The Kentucky Employees Retirement System (KERS) was created by statute in 1956 to provide a secure means of retirement savings for state government employees. KERS is one of several retirement systems, which include county employees, state employees, and state police, governed by the Board of Trustees (Board). Five trustees are elected by KERS mеmbers, three are appointed by the Governor, and the Commissioner of Personnel occupies the final position. KRS 61.645(1). The Board oversees *712 the system in a fiduciary capacity, and administers the plan “solely in the interest of the members and beneficiaries.... ” KRS 61.650(1).
In 1972, the General Assembly enacted KRS 61.692 which provides:
It is hereby declared that in consideration of thе contributions by the members and in further consideration of benefits received by the state from the member’s employment, KRS 61.510 to 61.705 shall, except as provided in KRS 6.696, constitute an inviolable contract of the Commonwealth, and the benefits therein shall, except as provided in KRS 6.696, not be subject to reduction or impairment by alteration, amendment, or repeal.
KERS membership is mandatory for all full time public employees who are not members of another retirement system. Regular employee members are required to contribute 5% of their wages. Hazardous duty workers and state police officers must contribute 7% of their wages into the system. The state, pursuant to KRS 61.565, must contribute to the system. The amount of the state contribution and whether it may be mandated by the Board is at issue in this litigation.
In September 1991, the Board of Trustees’ actuary determined that the state contribution to the system should be increased because of losses in investment return, salary increases, and expected increases in medical premium rates. The actuary recommended that the state rate of contribution to the plan, beginning July 1,1992, be set as follows: for KERS nonhazardous, 8.66%, up from 7.65%; for KERS hazardous, 17.55%, up from 15.5%; and for SPRS, 21.84%, up from 19.57%. The Board adopted the proposed increases and included them in its budget request.
The Governor declined to follow the Board’s recommendations. He submitted a state rate of contribution the same as that of the previous year. In the process of so doing, the Governor concluded that valuation of KERS assets should be modified to reflect market value, not book value as was being used by the Board. It was suggested that market value better reflected the financial condition of KERS. No actuarial assistance was used in reaching this conclusion. Utilization of the market value of assets is required in pensiоn funding for Employee Retirement Income Security Act (ERISA) qualified plans, and it is typical of the valuation method used in most public plans.
After the General Assembly enacted the 1992 Budget Bill, the Board, on advice of its actuary, adopted the modified market system of asset valuation. The actuary noted, however, that state contribution rates should be re-examined duе to uncertainty with regard to medical funding expense and health insurance benefits when viewed under the new valuation method. In passing, we observe that the legislative and judicial retirement plans of Kentucky use book valuation of assets.
The Board filed a Petition for Declaration of Rights, pursuant to KRS 418. It claimed that the 1992 Budget Bill usurped the authority of the Board to аct independently to set actuarially sound employer contribution rates. The Board asserted that failure to meet its contribution requests impaired KERS member contract rights under KRS 61.692. It claimed the protection of Section 19 of the Kentucky Constitution, and of Article I, Section 10, and the Fifth and Fourteenth Amendments to the United States Constitution.
On April 22, 1992, the Franklin Circuit Court granted summary judgmеnt in favor of the Board, holding Part III, Subsection 16 of the Budget Bill void as an unlawful impairment of KERS members’ inviolable contract rights, including all statutory rights specifically referenced in KRS 61.692. The court ordered appellants to “take such steps as are necessary to cause employer agencies immediately to pay over to the Kentucky Retirement Systems аll past due employer contributions plus interest ... based upon the rates established by the Board rather than the rate set out in the budget bill.” Effectively, the judgment of the trial court granted unrestricted power to the Board to say what sum it should receive as payments from the Commonwealth. Of course, we assume the trial court included an implied condition that the Board not act arbitrarily.
*713 While we recognize that the retirement savings system has created an inviolable contract between KERS members and the Commonwealth, and acknowledge that the General Assembly can take no action to reduce the benefits promised to participants, we must nevertheless reverse the trial court. Contrary to the apprоach it took, the focus of the litigation should be upon what, if any, substantive contractual infringement occurred by virtue of the actions of the Governor and General Assembly in rejecting the recommendations of the Board. We conclude that since there was no showing that any benefit commitment made to KERS members was infringed, or threatened, the Board had no power to mandate rates of contribution and require their adoption.
Prior to reaching the issues which are decisive, it is necessary to address appellants’ procedural claims. As a first matter, we hold that the named appellants do not have immunity in this action. In
Rose v. Council for Better Education, Inc.,
Ky.,
Similarly, in
Pkilpot v. Patton,
Ky.,
The crucial issue before us is whether the General Assembly must blindly defer to the Board in matters of state retirement funding. We have acknowledged that KERS members have a contractual right to the benefits they were promised upon retirement. Any reduction or demonstrable threat to those promised benefits might well run afoul of Section 19 of the Kentucky Constitution, but we can leave that issue for another day. In the present ease there has been only a refusal by the executive and legislative branches of government to adhere to the Board’s suggested funding rates. There has been no showing that the retirement benefits promised to KERS members have been or will be infringed by the failure to adopt the Board’s recommendations.
While the Board’s necessary function is the management of the KERS, such does not encompass an unrestricted right to demand funding from the General Assembly. To achieve its determination that contribution rates should remain constant from the previous year, the General Assembly temporarily suspended KRS 61.565 which allows the Board to set the contribution rate. This suspension was necessary to permit the General Assembly to maintain funding at the 1991 levels. WTiile appellees assert that the suspension of the statute was a constitutional violation in that the statute suspended is a contractual right, such is without merit. The contract between the Commonwealth and its employees is for retirement funding. It is not a contract which denies the General As
*714
sembly the ability to fashion its ways or means in providing the pension funds. The appellees’ argument that the retirement statutes forever removed legislative power to amend those statutes runs afoul of our holding in
Legislative Research Commission v. Brown,
Ky.,
We have held that adoption of a budget is a legislative matter.
Legislative Research Comm’n v. Brown,
Ky.,
Inasmuch аs the General Assembly may set rates of contribution that differ from those recommended by the Board, it also possesses the power to suspend current statutes to accomplish the task. At the time the General Assembly decided that funding rates should remain constant from the previous year, there was a budget shortfall. It was the duty of the General Assembly to take steps tо ensure the continued operation of government without excessive generosity to one governmental entity at the expense of others. We have held that “[i]f revenues become inadequate, the General Assembly must be empowered to use adequate devices to balance the budget. Provisions in the budget document which effectively suspend and modify existing statutes which carry financial implication certainly are consistent with those duties and responsibilities.”
Commonwealth ex rel. Armstrong v. Collins,
Ky.,
While the Board held to the book valuation method to determine asset value and required funding, both the General Assembly and the governor adopted the modified market value approach. The Board later adopted the market valuation approach for future funding requests, but held to its previous requests due to an increased projected cost for medical expense funding. The change to market valuation netted an increase of $230 million in the value of KERS assets as of June 30, 1991, an increase that reached $322 million by June 30, 1993. If the market value had been used in determining contribution rates, those rаtes would have been substantially the same as, or less than, the rates approved by the General Assembly. Instead, upon re-examining its suggested contribution rates under the modified market value method, the Board’s actuary justified maintaining his proposed rates because of a suggested improper initial projection in future medical insurance costs as effеcted by the change in valuation methods.
Although adoption of the modified market valuation method was a substantial change for KERS, its own actuary described the change as reasonable, and adopted the method for 1992 and future valuations. This method is the same as is used by the Kentucky Teacher’s Retirement System. As to the claimed under funding of potential medicаl expenses, there has been no showing that benefits promised to KERS members will be infringed by the funding rates set by the General Assembly. The Board’s actuary contended that medical insurance funding must be re-examined with regard to modified market valuation. He later admitted, however, that his projected inflation rate for medical expenses of 10% was excessive, and that a rate of 6% was more appropriate in the future.
What is clear upon the actuary’s recommendation is that the medical insurance portion of KERS benefits was in no danger from the rates set by the General Assembly. In 1992, Kentucky was one of only six states which attempted to pre-fund medical insurance obligations, with most states choosing instead a “pay as yоu go” method which avoids guesswork in predicting future rates of inflation for medical expenses. The KERS request for insurance pre-funding was not ignored, as the General Assembly set what may be characterized as a conservative rate in its attempt to meet the KERS desire *715 to pre-fund the obligations while also maintaining prudent control of tax expenditures.
Cases frоm other jurisdictions which are cited by appellees are easily distinguishable.
See, e.g., United States Trust Co. v. New Jersey,
In
Valdes v. Cory,
While appellees wish to characterize the Kentucky General Assembly’s actions as those in Valdes, we are unpersuaded. In Valdes, a complete suspension of employer contributions ocсurred, and there was a raid on the reserve account to pay for the state’s contribution. This is a far cry from the present case in which the 1992 Budget Bill merely maintained the rate of contribution as that of the previous year. After a change in the valuation method from book value to modified market value, and without regard to the Board’s admittedly excessive estimate of future medical expenses, actuaries determined that the rate of contribution under the new method should be lower than the rate submitted by the Board. 1 The 1992 Budget Bill did not impair the contractual rights of KERS members.
In
Dadisman v. Moore,
Only upon a determination that the contract between KERS members and the state is substantially impaired by legislative action do we neеd to decide whether the legislation impairing the contract is reasonable and necessary to serve a legitimate and important public purpose, necessitating a temporary impairment.
See Maryland State Teachers Ass’n v. Hughes,
Appellants were within their discretion to modify the funding requests submitted by the Board. The 1992 Budget Bill constituted a proper exercise of legislative authority. We reverse the judgment of the Franklin Circuit Court and remand for entry of judgment in conformity herewith.
Notes
. Sheryl R. Wingert, Vice President and Actuary of The Segal Company, fоund that ''[i]f the Board’s actuary had used the modified market value of assets in the 1990 and 1991 actuarial valuations, the calculated employer contribution rates would have decreased because the modified market value of assets was greater than the book value.” Wingert Aff. at 3.
Ken Hohman, consulting actuary and managing partner of the Louisville office of Bryan, Pendleton, Swats & McAllister, found that "if the Board’s actuary had used the modified market value method of valuing KERS’ assets (that he adopted in the following year), and kept all other assumptions the same,” the 1992 rates would have been substantially less than those submitted by the Board, and practically the same as the 1991 rates maintained by the Governor and General Assembly for the 1992 Budget Bill. Hoh-man Aff. at 3-4.