Lawsuit to test raid of state pension fund

By John Duchemin
Advertiser Staff Writer

In 1982, as the California government struggled to balance its budget, lawmakers proposed a handy way to generate hundreds of millions of dollars: Raid the state employees' pension fund.

California legislators voted to halt the monthly payments to the state's multibillion-dollar Public Employees Retirement System, a move that would let them use the money for government expenses. Several California retirees successfully sued the state, claiming lawmakers were illegally weakening the pension fund. The government was forced to find another way to make ends meet.

The landmark 1983 case will serve as a key precedent in a $350 million lawsuit filed April 23 against the Hawai'i state government. The police union and several co-plaintiffs claim the state violated pensioners' constitutional rights in the late 1990s by cutting contributions to the $8.4 billion State of Hawai'i Employees Retirement System.

The lawsuit is the first of its kind in Hawai'i, where the Legislature routinely has cut contributions to the pension fund to balance the state budget. But lawyers for the State of Hawai'i Organization of Police Officers claim in their suit that the practice is illegal — and have amassed a formidable stack of cases from other states to back up their argument.

"We believe there's a great weight of case law out there, in the great majority of jurisdictions, finding in favor of protecting the employees' rights," said Peter Gruenstein, the Hawai'i plaintiffs' lead lawyer. The plaintiffs demand that the state return the $346.9 million in contributions that lawmakers withheld in the late 1990s.

Pensioners often win

For decades, pensioners in other states have fought governments over the disposition of pension funds, which some lawmakers have treated as cash cows to be milked in times of fiscal crisis. State courts often have ruled in their favor.

"Multibillion-dollar funds can look like a golden pot of money when you're under pressure to make ends meet," said Brad Pacheco, spokesman for the $150 billion California Public Employees' Retirement System, which has fended off repeated attempts by politicians to limit contributions or drain the fund's cash reserves.

Gruenstein has been through similar cases in Alaska, his home base. In the 1990s he represented city employees in Anchorage, whose pension funds by 1994 had built a $35 million surplus. The city government wanted to take the surplus, but the employees and the pension fund sued, arguing the city had no right to take money intended for retirees.

The Alaska Supreme Court eventually ruled that public employees had a constitutional right to "actuarial soundness" in their pension fund. Removal of the surplus would harm the fund's ability to weather hard times, and was therefore illegal, the court decided.

The case ended in 1999 with a settlement favorable to the 810 city employees and retirees: They would get to split $56 million in surplus that the city agreed to return to the fund.

For some pensioners, the deal brought more than $105,000 in added benefits.

Such a lucrative settlement is impossible in Hawai'i, where the ERS is operating at an actuarial deficit. Rather than a surplus, ERS has less in the till than it owes to its 93,000 pensioners. The Hawai'i government's withholding of contributions between 1999 and 2001 only served to weaken ERS finances further: pension fund assets dropped by $1.5 billion from their peak in 2000.

Still, Gruenstein said the legal issues are similar — Hawai'i plaintiffs, like those in Alaska, are claiming the government can't take money intended for pensioners.

"That's exactly the issue we were litigating in Alaska," he said. "The only difference is in that case we were really deciding who won the lottery. It's more serious in this situation, where the very integrity of the system is at stake."

Withholding legal

Hawai'i government officials have argued that the pension fund exists at the whim of lawmakers. The government has a legal obligation to pay public employees' pensions, but it also has considerable leeway in deciding how much money to put into the fund in any given year, officials say.

The state was therefore justified in withholding money from the pension fund in the late 1990s, despite the objections of retirees, ERS board members and financial consultants, said Sen. Colleen Hanabusa, D-21st (Barbers Point, Makaha), in an interview last month.

"If retirees haven't gotten their benefits because of an act of the Legislature, that would be something else ... but as far as I know, all retirement benefits have been paid," Hanabusa said. "The bottom line is we can always sell assets or raise taxes to fund it (ERS) if it ever became necessary, but I don't see that happening at any time."

Hanabusa did not return calls seeking further comment.

The administration of Gov. Ben Cayetano, tasked with defending the state in the lawsuit, has not received an official summons from the First Circuit Court of Hawai'i and is refraining from comment, said spokeswoman Jackie Kito.

Legal precedent

Hanabusa's position resembles the arguments of lawmakers in other key cases in Washington, California, and New York, in which courts ruled that governments could not manipulate public employees' pension funds in a way that makes them financially unstable.

The Hawai'i plaintiffs will rely on these cases:

• In 1972, the Washington State Supreme Court found that the governor violated the Contracts Clause of the U.S. Constitution when he tried to withhold government contributions to the retirement system.
• In 1993, the New York Court of Appeals ruled that lawmakers violated the state constitution by trying to change the way government pension fund contributions were calculated. The new method would have been less expensive for New York, but would have damaged the pension system's fundamental soundness, the judges ruled.
• In 1997, the California Court of Appeals ruled that Gov. Pete Wilson could not delay payments to the pension system to balance the budget, because it violated the state employees' "contractual right to an actuarially sound retirement system."

No guarantees

Not all cases have gone the way of pensioners. Judges in more conservative jurisdictions have ruled that public employees' right to a pension does not necessarily extend to the pension fund.

"Some states have held that pensions are a gratuity, not a contract, and therefore there's no violation when the contributions are withheld," said Tom Harris, general counsel for the State Employees' Association of North Carolina, which last year sued its state government to prevent a $150 million diversion from the retirement fund.

A North Carolina judge dismissed the lawsuit, but the union has appealed.

Gruenstein said Hawai'i courts are more likely to follow the examples set in Pacific states, where constitutions are newer and pensioners' rights are more specifically protected. Alaska and Hawai'i, the two newest states, often look to each other on issues of law, and California is frequently a model state for legal precedents, he said.

In any case, Gruenstein said, Hawai'i is probably in for a years-long legal battle that, if the plaintiffs win, could have astounding implications for the government's budget — much like the federal Felix vs. Cayetano ruling, which is forcing the state to spend hundreds of millions of dollars to beef up education for students with disabilities. The $350 million that plaintiffs want returned to the pension fund would pay for one-tenth of the state's general fund budget in 2003.

Advertiser capitol bureau reporter Lynda Arakawa contributed to this report.