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The Honolulu Advertiser
Posted on: Friday, November 15, 2002

ERS joins pension fund lawsuit against state

By John Duchemin
Advertiser Staff Writer

The State of Hawaii Employees' Retirement System has joined a lawsuit against the state government that seeks to recover $350 million that lawmakers diverted from the pension fund in the late 1990s.

ERS said the state illegally skimmed the money from its $7 billion fund, which supports the retirement benefits of more than 90,000 current and retired state beneficiaries.

In diverting the money, the ERS said, the Legislature endangered the fund's fiscal soundness. In its motion to intervene in the lawsuit, ERS is asking the court to ban future "legislative skimming."

But in a significant difference of opinion with the original plaintiffs — the State of Hawaii Organization of Police Officers — ERS does not seek the return of the $350 million taken from ERS profits in the late 1990s that was used to help balance the state budget.

"Simply ordering the money back into the system will not necessarily ensure that something similar couldn't happen in the future," said James E. Duffy Jr., the Ho-nolulu lawyer representing ERS. "The trustees feel the court should establish standards for future contributions to assure stability and actuarial soundness of the system."

The motion is the first indication of the state retirement system's stance on the issue since the police union filed its suit in April. 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. But ERS officials said they have been reviewing the police union's suit and have not made a public comment.

Officials at the state attorney general's office did not return calls requesting comment yesterday afternoon.

Lawyers at Matsui Chung Sumida & Tsuchiyama, the Honolulu law firm representing the state in the case, also did not return calls requesting comment.

Lawyers for the police union said yesterday they are pleased by the ERS' intervention on their behalf, saying the fund's presence adds clout to their cause.

"Having ERS' support is certainly a positive development," said Peter Gruenstein, the Alaska-based lead attorney for the police union. "A consensus is slowly building that raids on the pension fund are wrong, and that there's a legal basis to say so."

The intervention filed by ERS now pits the pension fund against state officials who have a heavy influence on ERS policy.

The state appoints four of the eight voting members of the ERS board of trustees, and state budget director Neil Miyahira sits on the board as an ex-officio member.

The lawsuit has widespread fiscal implications in that it demands the government return $350 million — enough to pay for one-tenth of the state's annual general fund budget — that the Legislature refused to contribute to the pension fund in the late 1990s.

Gruenstein said he hopes ERS will remain a strong advocate of his clients' cause, even though the board has opted not to seek return of the money as part of its filing.

"We think it's important that ERS' support of its members' constitutional rights is not compromised by other considerations," he said.

The lawsuit filed in April by the police union said that the state violated pensioners' constitutional rights by harming the fund's ability to meet its future financial obligations.

That lawsuit 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.

State attorneys have argued lawmakers did nothing wrong, because the fund has still made all current pension payments despite the draining of money.

Both sides, in their defenses, cite legal precedents from other states where similar cases have arisen.

ERS' move to support the police union comes after a Tuesday board meeting in which pension fund trustees voted in favor of the intervention after an hours-long meeting in closed executive session with police union representatives.

It also comes one month after the City and County of Honolulu intervened on behalf of the state government, which is the principal defendant in the case.

The Honolulu government echoed state attorneys' arguments that lawmakers using ERS profits to help balance the budget was not illegal.

Lawyers for the city and county also want Hawai'i's other counties to be called into the lawsuit.

A First Circuit Court hearing is set for this afternoon on a motion by the city to bring the Maui, Kaua'i and Hawai'i county governments into the case.

Also looming in the lawsuit are several crucial decisions.

On Nov. 26, the court is set to hear arguments on the police union's motion to make the lawsuit a class action. Two plaintiffs' motions for summary judgment — a pre-trial ruling in their favor — are set for February. A state motion to dismiss the lawsuit is also set for February.

Gruenstein said yesterday he remains hopeful for a favorable outcome. He said he anticipates Gov.-elect Linda Lingle, who takes office Dec. 2, to be more sympathetic to the police union than Cayetano, who supported the Legislature's 1998 vote to drain pension funds. A key Lingle endorsement came from SHOPO.

"It's quite conceivable that the state will consider a different position when she becomes governor," Gruenstein said.

Lingle, on the Mainland for a meeting of the National Governors' Association, could not be reached for comment last night.

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