Darrell V. McGraw, Jr.
Silas B. Taylor
Senior Deputy Attorney General
Charleston, West Virginia
Attorneys for the Appellants
Charleston, West Virginia
Stephen P. Goodwin
Carte P. Goodwin
Raymond S. Franks, II
Goodwin & Goodwin
Charleston, West Virginia
Attorneys for the Appellees
William B. McGinley
Charleston, West Virginia
Attorney for Amicus Curiae,
West Virginia Education Association and
West Virginia Association of Retired School Employees
JUSTICE ALBRIGHT delivered the Opinion of the Court.
2. The realization and protection of public
employees' pension property rights is a constitutional obligation of the
State. Syl. Pt. 18, in part, Dadisman v. Moore, 181 W.Va. 779,
384 S.E.2d 816 (1988).
3. The payment of statutorily promised pension
benefits, on maturity, is a general and moral obligation of the State. Syl.
Pt. 19, Dadisman v. Moore, 181 W.Va. 779, 384 S.E.2d 816 (1988).
4. When, by reason of casual deficits in
its revenues, the state incurs liability in the discharge of indebtedness
incident to such deficits, the same may be funded by bonds for the issuance
of which provision is made by legislative enactment, on the basis of the redemption of 'a previous liability of the State' within the meaning of
section 4, Article X, West Virginia Constitution. Syl. Pt. 4, Dickinson
v. Talbott, 114 W.Va. 1, 170 S.E. 425 (1933).
5. W.Va. Const., art. X, § 4,
allows the legislature to issue bonds without a constitutional amendment
'to redeem a previous liability of the State.' Syl. Pt. 1, State
ex rel. Dep't of Empl. Secur. v. Manchin, 178 W.Va. 509, 361 S.E.2d 474
6. The Pension Liability Redemption Act, West Virginia Code §§ 12-8-1 to -16 (2002) (Repl. Vol. 2004), is unconstitutional in that implementation of its provisions would result in violation of the debt clause set forth in section four, article ten of the West Virginia Constitution.
Appellants, the State Treasurer (See
footnote 1) and the State Auditor, (See
footnote 2) appeal from the March 1, 2004, order
of the Circuit Court of Kanawha County granting summary judgment to Appellees,
the Governor (See
footnote 3) and the Acting Secretary of the Department
of the Administration, (See
footnote 4) in connection with the declaratory and
injunctive action Appellants initiated to determine whether issuance
of $3.9 billion in general revenue bonds pursuant to the Pension Liability
Redemption Act (the Act) (See
footnote 5) is in violation of our state constitution.
Upon our careful review of the issues presented against the record of
this case, we determine that the lower court was in error in ruling that
the Act does not run afoul of the constitutional provision that prohibits
the state, as a general rule, from incurring debt. (See
footnote 6) Because we do not find any exceptions to
the constitutional debt prohibition to be applicable, we are compelled
to conclude that such a funding mechanism cannot be undertaken absent
express approval by the citizens of this state in the form of a constitutional
amendment. Accordingly, we reverse the ruling of the circuit court on the specific grounds that the
issuance of general revenue bonds pursuant to the Act would be in violation
of section four, article ten of the West Virginia Constitution.
The three systems addressed by the Act are the
Judicial Retirement System, (See
footnote 9) the State Troopers Retirement System, (See
footnote 10) and the Teachers Retirement System. (See
footnote 11) The parties agree that the three retirement
systems at issue are actuarially sound, which means that their existing assets
combined with the future employee and presently required future employer
contributions are sufficient to pay the obligations of the systems as they
become due at the present time.
What the Act and the attempted bond issuance are
aimed at addressing is an accounting projection referred to as the unfunded
actuarial accrued liability, (UAAL), (See
which is essentially the excess of the actuarial accrued liability (See
footnote 13) of the respective pension funds over the
actuarial value of their assets. (See
footnote 14) As of June 30, 2003, the valuation performed
by the Consolidated Public Retirement Board's actuary identified UAAL
figures in the amounts of $44 million for the Judges Retirement System; $350 million for
the State Troopers Retirement System; and $5.05 billion for the Teachers
Retirement System. (See
footnote 15) To address these massive unfunded liabilities, (See
footnote 16) the state is statutorily required to make
supplemental appropriations that are recalculated annually to amortize the
UAAL over a specific term. (See
footnote 17) While the state is at present meeting the
funding obligations imposed by the supplemental appropriations required because
of the UAAL, the concern remains, based on the projection of future appropriations
required to keep the respective funds in actuarially sound condition, that
these annual supplemental appropriations could eventually present an insurmountable
funding burden for this state.
In recognition of these looming funding concerns, the Legislature enacted the subject statute in 2000 with the intention of pursuing the issuance of $3.9 billion in general revenue bonds for the stated purpose of redeeming the UAAL. The Act states specifically that it
provides for the redemption of the unfunded actuarial
accrued liability of each pension system, which is a previous liability of the
state, through the issuance of bonds for the purpose of: (i) Providing for the
safety and soundness of the pension systems; and (ii) redeeming each such previous
liability of the pension systems in order to realize savings over the remaining
term of the amortization schedules of the unfunded actuarial accrued liabilities
and thereby achieve budgetary savings.
W.Va. Code § 12-8-2(f).
In challenging the constitutionality of the Act,
Appellants argued below that the Act violates the debt provision of the State
Constitution which, barring certain exceptions, prohibits the the state from
incurring debt. See W.Va. Const. art. X, § 4. Appellants strongly
dispute the applicability of the exception upon which both the Legislature
and Appellees rely to support the investment plan contemplated by the Act
_ an exception that permits the state's credit to be extended for a previous
liability of the state. Id. In addition, Appellants challenge
the Act on grounds of improper delegation of legislative power, asserting
that the enactment fails to provide sufficient guidance for purposes of effectuating
its provisions. Appellants further maintain that provisions of the Open Governmental Proceedings Act (See
footnote 18) were violated because public hearings
were not held in connection with authorization of the subject bonds.
Upon its consideration of these issues, the circuit
court relied upon case law charging the State with the responsibility of
adequately funding its retirement systems to determine that the UAAL is
a legitimate debt that constitutes a 'previous liability of the State.' Having
declared an exception to the debt clause to be applicable, the circuit court
proceeded to rule that the Act's proposed bond issuance does not violate
the constitutional debt limitation of W.Va. Const., art. X, § 4. The
lower court also ruled in favor of Appellees with regard to the challenges
raised by Appellants involving improper delegation of legislative power and
violations of the Open Governmental Proceedings Act. Through this appeal,
Appellants seek to have the Act declared unconstitutional based upon violation
of the constitutional debt provision.
At the core of this appeal is the fundamental question of whether issuance of the bonds authorized by the Act would violate the debt clause of the state constitution. That provision mandates that: No debt shall be contracted by this State, except to meet casual deficits in the revenue, to redeem a previous liability of the State, to suppress insurrection, repel invasion or defend the State in time of war[.] W.Va. Const. art. X, § 4 (emphasis supplied). In upholding the Act, the circuit court determined that the UAAL was a previous liability of the State based on prior decisions of this Court requiring adequate funding of public retirement systems. Upon analysis, however, we cannot agree with the lower court's conclusion that the bonds can issue without violating the debt clause under the guise of characterizing the UAAL as a previous liability of the State. (See footnote 19) W.Va. Const. art. X, § 4 .
A. Obligations Imposed on State by Public Pension
A review of this Court's rulings concerning the obligations imposed on the state as a result of various public pension funds is necessary to understand why the bond sale authorized by the Act does not fall within the previous liability exception to the debt provision. (See footnote 20) In Booth v. Sims, 193 W.Va. 323, 456 S.E.2d 167 (1995), this Court explained why the creation and operation of public retirement systems do not ordinarily create debt in violation of the state constitution:
This Court concluded long ago that our pension systems do not involve the creation of an unconstitutional debt. State ex rel. Board of Governors v. Sims, 133 W.Va. 239, 244, 55 S.E.2d 505, 508 (1949). Although Sims did not discuss the rationale behind its reasoning on this issue, . . . it should now be clear that pension systems are constitutional for the same reasons that special revenue bonds are constitutional: The pledge for the pension fund derives from the actuarially sound contributions of the employees and the Division; that is, the fund is expected to generate its own money to meet its eventual obligations. Because money is expected to be put away as a condition precedent to fund the system, pensions are legitimate debts of the State. Consequently, W.Va. Const. art. VI, § 51B(3)(d) requires the Governor to prepare a yearly budget that allows for payment of pensions as constitutionally created debt of the State.
193 W.Va. at 332-33, 456 S.E.2d at 176-77.
The mechanism that prevents the pension obligation from being unconstitutional in terms of its characterization as a debt is the expectation that the employee contributions plus the state/employer's statutorily specified contribution levels will provide sufficient funds to meet the required level of annual benefit payments. In syllabus point fourteen of Booth, we recognized the remedy that is available to a pensioner upon the state's failure to make pension installments:
Because pensions are a lawful
debt of the State, the proper remedy for any failure to pay a pension is a mandamus
action against the state treasurer and auditor. The funding of any pension program
is the legislature's problem_not the state employees' problem_and once the legislature
establishes a pension program, it must find a way to pay the pensions to all
employees who have substantial reliance interests.
193 W.Va. at 328, 456 S.E.2d at 172. As this Court explained in Booth, there is no enforceable cause of action by a retiree against the state treasurer or auditor until the funds are not available to pay the pension benefits to which retirees are statutorily entitled.
In the seminal case addressing the obligations of the State to meet its pension commitments, we acknowledged that [t]he realization and protection of public employees' pension property rights is a constitutional obligation of the State. Syl. Pt. 18, in part, Dadisman v. Moore (Dadisman I), 181 W.Va. 779, 384 S.E.2d 816 (1988). We further recognized in syllabus nineteen of Dadisman I that [t]he payment of statutorily promised pension benefits, on maturity, is a general and moral obligation of the State. Id. at 782, 384 S.E.2d at 819. We specifically identified the constitutional underpinnings for the protections that attach to the rights of public employees to receive statutorily established pension benefits. Those constitutionally mandated principles include protection from the impairment of contracts and require application of due process principles when modifications are sought that would affect the receipt of vested retirement benefits. Based on the contractual nature of such pension rights, the state is obligated to remit to public retirees those retirement benefits to which they are entitled by law. See id. at 791-92, 384 S.E.2d at 828-29.
In response to this Court's directives in Dadisman
I, the Legislature authorized an audit of PERS to determine whether
the plan was actuarially unsound. The audit revealed that PERS was not
rendered actuarially unsound by the underfunding in view of an amortization
plan that involved replacement of wrongfully withheld or diverted appropriations
from PERS over a sixteen-year period. State ex rel. Dadisman v. Caperton (Dadisman
II), 186 W.Va. 627, 413 S.E.2d 684 (1991). Consequently, we recognized that
PERS was not in need of further appropriations at this time to return the
fund to soundness. After reemphasizing the Legislature's obligation to timely
and complete[ly] fund and proper[ly] appl[y] . . . all employer contributions
to the employer accumulation fund of the PERS, without diversion to unauthorized
purposes we found the issue of adequate funding essentially mooted by the actuarial sound condition of the fund. (See
footnote 21) 186 W.Va. at 632, 413 S.E.2d at 689. We
reached a similar result in the well-reasoned decision of West Virginia
Education Association v. Consolidated Public Retirement Board, 194
W.Va. 501, 460 S.E.2d 747 (1995), in which we addressed the issue of
inadequate funding of the Teachers Retirement System. Due to the passage
of legislation aimed at correcting the unfunded liability over a period
of forty years that included annual determinations of actuarial soundness,
we found the funding issue mooted by the legislation. (See
footnote 22) Id. at 511, 460 S.E.2d at 757.
Significantly downplaying the historical underpinnings
to the characterization of misappropriated funds as a public debt in Dadisman
I, Appellees argue that this Court's recognition of a duty to repay those
funds to PERS combined with the legislation at issue is sufficient to invoke
the debt clause exception that permits extension of this state's credit for
a previous liability of the state. W.Va.Const. art. X, § 4.
Further analysis of the law as it pertains to pension rights and payment
obligations, however, demonstrates why this Court's acknowledgment of a public
debt with regard to misappropriations that affected PERS _ a retirement system that is not even at issue in this case _ does
not cause the UAAL identified with respect to the three retirement systems
at issue here to rise to the constitutionally significant level of a previous
liability of the state for purposes of involving this state's credit
in the manner contemplated by the Act. Id.
The recognition by this Court in Dadisman I and II and
in Consolidated Public Retirement Board that the respective retirement
funds must be funded pursuant to statutory requirements which extend over
a period of years does not entitle the Legislature to invoke the previous
liability exception to the clear constitutional prohibition against
incurring debt on the state's behalf. While the term previous liability is
certainly subject to differing views, (See
footnote 23) we are certain that the mere designation of
the state's obligation to continue to fund PERS, the teachers retirement
funds, and by logical implication all other retirement systems that are statutorily
established, does not fall within the ambit of what the constitutional drafters
intended as a permissible basis for extending the state's credit. As Appellants
aptly note, if recognition of an obligation to fully or adequately fund was
the threshold test for invoking the previous liabilityexception,
there are virtually no state funding obligations for which the reasoning upon which Appellees rely would not justify the
use of an investment scheme such as that contemplated by the Act. (See
In discussing the debt clause, we observed in Dickinson that
The phraseology employed in the section under consideration
[art. X, § 4] indicates that the framers of the Constitution anticipated
that emergencies might arise in the state's finances when it would be necessary
for indebtedness to be incurred by the state, and therefore provisions were made
that such conditions might properly be met if and when they should arise. . . .
. . .
We are of the opinion also that legislative justification of the five-million-dollar bond issue is based not only on the existence of casual deficits within the meaning of section 4, Article X of the Constitution, but as well on the existence of a previous liability of the State within the meaning of said section. The unanticipated decline in receipts of public revenue produced first the deficits in such revenue and then, to meet the same, indebtedness was incurred by the state as hereinabove stated.
114 W.Va. at 6, 170 S.E. at 428 (emphasis supplied).
In upholding the bond issue in Dickinson, this Court made clear that application of the previous liability exception to the debt clause requires an existing indebtedness and an accompanying liability that results when that specific indebtedness is discharged or satisfied:
When, by reason of casual deficits
in its revenues, the state incurs liability in the discharge of indebtedness
incident to such deficits, the same may be funded by state bonds for the issuance
of which provision is made by legislative enactment, on the basis of the redemption
of a previous liability of the State within the meaning of section
4, Article X, West Virginia Constitution.
114 W.Va. at 2, 170 S.E. at 426, syl. pt. 4. More recently, we were again asked to approve a bond issuance under the previous liability exception to the debt clause.
In State ex rel. Department of Employment Security v. Manchin, 178 W.Va. 509, 361 S.E.2d 474 (1987), we upheld the sale of bonds pursuant to The Debt Fund Act (See footnote 25) _ legislation designed to repay the federal government for moneys borrowed to pay unemployment compensation premiums. (See footnote 26) In syllabus point one of that decision, we recognized that W.Va. Const., art. X, § 4, allows the legislature to issue bonds without a constitutional amendment 'to redeem a previous liability of the State.' Just as in Dickinson, this Court found the previous liability exception applicable due to preexistent borrowing compelled by bleak economic conditions:
[T]here is no question that the money borrowed from the federal government pursuant to our qualifying agreement with the Secretary of Labor . . . is a valid, existing debt of the State. . . .
Thus, having determined that there is a preexisting liability of the State that in one way or another must be repaid to the federal government, we find no impediment in W.Va. Const., art. X, § 4. . . .
178 W.Va. at 515, 361 S.E.3d at 480.
In Gribben v. Kirk, 197 W.Va. 20, 475 S.E.2d 20 (1996), this Court rejected the Legislature's attempt to characterize a judgment against the state for unpaid overtime owed to police officers under certain wage payment statutes as a moral obligation of the state. Id. at 25, 475 S.E.2d at 25. Based on the fact that this judgment representing unpaid overtime and interest was a valid legal obligation of the State, this Court determined that the financial obligation was a previous liability of the State under section 4, article X which must be discharged in a manner consistent with our Constitution. 197 W.Va. at 25, 475 S.E.2d at 25.
There is no dispute that the three funds at issue
are currently in actuarially sound condition. While Appellees want us to
view the Legislature's obligation to inject increasingly large appropriations
into the funds at issue because of the UAAL as the type of enforceable debt
that translates into a previous liability within the meaning
of the debt clause exception, we are not persuaded by this argument. To be
required to make appropriations is one thing; to have a valid and enforceable
debt against the state is an entirely different matter.
In marked contrast to those three decisions in
which this Court has approved extension of this state's credit under the previous
liability exception, there has been no default in the payment of pensions
which would in turn give rise to the creation of an enforceable sum specific
indebtedness. The existence of a recognized moral obligation to pay pension
benefits _ one that is currently being met _ does not equate to a previous
liability of the state within the constitutional meaning of that exception
to the debt clause. Provided the Legislature is currently appropriating sufficient
funds and continues to responsibly make additional appropriations necessitated
by past imprudent financial decisions, there is no present indebtedness resulting
from the discharge of a specific liability. Moreover, the statutorily required and prudently performed annual
calculations of the UAAL relative to the pension systems at issue do not
in any manner reflect or represent amounts that are currently owed to anyone.
As such, these calculated projections, which can be altered at any time based
on different assumptions and market results, similarly cannot come within
the constitutional meaning of a previous liability of the state.
Notwithstanding the Legislature's ostensibly foresightful
attempt at reducing anticipated future appropriations required to maintain
the fiscal soundness of the funds at issue, (See
footnote 27) the necessary financial prerequisite for extending
the state's credit is not demonstrated by the record before us. Because of
the current actuarially sound status of the three retirement funds at issue
and because there is no present indebtedness resulting from the
actual discharge of debt attributable to such funds, there is
no previous liability within the meaning of section four of article
ten of the state constitution that would permit issuance of the general revenue
bonds contemplated by the Act. Absent the applicability of this constitutional
exception to incurring debt on the state's behalf or any other exception,
the bond sale and investment plan at issue may only be implemented with the
consent of the people expressed by the adoption of a constitutional amendment. (See
footnote 28) Accordingly, we hold that the Pension
Liability Redemption Act is unconstitutional in that implementation of
its provisions would result in violation of the debt clause set forth
in section four, article ten of the West Virginia Constitution.
As this Court wisely enunciated in Dickinson, [t]he state's constitutional requirements are for the preservation of the state and the maintenance of its integrity and for the protection of the people. 114 W.Va. at 5, 170 S.E. at 427. Though the specific historical concerns which prompted the inclusion of the debt clause may no longer exist, (See footnote 29) the objectives for which the debt clause was initially enacted _ to curtail the accumulation of mountainous financial obligations that would severely saddle future generations of this state _ remain as valid as when the constitution was first adopted. Despite the passage of time, the pitfalls and dangers attendant upon unrestrained expenditures of public funds to be derived from revenues in the future of which our constitutional forebears were justifiably determined to prevent are just as deserving of vigilant watchdogging today as in 1872. State ex rel. State Road Comm'n v. O'Brien, 140 W.Va. 114, 128, 82 S.E.2d 903, 910 (1954) (Lovins, J., dissenting). See generally R. Briffault, Foreword: The Disfavored Constitution: State Fiscal Limits and State Constitutional Law, 34 Rutgers L.J. 907, 909, 952 (2003) (noting existence of enormous gap between the written provisions of state constitutions and actual practice; recognizing judicial complicity in evasion of constitutional restrictions on debt limitation, and observing that voter approval requirements are an important theme in contemporary tax and expenditure limitations). (See footnote 30)
Having determined that the Pension Liability Redemption
Act is unconstitutional, the decision of the Circuit Court of Kanawha County
is hereby reversed.
[T]he Board's actuary estimates the total pension
benefits, both accrued and unaccrued, that will be paid in the future to
past and present employees based on their service to date and discounts these
estimated benefits to their present value using an estimated,
or assumed, rate of return on system assets. The result of this calculation
is called the Actuarial Accrued Liability. To the extent that
the existing assets of the system fall short of the estimated present value
of these estimated future benefits, the system is said to have an Unfunded
Actuarial Accrued Liability equal to the amount of this shortfall.
It was suggested in oral
argument that if the act is upheld, any legislature at any time may direct
the issuance of bonds to meet shortages in the income of the state, and thereby
the pay-as-you go plan of the Constitution will be destroyed. This proposition
is a non-sequitur. The instant act was passed because of a great and unusual
emergency. Therein alone is there justification for the enactment. Only on
similar basis could any subsequent bond issue be upheld. It is a canon of
law that officials will perform their duty. We cannot assume that the Legislature
will at sometime pass a similar act unless another grave emergency justifies
it. Neither the Legislature nor the courts would approve an issue that was
not grounded on the plainest necessities.
Dickinson, 114 W.Va. at 8-9, 170 S.E. at 429.
When our Constitution of 1872 was formed, the experience
of the mother state with debts contracted by her, and with suits to compel
payment, were fresh in the minds of the framers of that Constitution. Numerous
suits ending in heavy judgments and costs had been prosecuted against the
commonwealth; illiberal contracts and guaranties of enterprises had been
made by governmental agencies detrimental to her interests; public officers
and agencies had not been always zealous and careful in the conduct of public
affairs; and juries leaned toward the individual as against the commonwealth.
With this experience, the framers of the Constitution of 1872 provided that
this state should not contract indebtedness, except in specified instances.
. . .
Id. at 188-89, 153 S.E. at 306-07.