Transfer of assets and liabilities of pension system upon annexation of a portion of one municipality's territory by another municipality

FIRE PROTECTION DISTRICTS-CITIES-FIREFIGHTERS-PENSION LIABILITIES-MUNICIPAL CORPORATIONS-ANNEXATION-PUBLIC FUNDS- Transfer of assets and liabilities of pension system upon annexation of a portion of one municipality's territory by another municipality

1.         If, through annexation or incorporation, a city acquires more than 60 percent, but less than 100 percent, of the assessed valuation of the real property of a fire protection district, all of the district's assets and a proportionate share of the district's liabilities, pension fund assets and liabilities excepted, are transferred to the city.

2.         If, through annexation or incorporation, a city acquires more than 60 percent, but less than 100 percent, of the assessed valuation of the real property of a fire protection district which has existing liabilities for pension obligations established pursuant to chapter 41.16 or 41.18 RCW, and has funds dedicated for the payment of such obligations, both the liabilities and the assets are retained by the fire protection district.

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                                                               September 2, 1994

HonorableBob McCaslin
State Senator, District 4
105 Institutions Building, MS 40404
Olympia, WA  98504-0404    

                                                                                                            Cite as:  AGO 1994 No. 12

Dear Senator McCaslin:

            By letter previously acknowledged, you have requested an opinion on the following question:

            If, through incorporation or annexation, a city acquires more than 60 percent, but less than 100 percent, of the assessed valuation of the real property of a fire protection district, do any or all of the liabilities of the fire protection district become the legal liabilities of the newly incorporated or annexing city?

            Although your question is directed generally to all of a fire protection district's liabilities, we understand you are specifically concerned about a fire protection district's responsibility for the pension benefits of its retired or active firefighters.  Your concern is that if the district loses through annexation or incorporation at least 60 percent of the assessed valuation of the real property within the district, the district's remaining tax base may be insufficient to fund its pension liabilities.  We will, therefore, answer your question as it relates to a fire protection district's liabilities in general and the district's pension obligations in particular.

                                                               BRIEF ANSWER

            When at least 60 percent, but less than 100 percent, of the valuation of the real estate within a fire protection district is annexed or incorporated into a city or town, a proportionate share of the fire protection district's liabilities equal to the percentage of the total assessed valuation of the real estate within the district that has been annexed or incorporated is transferred to the annexing or incorporating city or town.  RCW 35.02.190.[1]

            However, for reasons outlined below, we conclude a fire protection district's pension obligations under chapters 41.16 and 41.18 RCW, and its obligations under RCW 41.26.150 to pay for the necessary medical services of its active or retired firefighters who are members of the Law Enforcement Officers' and Fire Fighters' Retirement System (LEOFF) Plan I, are not among the liabilities transferred to the annexing or incorporating municipality under RCW 35.02.190.  In addition, the pension fund created pursuant to RCW 41.16.050 is not an asset of the district for purposes of RCW 35.02.190.  The following background information is necessary to explain why we have reached this conclusion.[2]

                                                                BACKGROUND

A.        A Fire Protection District's Liability to its Retired Firefighters for Pensions Payable from the Firemen's Pension Funds Established Prior to March 1, 1970 under Chapters 41.16 and 41.18 RCW.

            Chapter 41.16 RCW (Firemen's Relief and Pension Act of 1947) and chapter 41.18 RCW (Firemen's Relief and Pension Act of 1955) created firemen's pension systems in "municipalities" which, for purposes of the 1955 Act, include fire protection districts having regularly organized full-time paid fire departments.  RCW 41.18.010(13).  In 1955, fire protection districts having full paid fire departments were authorized to establish a firemen's pension fund under RCW 41.16.050 for the payment of various service or disability retirement allowances and death benefits provided under chapters 41.16 and 41.18 RCW.  See RCW 41.16.240.

            The firemen's pension funds created under RCW 41.16.050 are funded, in part, with taxes on fire insurance premiums and an annual tax levy on real property within the district.  RCW 41.16.050, .060.  Each pension fund established by a fire protection district under RCW 41.16.050 is administered by a five-member pension board consisting of the chairman of the district's fire commissioners, the county auditor, county treasurer, and two representatives selected among firefighters employed by the district and retired firefighters subject to the board's jurisdiction.  RCW 41.18.015.  The board, among other responsibilities, has the power to allow or disallow all applications for pension or other benefits payable from the pension fund.[3]  RCW 41.16.040, 41.18.020.

            As of March 1, 1970, the Legislature created a statewide pension system, the Law Enforcement Officers' and Fire Fighters' Retirement System, which covers all full-time firefighters and law enforcement officers employed as such on or after March 1, 1970.  Members of the prior pension systems under chapters 41.16 and 41.18 RCW who were employed as firefighters on March 1, 1970, became members of LEOFF.  However, such members were guaranteed pension benefits at least equal to those they were entitled to as members of the prior pension systems.  RCW 41.26.040(2).  The prior pension funds were retained to fund benefits payable under the prior systems which exceed benefits payable under the LEOFF system.[4]  RCW 41.26.040(3).

            In summary, a fire protection district losing a portion of its real property through annexation or incorporation could be liable for pension benefits payable from a firemen's pension fund established by the district pursuant to RCW 41.16.050.[5]

B.         A Fire Protection District's Liability for the Payment of the Necessary Medical Expenses Incurred by its Active and Retired Firefighters who are Members of LEOFF Plan I.

            Employers of firefighters and law enforcement officers are responsible for the payment of hospital costs and other medical expenses incurred by active employees and retired members of LEOFF Plan I.[6]  The statute creating this obligation is RCW 41.26.150, which reads, in part:

                        (1)        Whenever any active member, or any member hereafter retired . . . requires medical services,the employer shall pay for the active or retired member the necessary medical services not payable from some other source. . . .In the case of active or retired fire fighters the employer may make the payments provided for in this section from the firemen's pension fund established pursuant to RCW 41.16.050 where the fund had been established prior to March 1, 1970.  If this pension fund is depleted, the employer shall have the obligation to pay all benefits payable under chapters 41.16 and 41.18 RCW.

(Emphasis added.)

            The obligation extends for the life of the LEOFF Plan I member and covers a broad range of medical services. RCW 41.26.030(22).  Local disability boards, at their discretion, designate which medical services are to be paid by the employer.  RCW 41.26.150(1)(b).  RCW 41.26.150(1) authorizes employers to use the firemen's pension funds created under RCW 41.16.050 for this purpose.[7]

            Thus, a fire protection district, as an employer of firefighters who are active or retired members of LEOFF Plan I, may have an ongoing obligation to pay the above-described medical services.  Thus, the following analysis assumes a district losing a portion of its real property through incorporation or annexation is potentially liable for such medical services under RCW 41.26.150.

                                                                    ANALYSIS

            At the outset, we note that there is no plain statutory language directly answering your question, so that analyzing it becomes an exercise in divining the intent of the Legislature by reading together a number of different provisions which were enacted at different times over the years.  Given the current state of the law, we believe our answer is the best possible consistent with apparent legislative intent and traditional guidelines for statutory interpretation.  However, this is an area in which the Legislature could provide clearer guidance by amending the annexation statutes (RCW 35.02, 35.13), or the pension statutes (RCW 41.16, 41.18, 41.40).

            With this qualification in mind, we begin our analysis by citing the general rule that it is within the power of the Legislature, in changing the boundaries of counties or municipal corporations, or in annexing one to the another, to provide how the property of the former corporations, and the burden of paying their debts, shall be distributed among them.  56 Am. Jur. 2dMunicipal Corporations § 95 (1971).  It has also been stated that:

                        In the absence of statute, it is the rule that the part of a municipal or quasi-municipal corporation which remains after parts have been detached retains all its property, powers, rights and privileges, and remains subject to all its obligations and duties.  Thus where a part of the territory of a town is detached and annexed to another town or created into a new town, the old town, not being dissolved, retains all its franchises and property and remains liable for all debts existing at the time such territory is detached, and none of such debts become a charge against the town to which the territory is annexed or against the new town created, unless specially provided in the statute or ordinance making the change.

2 E. McQuillin, Municipal Corporations § 7.47 (3d ed. 1983).

            In Washington, RCW 35.02.190 governs the allocation of a fire protection district's assets and liabilities when a district loses a portion of its real property through annexation or incorporation.  RCW 35.02.190 reads, in part:

                        Ifa portion of a fire protection district including at least sixty percent of the assessed valuation of the real property of the district is annexed to or incorporated into a city or town, ownership of all of the assets of the district shall be vested in the city or town . . . .When at least sixty percent, but less than one hundred percent, valuation of the real estate of a district is annexed to or incorporated into a city or town, a proportionate share of the liabilities of the district at the time of such annexation or incorporation, equal to the percentage of the total assessed valuation of the real estate of the district that has been annexed or incorporated, shall be transferred to the annexing or incorporating city or town.

                        Ifall of a fire protection district is included in an area that incorporates as a city or town or is annexed to a city or town or fire protection district,all of the assets and liabilities of the fire protection district shall be transferred to the newly incorporated city or town on the date on which the fire protection district ceases to provide fire protection services pursuant to RCW 52.04.161 or to the city or town or fire protection district upon the annexation.

(Emphasis added.)

            According to RCW 35.02.190, all of a fire protection district's assets anda proportionate share of its liabilities are transferred to the annexing or incorporating city or town when at least 60 percent, but less than all, of the district's real property is annexed or incorporated.  When the annexation or incorporation includes all of a fire protection district,all of the district's assets and liabilities are transferred to the annexing or incorporating city or town.

            RCW 35.02.190 essentially resolves your question as to the transfer of assets and liabilities of a fire protection district in general.  However, it is not so clear whether the pension fund itself, or the liabilities payable from the fund, are among the assets transferred or the liabilities apportioned pursuant to RCW 35.02.190.

            We must first determine whether annexation or incorporation of at least 60 percent, but less than all, of the assessed valuation of a fire district's real property affects a retiree's or active employee's entitlement to the medical and pension benefits outlined above.  Pertinent to this question is RCW 41.16.250, which provides, in part:

                        If all or any portion of a fire protection district is annexed to or incorporated into a city or town, or is succeeded by a metropolitan municipal corporation or county fire department, no full time paid fireman affected by such annexation, incorporation or succession shall receive a reduction in his retirement and job security rights[.]

            Although RCW 41.26.250 does not apply expressly to retired firefighters, we think it should be so construed.  This interpretation would be consistent with the principle that the annexation or incorporation or territory must not impair vested rights or the obligation of contracts.  2 E. McQuillin,Municipal Corporations § 7.46.40 (3d ed. 1983).  In Washington, the courts have adopted the vested rights theory of pensions, which holds that an employee acquires a vested right to a pension commencing from the employee's first day of employment.  SeeBakenhus v. Seattle, 48 Wn.2d 695, 701-02, 296 P.2d 536 (1956) (an employee has a vested contractual right to pension benefits).  Since theBakenhus line of cases is quite clear and our courts have followed it consistently, we believe that the courts of this state would (1) choose an interpretation of Washington statutes which would avoid impairing pension benefits, to the extent they had any choice in the matter; and (2) possibly invalidate as unconstitutional any statute clearly impairing such pension benefits.  Given this case law, and also given the Legislature's policy of protecting the benefits of retired public employees, we avoid interpreting the annexation statutes to result in leaving neither the annexing city nor the fire protection district liable for the benefits.  We therefore conclude that paying the benefits must either remain with the fire district or move to the annexing or incorporating city or town.

            We now turn to the question of whether a chapter 41.16 RCW pension fund is an asset of the district transferred to the annexing city or town.  If the answer is yes, the entire pension fund presumably would be transferred to the annexing or incorporating city or town.  Although the meaning of "asset" may be broad enough to include a pension fund, we do not believe this conclusion reasonable in light of existing statutes.

            Under the rule set forth in RCW 35.02.190, all of a fire protection district's assets, and a proportionate share of its liabilities, are transferred to the annexing or incorporating city or town.  If we were to conclude the pension fund as an asset of the district, the entire pension fund would transfer to the annexing or incorporating city or town.  In that event, the responsibility for paying the fund's liabilities should likewise transfer because the fund was established for that purpose.   However, RCW 34.02.190 provides for the apportionment of the district's liabilities.  If the district's liabilities for the pension and medical benefits outlined above were apportioned, a share of such liabilities would transfer to the annexing city or town and the balance of the liabilities would remain with the district.  Because the pension fund would not be apportioned between the district and the acquiring city or town, the district would lose the source of funds established to pay such liabilities.  In our opinion, the present statutory scheme does not support this result.

            We first note that administration of the pension fund is statutorily linked to county rather than municipal government.  The county auditor and county treasurer sit on the pension board.  The county treasurer of the county in which the fire protection district is located has the duty to receive and disburse to the proper fund the revenues the district receives from taxes and assessments.  RCW 52.16.010.  There is no statute providing for the transfer of these administrative functions, or the jurisdiction for authorizing payment from the funds, from officials of the fire protection district to the annexing or incorporating city or town.  Nor do we know whether in all cases the annexing or incorporating city or town will have established a pension board under chapter 41.16 RCW able to assume this responsibility.  The absence of a statute providing for the transfer of the duties of administering a firemen's pension fund from one pension board to another suggests the Legislature did not intend that annexation or incorporation of a portion of a fire district would result in the transfer of a firemen's pension fund to the acquiring city or town.

            Second, we question whether the pension fund can be considered an "asset" of the district.  The Attorney General has previously concluded the revenues placed in a municipal firemen's pension fund cannot be used for any purpose other than paying the pension and medical benefits described above.  AGO 1971 No. 16, at 6.  The Attorney General has also opined there is no statutory authority to transfer monies in the pension fund to the district's current expense fund.  AGLO 1981 No. 7, at 6.  Thus, monies in the pension fund are held in trust for the fund beneficiaries and thus cannot be diverted to satisfy the general obligations of the district.

            We have been unable to locate any Washington cases dealing with the transfer of trust funds upon annexation or incorporation of all or a portion of one municipality by another.  However, other jurisdictions have held that statutes providing for apportionment of assets upon annexation or incorporation do not apply to funds held in trust by the original municipality for a special purpose.  See, e.g.,City of Lansing v. Township of Lansing, 356 Mich. 641, 97 N.W.2d 804 (1959);Village of Bayside v. Town of Milwaukee, 267 Wis. 448, 66 N.W.2d 129 (1954); Royal Oak v. Ferndale, 309 Mich. 458, 15 N.W.2d 707 (1944).  In these cases, the courts found that trust property held for the benefit of trust beneficiaries is not owned by the municipality itself.  Therefore, because the trust property was not an asset of the municipality being annexed or incorporated, the courts held the statutes governing apportionment or transfer of assets did not apply.  In the absence of a statute to the contrary, we believe it is reasonable to apply the reasoning of these cases to a firemen's pension fund.  We therefore conclude that a pension fund is not an asset of a fire protection district for purposes of RCW 35.02.190.

            We believe it follows that a fire protection district's obligations for pension and medical benefits are not apportionable liabilities under RCW 35.02.190.  Two statutes support this conclusion.  The first is the last sentence of RCW 41.26.150(1), which reads:  "If this pension fund [established pursuant to RCW 41.16.050] is depleted, the employer shall have the obligation to pay all benefits payable under chapters 41.16 and 41.18 RCW."  The second is RCW 41.16.250, which provides that no full-time paid fireman affected by a fire protection district's annexation, incorporation, or succession, shall receive a reduction in his retirement rights.  These statutes, read together, suggest the original employer remains liable for the pension and medical benefits described in this opinion.  We therefore conclude such liabilities remain with the district upon annexation or incorporation of at least 60 percent, but less than all, of the district's real property.

            Although it is possible this conclusion might result in a financial hardship for a fire protection district losing a substantial portion of its tax base, the existing statutory scheme does not address this situation.  Such matters are appropriately resolved by the Legislature.

            In summary, RCW 35.02.190 provides for the transfer of a proportionate share of a fire district's liabilities when at least 60 percent, but less than all, of a district is annexed or incorporated into a city or town.  However, we conclude the firemen's pension fund and the liabilities payable from the fund are not subject to transfer or apportionment under RCW 35.02.190.        

            We trust this opinion will be of assistance to you.

                                                                        Very truly yours,

                                                                        ALICE M. BLADO
                                                                        Assistant Attorney General

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