                         TO BE PUBLISHED IN THE OFFICIAL REPORTS


                              OFFICE OF THE ATTORNEY GENERAL

                                        State of California


                                        DANIEL E. LUNGREN

                                          Attorney General


                            ______________________________________

                   OPINION              :

                                        :          No. 95-909

                   of                   :

                                        :          June 19, 1996

          DANIEL E. LUNGREN             :

            Attorney General            :

                                        :

          GREGORY L. GONOT              :

         Deputy Attorney General        :

                                        :
______________________________________________________________________________


           THE HONORABLE RICHARD K. RAINEY, MEMBER OF THE CALIFORNIA
STATE ASSEMBLY, has requested an opinion on the following question:

                 May a retirement system that operates under article 5 of the County Employees
Retirement Law of 1937 (Gov. Code, '' 31580-31607) transfer "excess earnings" to county advance
reserves for the purpose of offsetting employer or employee contributions to the system?


                                            CONCLUSION

                   A retirement system that operates under article 5 of County Employees Retirement Law
of 1937 (Gov. Code, '' 31580-31607) may transfer "excess earnings" to county advance reserves solely
for the purpose of paying retirement benefits and not for the purpose of offsetting amounts owed in
employer or employee contributions. However, based upon an actuarial evaluation of the assets and
liabilities of the system due to the transfer of excess earnings to county advance reserves for payment of
retirement benefits, the future rates of employer and employee contributions to the system may be
adjusted.




                                                   1.                                             95-909

                                                      ANALYSIS


               Under the County Employees Retirement Law of 1937 (Gov. Code, '' 31450-31895;
hereinafter "Act"), 1 counties are authorized to establish independent retirement systems for their
employees. (' 31500; 70 Ops.Cal.Atty.Gen. 1, 2 (1987).) The management of a county system is
vested in a board of retirement. (' 31520.) The main function of such a board is to administer the
employees retirement fund ("Fund"), which is "a trust fund created . . . solely for the benefit of the
members and retired members of the system and their survivors and beneficiaries." (' 31588.)

                The Act provides retirement benefits for county employees (and employees of
participating public districts within a county) which are funded by employer contributions, employee
contributions, and investment earnings on monies deposited in the fund. (70 Ops.Cal.Atty.Gen., supra,
p. 2.) Upon retirement, members of the system receive a regular retirement allowance,2 and in most
cases supplemental benefits, including various types of cost-of-living adjustments. ('' 31681.8,
31870-31874.4, 31875-31879.2.)

                 The question we have been asked to resolve centers on certain financial provisions
contained in article 5 ('' 31580-31607) of the Act.3 Section 31592 provides:

                "Earnings of the retirement fund during any year in excess of the total interest
        credited to contributions and reserves during such year shall remain in the fund as a
        reserve against deficiencies in interest earnings in other years, losses on investments
        and other contingencies, except as provided in Sections 31529.5 and 31592.2."4

Section 31592.2 provides:

                 "In any county, earnings of the retirement fund during any year in excess of the
        total interest credited to contributions and reserves during such year shall remain in the
        fund as a reserve against deficiencies in interest earnings in other years, losses on
        investments, and other contingencies, except that, when such surplus exceeds 1 percent
        of the total assets of the retirement system, the board may transfer all, or any part, of
        such surplus in excess of 1 percent of the said total assets into county advance reserves
        for the sole purpose of payment of the cost of the benefits described in this chapter.


    1
     All section references are to the Government Code unless otherwise indicated.
    2
      The regular retirement allowance is funded one-half by employer contributions and one-half by employee
contributions. It reflects both the employer provided pension (see '' 31471-31473) and an equal employee annuity
(see ' 31457).
    3
     Counties have the option of adopting an alternative set of financial provisions set forth in article 5.5 (''
31610-31619) of the Act. This opinion does not address those provisions. (See 70 Ops.Cal.Atty.Gen., supra, pp. 5-8.)
    4
     Section 31529.5 pertains to contracting for outside legal services.


                                                            2.                                             95-909

               "Where the board of supervisors has provided for the payment of all, or a
       portion, of the premiums, dues, or other charges for health benefits, Medicare, or the
       payment of accrued sick leave at retirement to or for all, or a portion, of officers,
       employees, and retired employees and their dependents, from the county general fund
       or other sources, the board of retirement may authorize the payment of all, or a portion,
       of payments of the benefits described in this paragraph from the county advance
       reserves."

In 70 Ops.Cal.Atty.Gen. 1, supra, we explained the operation and significance of these statutory
provisions:

                "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 reserve for the payment
       of benefits." (Id., at pp. 2-3; fn. omitted.)

                                                     3.                                                  95-909

                Having reviewed the statutorily prescribed treatment of "excess earnings," we consider
the question of whether a county retirement board may transfer excess earnings to county advance
reserves for the purpose of offsetting amounts owed in employer or employee contributions to the
system. We conclude that it may only transfer excess earnings to county advance reserves to pay for
retirement benefits and not for the purpose of offsetting the amounts owed in employer or employee
contributions. However, such transfer may in turn require adjustments in the level of employer and
employee contribution rates necessary to fund the system in the future.

                 Various principles of statutory construction assist us in our inquiry. "When
interpreting a statute our primary task is to determine the Legislature's intent." (Freedom Newspapers,
Inc. v. Orange County Employees Retirement System (1993) 6 Cal.4th 821, 826.) "To determine the
intent of legislation, we first consult the words themselves, giving them their usual and ordinary
meaning." (DaFonte v. Up-Right, Inc. (1992) 2 Cal.4th 593, 601.) "`A statute must be construed "in
the context of the entire statutory system of which it is a part, in order to achieve harmony among the
parts." [Citation.]'" (People v. Hull (1991) 1 Cal.4th 266, 272.) "[S]tatutes relating to the same
subject must, to the extent possible, be harmonized, both internally and with each other. [Citation.]"
(Long Beach Police Officers Assn. v. City of Long Beach (1988) 46 Cal.3d 736, 747; see In re Catalono
(1981) 29 Cal.3d 1, 10-11; In re Robert B. (1995) 39 Cal.App.4th 1816, 1822-1823; San Francisco
Police Officers' Assn. v. City and County of San Francisco (1995) 37 Cal.App.4th 283, 295.)

                 Looking first to the language of section 31592.2, we find that when earnings are in
excess of 1 percent of the total assets of the retirement system, "the board may transfer all, or any part,
of such surplus in excess of 1 percent of the said total assets into county advance reserves for the sole
purpose of payment of the cost of the benefits described in this chapter." The "benefits described in
this chapter" are the benefits to which a system member is entitled at retirement. The cost of these
benefits is incurred by the retirement system as an entity separate from the county and independently
administered by the retirement board. (See Traub v. Board of Retirement (1983) 34 Cal.3d 793,
798-799; Summerford v. Board of Retirement (1977) 72 Cal.App.3d 128, 132.)

               Our construction of the terms of section 31592.2 is consistent with the other
requirements of the Act. For example, section 31588.2 states:
                "Notwithstanding any other provision of law, no funds in the retirement fund
        shall be expended for any purpose other than the expense of administration of the
        system, investments for the benefit of the system, and the provision of benefits to the
        members and retired members of the system and their survivors and beneficiaries."
Section 31588.2 precludes the use of any monies, not just excess earnings, contained in the Fund for
purposes unrelated to the payment of administrative expenses, investment of the assets, or the payment
of retirement benefits.

                Section 31588 states:




                                                    4.                                             95-909

                "A trust fund account to be designated as `employees retirement fund' shall be
        opened upon the books of the retirement board, or treasurer and auditor if authorized by
        the board, of any county adopting this retirement system.

                "The `employees retirement fund' shall be a trust fund created or continued and
        administered in accordance with this chapter, solely for the benefit of the members and
        retired members of the system and their survivors and beneficiaries.

                 "Nothing in this section shall be construed to prohibit the retirement board
        paying administrative costs, already authorized or to be authorized, or to prohibit the
        transfer of surplus funds to county advance reserves."

Pursuant to the terms of section 31588, the Fund is to be administered "solely for the benefit of the
members . . . ." Such restriction does not preclude "paying administrative costs" or transferring
"surplus funds to county advance reserves." As we have demonstrated, section 31592.2 authorizes the
transfer of surplus funds to county advance reserves if (1) they exceed 1 percent of the total assets of the
retirement system and (2) they are used solely to pay for retirement benefits.

                Section 31874 provides in part:

                 "This article (commencing with Section 31870) may be made applicable in any
        county on the date specified in the ordinance, or if no such date is specified, on the first
        day of the month after the effective date of an ordinance adopted by the board of
        supervisors to this effect, provided that an actuarial survey of the retirement system has
        been made by the adopting county prior to the passage of said ordinance. No provision
        of this chapter shall prevent or be construed to prevent the use and expenditure of
        surplus described in Section 31592.2 to fund any part or all of any increases in
        allowances otherwise permitted after this article or Article 16.6 (commencing with
        Section 31875) or both this article and Article 16.6 or any of the provisions of this
        article or Article 16.6 have been made applicable."

Section 31874 refers to "[t]his article" ('' 31870-31874.3) and "article 16.6" ('' 31875-31879.2), both
of which concern cost-of-living adjustments made to retirement allowances and other benefits.
Surplus funds may be used to pay for increases in such allowances and benefits. Consistent with the
requirements of section 31592.2, section 31874 allows for the use of surplus funds for retirement
benefits under certain conditions.

                Finally, we note that our construction of the terms of section 31592.2 is consistent with
the Constitution. Section 17 of article XVI of the Constitution provides:

                ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

                "Notwithstanding any other provisions of law or this Constitution to the
        contrary, the retirement board of a public pension or retirement system shall have


                                                                        5.                                         95-909

       plenary authority and fiduciary responsibility for investment of moneys and
       administration of the system, subject to all of the following:

               "(a) The retirement board of a public pension or retirement system shall have
       the sole and exclusive fiduciary responsibility over the assets of the public pension or
       retirement system. The retirement board shall also have sole and exclusive
       responsibility to administer the system in a manner that will assure prompt delivery of
       benefits and related services to the participants and their beneficiaries. The assets of a
       public pension or retirement system are trust funds and shall be held for the exclusive
       purposes of providing benefits to participants in the pension or retirement system and
       their beneficiaries and defraying reasonable expenses of administering the system.

               "(b) The members of the retirement board of a public pension or retirement
       system shall discharge their duties with respect to the system solely in the interest of,
       and for the exclusive purposes of providing benefits to, participants and their
       beneficiaries, minimizing employer contributions thereto, and defraying reasonable
       expenses of administering the system. A retirement board's duty to its participants and
       their beneficiaries shall take precedence over any other duty.

               ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ."

Restricting the use of excess earnings to the payment of retirement benefits allows Fund assets to be
administered "for the exclusive purposes of providing benefits to participants in the . . . retirement
system and their beneficiaries . . . ."

        Of course, the transfer of excess earnings to county advance reserves for payment of retirement
benefits may affect employer and employee contribution rates necessary to fund the system in the
future. As previously mentioned, the sources of benefit payments are (1) employer contributions, (2)
employee contributions, and (3) investment earnings. As retirement benefits are paid, the amount of
future contributions (assets) needed may be correspondingly adjusted.

       In this regard, section 31453 provides:

               "An actuarial valuation shall be made within one year after the date on which
       any system established under this chapter becomes effective, and thereafter at intervals
       not to exceed three years. The valuation shall be conducted under the supervision of
       an actuary and shall cover the mortality, service, and compensation experience of the
       members and beneficiaries, and shall evaluate the assets and liabilities of the retirement
       fund. Upon the basis of the investigation, valuation, and recommendation of the
       actuary, the board shall, at least 45 days prior to the beginning of the succeeding fiscal
       year, 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. 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.

                                                                       6.                                          95-909

        No adjustment shall be included in the new rates for time prior to the effective date of
        the revision."

Section 31454 provides:

                "The board of supervisors shall not later than 90 days after the beginning of the
        immediately succeeding fiscal year adjust the rates of interest, the rates of contributions
        of members, and county and district appropriations in accordance with the
        recommendations of the board, but shall not fix them in such amounts as to reduce the
        individual benefits provided in this chapter."

Hence, the assets and liabilities of the Fund must be regularly evaluated, and employer and employee
contribution rates must be adjusted to reflect such evaluation. Although the excess earnings in
question may not be used to offset the amount of contributions already owed by employers or
employees, as long as individual benefits are not reduced, a board of supervisors may adjust future
employer and employee rates of contributions based upon an evaluation of the assets and liabilities of
the Fund.

        We conclude that a retirement system that operates under article 5 of the Act may transfer
excess earnings to county advance reserves solely for the purpose of paying retirement benefits and not
for the purpose of offsetting amounts owed in employer or employee contributions. However, based
upon an actuarial evaluation of the assets and liabilities of the system, including the transfer of excess
earnings to county advance reserves for payment of retirement benefits, the future rates of employer and
employee contributions to the system may be adjusted.

                                                *****




                                                    7.                                                95-909

