Could an Idaho political subdivision voluntarily withdraw its employees from PERSI without first triggering the statutory complete or partial withdrawal conditions, and did current employees have a constitutional right to keep accruing PERSI benefits if their employer left the system?

Plain-English summary

PERSI's acting chairman asked whether the system could let a political subdivision pull its employees out of PERSI even if the subdivision was still operating with the same workforce; what would happen to those employees' future pension accruals if it could; and whether PERSI would have a fiduciary duty to challenge a statute authorizing such a withdrawal. AG Alan G. Lance, with analysis from Deputies Thomas F. Gratton and Michael McDonagh, gave three answers.

First, current Idaho Code § 59-1326 does not permit voluntary withdrawal in those circumstances. Withdrawal is only available when an employer "incurs" complete withdrawal (ceases to employ active members) or partial withdrawal (loses more than 25 members and 25% of average membership in a fiscal year). A subdivision continuing in the same form with the same employees cannot meet either condition.

Second, even if the legislature passed new authorization for voluntary withdrawal, Idaho law as of 1996 did not appear to recognize a constitutional right of those employees to continue accruing PERSI benefits. The Idaho Supreme Court in Hanson v. City of Idaho Falls, 92 Idaho 512, 446 P.2d 634 (1968) and Nash v. Boise City Fire Department, 104 Idaho 803, 663 P.2d 1105 (1983) had adopted a "modified contract" approach that protected vested earned benefits, but McNichols v. Public Employee Retirement System of Idaho, 114 Idaho 247, 755 P.2d 1285 (1988) had let the legislature prospectively reduce the rate at which employees earn future benefits, suggesting Idaho would not follow California's broader rule (State of California v. Eu, 816 P.2d 1309 (Cal. 1991)) that future-accrual rights vest at hire.

Third, PERSI would not have a fiduciary duty to challenge new withdrawal legislation because such legislation would not directly impair existing rights, but PERSI would have standing to bring a declaratory judgment action under Idaho Code § 10-1201 (or potentially as an original proceeding in the Idaho Supreme Court under IAR 5 and 43, following Mead v. Arnell, 117 Idaho 660, 791 P.2d 410 (1990)) to confirm the statute's validity before authorizing actual withdrawals.

Currency note

This opinion was issued in 1996. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What were the "complete" and "partial" withdrawal triggers in § 59-1326?

Complete withdrawal under § 59-1326(2) occurred when the political subdivision ceased to employ any active PERSI members. Partial withdrawal under § 59-1326(3) occurred when the subdivision's average PERSI membership declined by both more than 25 members and more than 25% of average membership over a fiscal year. A subdivision still operating with the same workforce could not satisfy either trigger. The opinion noted there were no non-statutory grounds for withdrawal either.

What was the Hanson / Nash "modified contract" approach?

In Hanson the Idaho Supreme Court rejected both the "gratuity" view (pension as a revocable favor) and the "strict contract" view (pension terms locked at hire forever) in favor of a middle ground: pension rights are vested but subject to "reasonable modification for the purpose of keeping the pension system flexible and maintaining its integrity." Nash extended that framework, drawing on California's Dullea v. Massachusetts Bay Transportation Authority and Betts v. Board of Administration of Public Employees' Retirement System cases, to require that any modification disadvantageous to employees be "accompanied by comparable new advantages" and bear "some material relation to the theory of a pension system."

Why did McNichols matter so much for the future-accrual question?

In McNichols, the Idaho Supreme Court let the legislature prospectively reclassify certain employees out of the more generous police-officer tier of PERSI, reducing the rate at which they earned future benefits. The court did not engage in the Nash reasonableness analysis; it simply held that the legislature could prospectively limit future-accrual rates. The AG read this as evidence that Idaho courts did not view future-accrual rights as vested in the same way California did, putting Idaho closer to the federal Fourth Circuit's approach in Maryland State Teachers Association v. Hughes, 594 F. Supp. 1353 (D. Md. 1984) than to the California Supreme Court's approach in State of California v. Eu.

Why didn't PERSI have a fiduciary duty to challenge new withdrawal legislation?

Because the legislation by itself would not directly impair any vested or earned benefit. It would merely create a mechanism for political subdivisions to withdraw in the future. Even if a court eventually recognized a right to future accruals, the impairment would not occur until (a) an employer actually withdrew, and (b) that employer failed to provide a comparable replacement pension. Wisconsin Retired Teachers Ass'n v. Employee Trust Funds Board, 537 N.W.2d 400 (Wis. Ct. App. 1995), the AG's main authority on a board's duty to challenge invalid statutes, addressed legislation directly affecting plan benefits, not authorizing legislation with no direct effect.

What was the recommended way for PERSI to handle the legal uncertainty?

Bring a declaratory judgment action under the Uniform Declaratory Judgment Act (Idaho Code § 10-1201) before allowing any subdivision to withdraw. That way PERSI could confirm the statute's validity in advance instead of unwinding withdrawals after the fact if a court later struck the statute down. The AG also noted Mead v. Arnell, 117 Idaho 660, 791 P.2d 410 (1990) might support an original proceeding in the Idaho Supreme Court under IAR 5 and 43.

Background and statutory framework

PERSI is Idaho's defined-benefit pension system for state and local public employees, governed by Title 59, Chapter 13 of the Idaho Code. The PERSI board operates as fiduciaries of the retirement fund, with the obligation under Idaho Code § 59-1301(2) to "discharge their duties with respect to the fund solely in the interest of members and their beneficiaries." Idaho Code § 59-1305(1) gives the board "the powers and privileges of a corporation, including the right to sue and be sued in its own name as such board."

The 1996 question arose at a time when several political subdivisions, particularly local governments looking at less expensive alternative pension or 401(k)-style options, were exploring whether they could leave PERSI. The opinion's analysis was the legal foundation that would later have to be revisited if the legislature passed authorizing legislation, because the right-to-future-accruals question was unsettled and the AG's tentative answer (no recognized right) could be revisited as Idaho case law developed.

The constitutional dimension of the issue rests on the Contracts Clause of the U.S. Constitution (art. I, § 10) and the parallel impairment-of-contract clause in the Idaho Constitution (art. 1, § 16). The Contracts Clause analysis from United States Trust Co. v. New Jersey, 431 U.S. 1 (1977) and Energy Reserves Group v. Kansas Power and Light, 459 U.S. 400 (1983) governs whether a state law unconstitutionally impairs contract rights, including arguably-vested public pension rights.

Citations

• U.S. Const. art. I, § 10
• Idaho Const. art. 1, § 16; art. 5, § 9
• Idaho Code §§ 10-1201, 59-1301, 59-1302, 59-1305, 59-1326
• Idaho Appellate Rules 5, 43
• Hanson v. City of Idaho Falls, 92 Idaho 512, 446 P.2d 634 (1968)
• Nash v. Boise City Fire Department, 104 Idaho 803, 663 P.2d 1105 (1983)
• McNichols v. Public Employee Retirement System of Idaho, 114 Idaho 247, 755 P.2d 1285 (1988)
• Mead v. Arnell, 117 Idaho 660, 791 P.2d 410 (1990)
• Allen v. City of Long Beach, 287 P.2d 765 (Cal. 1955); Kern v. City of Long Beach, 179 P.2d 799 (Cal. 1947); State of California v. Eu, 816 P.2d 1309 (Cal. 1991)
• Public Employees Retirement Board v. Washoe County, 615 P.2d 972 (Nev. 1980)
• Maryland State Teachers Association v. Hughes, 594 F. Supp. 1353 (D. Md. 1984)
• Wisconsin Retired Teachers Ass'n v. Employee Trust Funds Board, 537 N.W.2d 400 (Wis. Ct. App. 1995)

Source

• Landing page: https://www.ag.idaho.gov/office-resources/opinions/
• Original PDF: https://ag.idaho.gov/content/uploads/2018/04/OP96-01.pdf

Original opinion text

The full 30+ page text of Attorney General Opinion 96-1, addressing PERSI voluntary withdrawal and future-accrual rights, is available at the linked PDF above. Key passages reproduced here for reference.

ATTORNEY GENERAL OPINION NO. 96-1
To: Mr. Jody B. Olson, Acting Chairman, Public Employee Retirement System of Idaho

CONCLUSION

1. Idaho Code § 59-1326 as presently written does not allow voluntary withdrawal from PERSI. There are no other statutory or non-statutory grounds that would allow voluntary withdrawal from PERSI by political subdivisions of the State of Idaho.

2. It does not appear that Idaho would recognize a right to future benefit accruals.

3. Although PERSI may have a fiduciary duty to challenge an invalid statute that interferes with the members' benefits, the proposed changes would not create any such direct interference. However, through its fiduciary responsibility to its members, PERSI would have standing to challenge the statute if PERSI chose to do so.

ANALYSIS

The only statute providing for employer withdrawal from PERSI under any circumstances is Idaho Code § 59-1326. Complete withdrawal under § 59-1326(2) requires the political subdivision to cease employing active members; partial withdrawal under § 59-1326(3) requires both a 25-member and 25% reduction in average membership over a fiscal year. A subdivision continuing in the same form with the same employees cannot meet either condition.

On future-accrual rights, the Idaho Supreme Court in Hanson v. City of Idaho Falls held: "The better reasoned rule in most American jurisdictions today is that the rights of the employees in pension plans such as Idaho's Retirement Fund Act are vested, subject only to reasonable modification for the purpose of keeping the pension system flexible and maintaining its integrity." 92 Idaho at 514.

Nash v. Boise City Fire Department further developed the analysis, drawing on California's Dullea decision: "An employee's vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. Such modifications must be reasonable, and it is for the court to determine upon the facts of each case what constitutes a permissible change." 104 Idaho at 805-06.

But McNichols took a narrower view of future-accrual rights: "the 3% cap could not be applied to Nash because the legislature cannot limit previously earned benefits." 114 Idaho at 249. The court held the legislature could prospectively reduce future-benefit accrual rates without engaging in the Nash reasonableness analysis. This strongly suggests Idaho does not view future-accrual rights as vested in the same way California courts do (State of California v. Eu, 816 P.2d 1309 (Cal. 1991)).

PERSI's fiduciary duties under Idaho Code § 59-1301(2) and § 59-1302(d) include responsibility to "administer the retirement system in accordance with the provisions of the Idaho Code governing the system." The Wisconsin Retired Teachers Ass'n decision recognized that trustees of a public retirement plan may have a fiduciary duty to challenge an invalid statute that interferes with members' benefits, but the proposed withdrawal legislation would not directly affect existing benefits. Even if Idaho courts recognized a future-accrual right, no actionable breach could occur until an employer actually withdrew and failed to provide a comparable replacement pension.

PERSI has standing under Idaho Code § 59-1305 to bring a declaratory judgment action to confirm the validity of withdrawal legislation before allowing any subdivision to withdraw. Such an action could potentially be brought as an original proceeding in the Idaho Supreme Court under IAR 5 and 43, following Mead v. Arnell, 117 Idaho 660, 791 P.2d 410 (1990).

DATED this 26th day of January, 1996.
ALAN G. LANCE
Attorney General

Analysis by:
THOMAS F. GRATTON
MICHAEL MCDONAGH
Deputy Attorneys General