MUNICIPAL CORPORATIONS ‑- CITIES AND TOWNS ‑- COUNTIES ‑- DISTRICTS ‑- EMPLOYERS AND EMPLOYEES ‑- MEDICAL BENEFITS ‑- SELF-FUNDING OF EMPLOYEE HEALTH BENEFITS BY LOCAL GOVERNMENT

MUNICIPAL CORPORATIONS ‑- CITIES AND TOWNS ‑- COUNTIES ‑- DISTRICTS ‑- EMPLOYERS AND EMPLOYEES ‑- MEDICAL BENEFITS ‑- SELF-FUNDING OF EMPLOYEE HEALTH BENEFITS BY LOCAL GOVERNMENT

Charter counties, charter cities, code cities and municipal corporations, in the exercise of proprietary functions, have broad legislative power that empowers them to self-fund their employee health and welfare benefits.  Other municipal corporations have only the powers expressly granted by the Legislature or necessarily or fairly implied in or incident to the powers expressly granted.  These municipal corporations do not have the authority to self-fund their employees' health and welfare benefits.

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                                                                   April 17, 1991

Honorable Robert V. Graham
State Auditor
Legislative Building, AS-21
Olympia, Washington 98504
                                                                                                                 Cite as:  AGO 1991 No. 17

Dear Mr. Graham:

            By letter previously acknowledged you asked for our opinion on a question we paraphrase as follows:

            In the absence of a statute expressly so providing, do local governments have the authority to self-fund their employees' health and welfare benefits?1/

             [[Orig. Op. Page 2]]

            We conclude that the answer to your question is yes with respect to charter counties, charter cities, code cities, and municipal corporations in the exercise of proprietary functions.  With respect to all other local governments, we conclude that the answer to your question is no.  Our analysis follows:

                                                                     ANALYSIS

            You have asked about the power of local governments to self-fund their employees' health and welfare benefits‑-i.e., to directly pay hospitalization and other medical expenses and disability payments.  Since your question is not confined to any particular type of local government, we assume that it is intended as a broad inquiry and we are guided by general legal principles in responding to it.

            The general rule is that municipal corporations are limited to those powers expressly granted to them by the Legislature and to powers necessarily or fairly implied in or incident to the powers expressly granted.  Chemical Bank v. WPPSS, 99 Wn.2d 772, 792, 666 P.2d 329 (1983); City of Spokane v. J-R Distributors, Inc., 90 Wn.2d 722, 585 P.2d 784 (1978).

            At least as to matters of local concern, however, this general rule does not apply to cities and counties that have adopted charters pursuant to article 11, sections 4 and 10, of the Washington Constitution, respectively, or to cities operating under the Optional Municipal Code, Title 35A RCW.  These cities and counties have legislative power akin to that of the state, except that their actions cannot contravene any constitutional provision or legislative enactment.  Thus, such a city or county has broad legislative power except when restricted by enactments of the state.  King Cy. Coun, v. Public Disclosure Comm'n, 93 Wn.2d 559, 562-63, 611 P.2d 1227 (1980);Winkenwerder v. Yakima, 52 Wn.2d 617, 622, 328 P.2d 873 (1958); La Mon v. Westport, 22 Wn. App. 215, 217-18, 588 P.2d 1205 (1978);Chemical Bank v. WPPSS, 99 Wn.2d 772, 792-93, 666 P.2d 329 (1983).

            Additionally, in recent years, our courts have concluded that in the exercise of proprietary functions, municipal corporations have broad authority and may exercise their business powers in much the same way as business corporations, so long as they act within the purposes of their statutory grants.  Hite v. Public Util. Dist. No. 2, 112 Wn.2d 456, 459, 772 P.2d 481 (1989);Tacoma v. Taxpayers, 108 Wn.2d 679, 693-95, 743 P.2d 793 (1987);see also Washington Pub. Util. Dist. Sys. v. Public Util. Dist. No. 12, 112 Wn.2d 1, 771 P.2d 701 (1989).

            These principles dictate that for charter counties, charter cities, code cities, and municipal corporations in the exercise of property functions, express statutory authority to self-fund  [[Orig. Op. Page 3]] employee health and welfare benefits is likely not necessary.  Rather, such entities may self-fund employee health benefits, so long as doing so does not contravene any state statute or constitutional provision, and self-funding employee health benefits is consistent with the statutory purposes of the entity.

            We have located no statute and are familiar with no constitutional provision expressly prohibiting local governments from self-funding employee health and welfare benefits.  In light of the fact that employee health and welfare benefits are commonly part of compensation packages for governmental employees, we similarly have no reason to believe that self-funding such benefits would be inconsistent with the statutory purposes of such entities.  Nor have we discovered any statute from which it would be appropriate to imply a prohibition against self-funding employee health and welfare benefits by charter counties, charter cities, code cities, or municipal corporations in the exercise of proprietary functions.

            We note, however, that the Legislature has enacted one statute that deals generally with health and welfare benefits of local government employees.  RCW 41.04.180 provides in part:

            Any county, municipality, or other political subdivision of the state acting through its principal supervising official or governing body may, whenever funds shall be available for that purpose provide for all or a part of hospitalization and medical aid for its employees and their dependents through contracts with regularly constituted insurance carriers or with health care service contractors as defined in chapter 48.44 RCW or self-insurers as provided for in chapter 48.52 RCW, for group hospitalization and medical aid policies or plans:  Provided, That any county, municipality, or other political subdivision of the state acting through its principal supervising official or governing body shall provide the employees thereof a choice of policies or plans through contracts with not less than two regularly constituted insurance carriers or health care service contractors or other health care plans, including but not limited to, trusts of self-insurance as provided for in chapter 48.52 RCW . . . .

            RCW 41.04.180 does three basic things.  First, it empowers‑-but does not require‑-local governments to provide hospitalization and medical aid to their employees.  Second, it specifies that when a local government contracts for such benefits, it must contract with regularly constituted insurance carriers, health care service contractors or self-insurers under chapter 48.52  [[Orig. Op. Page 4]] RCW.2/

            Third, it requires that when such contracts are made, employees be given a choice of policies or plans.

            After RCW 41.04.180 was enacted in 1963, we issued several opinions interpreting the law.  The opinions consistently concluded that local governments must comply with the provisions of the statute when contracting for hospitalization and medical aid benefits for their employees.

            In our first opinion, AGO 63-64 No. 45, we were asked whether a water district could provide hospitalization and medical aid benefits to commissioners of the district.  The 1963 version of RCW 41.04.180 limited benefits to employees and their dependents and did not include elected officers.  For this reason, AGO 63-64 No. 45 concluded that water districts did not have the authority to contract for benefits for district commissioners.  The Legislature amended RCW 41.04.180 in 1965 to permit counties to provide benefits to their elected officials and dependents on the same basis as county employees and their dependents.  Laws of 1965, ch. 57, § 1, p. 1191.

            In AGO 63-64 No. 122, we were asked whether RCW 41.04.180 authorized a school district to contract for and make premium payments toward the purchase of disability insurance under a franchise plan in addition to contracting for group disability insurance.  We concluded that it did not because RCW 41.04.180 only permitted group insurance.

            More recently, in AGLO 1974 No. 85, we were asked whether a county could make insurance premium payments for its retired employees, other than members of the law enforcement officers' and fire fighters' retirement system.  Since RCW 41.04.180 does not provide for such payments, we answered this question in the negative.

             [[Orig. Op. Page 5]]

            Although RCW 41.04.180 and the Attorney General Opinions, discussed above, might be read to infer that contracting with an insurance intermediary for hospitalization and medical benefits is the sole means by which such benefits can be provided, we believe that such a conclusion would read into the statute an unwarranted restriction on the authority of charter counties, charter cities, code cities, and municipal corporations when engaged in proprietary functions, to exercise their relatively broad authority.3/

             For example, in Utilities System, 112 Wn.2d, the Supreme Court ruled that a public utility district engaged in a proprietary function had the implied authority to indemnify its officers and employees by self-insurance.  The statutes authorized the district to purchase liability insurance for its officers and employees and to under take defense of claims against them.  RCW 54.16.095, .097.  The court stated that "while the authority to self-insure is not expressly granted by statute, it is fairly implied and essential to the declared objectives of the municipal corporation."  112 Wn.2d at 10.

            The Court of Appeals, Division II, reached a similar conclusion interpreting the powers of Code Cities in LaMon v. Westport, 22 Wn. App. 215, 588 P.2d 1205 (1978).  The question was whether the City of Westport had the authority to indemnify its officials and employees for attorneys' fees incurred in defending an action alleging that the official or employee violated the plaintiff's civil rights.  The court said:

                        The City of Westport is organized under the provisions of RCW Title 35A.  The legislative body of such a city has extremely broad powers, including, in fact, all powers it is possible for a city to have under the constitution of this state which are not specifically denied to code cities by law.  By virtue of RCW 35.23.460, the city clearly could purchase insurance to indemnify its employees against the type of expense incurred by the police chief in this case.  No statute prohibits the city from, in effect, self-insuring the same risk.

22 Wn. App. at 217 (footnotes omitted).

             [[Orig. Op. Page 6]]

            In view of the broad powers of charter counties, charter cities, code cities and municipal corporations when engaged in proprietary functions, we conclude that these entities do have the authority to self-fund the health and welfare benefits of their employees.

            We reach the opposite conclusion with respect to local governments other than charter counties, charter cities, code cities, and municipal corporations when exercising proprietary functions.  As noted above, the authority of these entities is limited to that expressly granted by statute or necessarily or fairly implied in or incident to powers expressly granted.  Chemical Bank, 99 Wn.2d at 792.  Moreover, the test for implied powers in this context is legal necessity, rather than practical necessity or convenience.  Hillis Homes, Inc. v. Snohomish Cy., 97 Wn.2d 804, 808, 650 P.2d 193 (1982);Chemical Bank, 99 Wn.2d at 792.

            Thus, authority for these local governments to self-fund health and welfare benefits would have to be based on an express statutory grant4/

            or a determination that such authority is implied as a matter of legal necessity.  We have little doubt that in this day and age, in the absence of express statutory authority, a court would find implied authority for local governments to compensate their employees and to do so in a form that could include health and welfare benefits.

            We do not believe, however, that authority to underwrite an unknown risk or to undertake the imprecise financial obligation inherent in self-funding such benefits would be further implied.5/

            Indeed, it would seem particularly unlikely that such additional authority properly would be implied where, as  [[Orig. Op. Page 7]] here, such local governments have available to them the avenue of contracting for such benefits under RCW 41.04.180.

            We trust that the foregoing will be of assistance to you.

Very truly yours,

KENNETH O. EIKENBERRY
Attorney General

WILLIAM B. COLLINS
Assistant Attorney General