSON: So that the present language was intended then to protect the accrual of benefits to the time that any municipality might dispense with a pension plan? Mr. VAN DUSEN: That is correct. This was simply designed to put pension benefits earned in public service on the same basis as deferred compensation earned in private employment. It is a contractual right. * * * Mr. VAN DUSEN: Mr. Chairman... I would like to indicate that the words accrued financial benefits were used designedly, so that the contractual 14

27 right of the employee would be limited to the deferred compensation embodied in any pension plan, and that we hope to avoid thereby a proliferation [p 774] of litigation by individual participants in retirement systems talking about the general benefits structure, or something other than his specific right to receive benefits. It is not intended that an individual employee should, as a result of this language, be given the right to sue the employing unit to require the actuarial funding of past service benefits, or anything of that nature. What it is designed to do is to say that when his benefits come due, he s got a contractual right to receive them.... * * * Mr. DOWNS: The other question I have, then: if the legislative body wanted to increase the pension rights, such as lowering the age at which a person would be eligible for benefits, and so on, could an additional contractual right be bestowed, or could that apply only in the future to a new financial system? Mr. VAN DUSEN: Mr. Chairman and Mr. Downs, the more hypothetical the questions get, the tougher the answer is, as I m sure Mr. Downs appreciates. However, what we are trying to deal with here are those financial benefits that have accrued. Once the employee, by working pursuant to an understanding that this is the benefit structure presently provided, has worked in reliance thereon, he has the contractual right to those benefits which may not be diminished or impaired. As far as his future service is concerned, he remains, as does any other employee, subject to the terms of employment prescribed by his employer. [1 Official Record, Constitutional Convention, 1961, pp , ] D. Public Pension Payments are Accrued Financial Benefits Although it may seem obvious, we need to determine if retirement benefits paid to retired state employees are accrued financial benefits protected by Const 1963, art 9, Definition of Accrued Financial Benefits The appropriate analytical process for determining accrued financial benefits was discussed by this Court in Studier, at : In order to reach the objective of discerning the intent of the people when ratifying a constitutional provision, we apply the plain meaning of each term used therein at the time of ratification unless technical, legal terms were employed. Phillips v Mirac, Inc, 470 Mich. 415, 422; 685 N.W.2d 174 (2004). In this case, the term benefits is modified by the words financial and accrued. Because these adjectives are not technical, legal terms that 15

28 would have been ascribed a particular meaning by those learned in the law at the time the Constitution was ratified, we discern the intent of the people in ratifying art 9, 24 by according the adjectives their plain and ordinary meanings at the time of ratification.... At the time that our 1963 Constitution was ratified, the term accrue was commonly defined as to increase, grow, to come into existence as an enforceable claim; vest as a right, to come by way of increase or addition: arise as a growth or result, to be periodically accumulated in the process of time whether as an increase or a decrease, gather, collect, accumulate, Webster's Third New Int'l Dictionary (1961), p 13, or to happen or result as a natural growth; arise in due course; come or fall as an addition or increment, to become a present and enforceable right or demand, Random House American College Dictionary (1964), p 9. Thus, according to these definitions, the ratifiers of our Constitution would have commonly understood accrued benefits to be benefits of the type that increase or grow over time such as a pension payment or retirement allowance that increases in amount along with the number of years of service a public school employee has completed.... That art 9, 24 only protects those financial benefits that increase or grow over time is not only supported but, indeed, confirmed by the interaction between the first and second clauses of that provision. Specifically, the first clause contractually binds the state and its political subdivisions to pay for retired public employees accrued financial benefits.... Thereafter, the second clause seeks to ensure that the state and its political subdivisions will be able to fulfill this contractual obligation by requiring them to set aside funding each year for those financial benefits arising on account of service rendered in each fiscal year.... Thus, because the second clause only requires the state and its political subdivision to set aside funding for financial benefits arising on account of service rendered in each fiscal year to fulfill their contractual obligation of paying for accrued financial benefits, it reasonably follows that accrued financial benefits consist only of those financial benefits arising on account of service rendered in each fiscal year.... Moreover, health care benefits do not qualify as financial benefits. At the time Const 1963, art 9, 24 was ratified, the term financial was commonly defined as pertaining to monetary receipts and expenditures; pertaining or relating to money matters; pecuniary, Random House, supra, p 453, or relating to finance or financiers, Webster's, supra, p 851, and finance was commonly defined as pecuniary resources, as of... an individual; revenues, Random House, supra; accord Webster's, supra. Pecuniary, in turn, was commonly defined as consisting of or given or extracted in money, or of or pertaining to money. Random House, supra, p 892; accord Webster's, supra, p Accordingly, the ratifiers of our Constitution would have commonly 16

29 understood financial benefits to include only those benefits that consist of monetary payments, and not benefits of a nonmonetary nature such as health care benefits. [Footnotes omitted, emphasis added.] The Studier analysis is consistent with earlier cases, such as Advisory Opinion re Constitutionality of 1972 PA 258, 389 Mich 659, ; 209 NW2d 200 (1973) and Ass n of Professional and Technical Employees v City of Detroit, 154 Mich App 440; 398 NW2d 436 (1986). In Constitutionality of 1972 PA 258, in response to complaints about legislation raising annual teacher retirement contributions by $84, the Court held that the adoption of Const 1963, art 9, 24, signaled the intention to give public employees a contractual right to receive the benefits of their pension plan and prohibit the employer from diminishing those benefits after the service has been performed. Accord, Kosa v Michigan Treasurer, 408 Mich 356, ; 292 NW2d 452 (1980); Shelby Twp Police and Fire Retirement Bd v Shelby Twp, 438 Mich 247, 250; 475 NW2d 249 (1991). However, the Court also held that the state may attach new conditions for earning benefits not yet accrued so long as the new conditions are not so unreasonable as to subvert the constitutional protections. Since the $84 annual increase applied only to pension benefits not yet accrued and was not unreasonable, the Court upheld the new fee. Similarly, in Ass n of Professional and Technical Employees, the Court rejected Detroit s attempt to impose unilaterally a new minimum retirement age that would have delayed retirement for some vested employees. Instead, the Court held that financial benefits of a pension plan accrue while the employee performs his or her work for the public employer and thus the imposition of a later retirement age impermissibly impairs the employees accrued financial benefits in violation of Const 1963, art 9,

30 2. SERA Retirement Plans What precisely does Const 1963, art 9, 24, guarantee to active and retired state employees? According to Studier, at 655, it guarantees that a retired state employee will receive the monetary payments accrued by that employee while an active employee of the state. However, Const 1963, art 9, 24, itself does not create a retirement plan for state employees or provide any formula for computing the monetary payments due on retirement. Rather, the details of any public employee s accrued financial benefits are left to whatever enabling legislation, ordinance, or contract creates the employee s retirement plan and defines the benefits. 12 For state employees, the relevant enabling legislation is the SERA. Thus, in order to know precisely what accrued financial benefits are protected by Const 1963, art 9, 24, we must look to the details in the SERA. The SERA defines two types of retirement plans for state employees: the Tier 1 plan and the Tier 2 plan: A. Tier 1 Plan. 13 Tier 1 is a retirement plan that provides a monthly pension payment for the life of a retired member (and, optionally, the surviving spouse or dependent of the member). The cash value of Tier 1 pension is computed using the formulas and factors in the SERA: 12 Comments of delegate Van Dusen, 1 Official Record, Constitutional Convention, 1961, p 771:... once an employee has performed the service in reliance upon the then prescribed level of benefits, the employee has the contractual right to receive those benefits under the terms of the statute or ordinance prescribing the plan. [Emphasis added.] 13 SERA 1-49, MCL

31 1. Eligibility. A member is eligible for full retirement at age 60 with 10 years of service or age 55 with 30 years of service. 14 A member may also be eligible for reduced early retirement at age 55 with 15 or more years of service. 2. Straight Life Pension. The basic annual straight life cash value of a Tier 1 employee s pension is the product of three factors: (1) the employee s final average compensation, 15 (2) the employee s years of service, 16 and (3) the pension factor Pension Options. The resulting straight life pension may be modified if the employee elects a survivor option or an equated plan. 4. Tax-free Payments. The cash pension paid out during retirement is free of state and local taxes. 18 B. Tier 2 Plan. 19 Tier 2 is a retirement plan adopted for all new state employees hired after March 31, 1997 (and any Tier 1 members who elected to switch plans). Under Tier 2, retirees do not receive a monthly pension check. Rather, they accumulate retirement funds in a 14 SERA 19; MCL Final average compensation is generally the average of the employee s highest three consecutive years of compensation. SERS, 1(e)(1); MCL 38.1e(1). 16 In addition to the actual years of service, a DB plan participant can earn additional service credits from prior military service, by purchasing additional service credit, and the like. SERS, 17a-17n; MCL 3817a-17n. 17 The pension factor for most Tier 1 employees is (1.5 percent). SERS, 20(1), MCL 38.20(1). Conservation officers, prison employees, and some previous early-out retirees use different factors. 18 SERA 40, MCL 38.40: The right of a person to a pension, an annuity, a retirement allowance, any optional benefit, and other right accrued or accruing to any person under the provisions of this act, and all money and investments and income of the funds are exempt from any state, county, municipal, or other local tax See, SERA 50-69, MCL