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The Honolulu Advertiser
Posted on: Wednesday, April 24, 2002

State named in lawsuit for pension fund dispute

By John Duchemin
Advertiser Staff Writer

The Legislature has illegally drained $346.9 million from the state Employees' Retirement System and should be forced to give the money back to the pension fund, according to a class-action lawsuit filed yesterday by the state police union.

The lawsuit by the State of Hawaii Organization of Police Officers on behalf of the 93,000 members of the pension fund also seeks a court injunction to prevent the state from ever again taking money from the fund, as well as additional damages including the lost earnings that would have accrued had ERS invested the money.

The union — along with co-plaintiffs George Kaho'ohanohano, a retired Maui police captain, and police detective Loren Andrade — contends that ERS money belongs to ERS alone and that the Hawai'i Constitution prohibits the state from "raiding" the fund or refusing to pay its required annual contributions.

The Legislature and Gov. Ben Cayetano were therefore breaking the law when they decided to put only $185 million into ERS between 1999 and 2001, instead of the required contribution — as determined by independent financial experts — of $522 million, the lawsuit alleges.

"We want to put a big 'no trespass' sign on ERS — to make it clear that in good times or bad, it's not available," said Peter Gruenstein, lead counsel for the plaintiffs.

Cayetano spokeswoman Kim Murakawa said the governor declined to comment on the lawsuit until state lawyers can review the issues.

The lawsuit comes as legislators struggle to balance the budget, which is faced with a revenue shortfall of $300 million in the next two fiscal years.

The suit also comes as the $8.4 billion ERS, which pays pensions for most state and local government employees, has struggled in recent years as the stock market and economic slump cut into the value of its assets. The ERS has also been hurt by the state's refusal to fully pay for the system in recent years.

Assets dropped from about $10 billion in 2000 to $8.4 billion in December 2001, a decline that ERS officials blame on a combination of increased benefit payments to retirees and the state reneging on its financing requirements.

ERS officials have long opposed government attempts to reduce contributions to the fund, saying that a drop in current payments would endanger state finances in later years.

ERS advisers with Callan Associates, the system's investment advisers, said in a February report that the fund won't keep pace with obligations to retirees unless the government quickly increases its payments. The report estimated that the fund will require as much as $500 million in state contributions each year by 2009 — triple current state financing levels.

ERS administrator David Shimabukuro said ERS has to review the SHOPO lawsuit before taking a position on the issues.

"However, we agree that the issue of adequate funding from the state for the ERS members is of utmost importance," he said.

SHOPO president Tenari Ma'afala said the union is concerned that ERS will be rendered unhealthy if the state continues to take money.

"Every month, every police officer pays 12.2 percent of his or her salary to our pension fund," Ma'afala said. "That pension fund is important to our future and our families' futures. It is simply wrong for the state of Hawai'i to raid the ERS and use its assets for the state's benefit."

But state Sen. Colleen Hanabusa, D-21st (Kalaeloa, Makaha), said yesterday that the state will always keep enough money in ERS to pay retirees' benefits, so pensioners shouldn't be too concerned at the recent skimming from the fund.

Hanabusa, vice president of the Senate and vice chairwoman of Senate Ways and Means Committee, was present when the Legislature decided in 1999 to help balance the budget by significantly limiting contributions to ERS for two fiscal years.

"If you read the constitution ... , it simply says there's an obligation to ensure that we provide these benefits," Hanabusa said. "How we provide these benefits are within the purview of the Legislature. And that's why I'm rather perplexed by this lawsuit.

"We are the state of Hawai'i. We determine how much people will be paid, we determine whether people have collective bargaining rights, we determine the whole gamut. We determine how much goes into ERS.

"If they have not gotten any retirement benefits because of ERS or because of the act of the Legislature, that may be something else. But as far as I know, all retirement benefits have been paid."

Gruenstein, however, said that such arguments ignore the long-term damage to pensioners' well-being that results from skimming ERS money.

"There's lots of law in lots of jurisdictions that runs counter to that argument," Gruenstein said. "Every time you take money out, bonuses like COLA (cost-of-living adjustment) increases are that much less likely."

He said research shows that Hawai'i has drained money from its pension fund more frequently than any other state government — and that the long-term drag on fund assets has created an underfinanced retirement system facing the specter of increasing payments for years to come.

"If you put the money the state has taken out over the years, the system would be overfunded," he said. "Neither the state or employees would have to put money in each year, and the surplus could be used for enhancements (to pensioners' benefits)."

Gruenstein, a specialist in class-action pension cases with the Anchorage, Alaska-based law firm Gruenstein & Hickey, said he recently helped Anchorage police officers win a similar case in which police officers won additional benefits that amounted in some instances to more than $100,000.

SHOPO is also represented by Anchorage lawyer Peter Maassen of Ingaldson Maassen; Will Aitchison of Aitchison & Vick in Portland, Ore.; and Mark Davis and Michael Livingston of the Honolulu law firm Davis Levin Livingston & Grande.

Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.