A law that allowed the Legislature to divert nearly $350 million from the state pension fund in the 1990s violated the state constitution, the Hawai'i Supreme Court ruled yesterday.

Although the decision does not require the state to repay the Employees' Retirement System, the decision prevents any future attempt by lawmakers to divert money from the pension fund, a lawyer involved in the case said.

In the 3-2 decision, the court granted the request by Employees' Retirement System trustees who wanted the law declared unconstitutional.

The Employees' Retirement System, or ERS, has about 100,000 members, consisting of state and county workers and government retirees who receive pension payments from the fund.

The state and counties pay hundreds of millions of dollars annually to the ERS, which uses outside advisers to invest the funds.

The pension fund has more than $11 billion of assets. The retirement plan has never missed payments to retirees in its decades-long history.

But the trustees and others say the fund could be more solidly funded if the state and county governments had fully paid what they were supposed to give the pension plan during the late 1990s. Government officials held off paying their full contribution into the fund during some lean budget years, noting that strong returns the fund was enjoying from its investments offset what they owed.

That underfunding was exacerbated by three subsequent sub-par investment years, which combined to give the ERS an unfunded liability of an estimated $5.13 billion.

There is no problem paying retirees' current pensions, but the state and counties have funded only 65 percent of future liabilities.

Legislators have committed to providing funding to cure the unfunded liability problem and refraining from the practice of diverting money owed the ERS.

CHALLENGE UNLIKELY

House Majority Leader Kirk Caldwell, D-24th (Manoa), said the Legislature has been concerned about the health of the retirement system and that it's unlikely lawmakers would seek to counter the high court's ruling by putting a constitutional amendment question on the ballot.

"There's a sense at the Legislature that they don't want to continue to take money out of that fund and instead they really believe it's good business practice to allow that fund to grow," Caldwell said. He said lawmakers have been looking at ways to bring the retirement system to a point where it's fully funded, such as changing how payments are made to the system and resisting an attempt to use some of the fund for "high-risk technology-based ventures."

While declaring the diversion of funds unconstitutional, the court did not require the state to repay the $350 million.

"It's a Pyrrhic victory," said Honolulu attorney Mark Davis, who represented retirees who sued.

Davis said his clients first filed the challenge and the ERS trustees later joined in the case. He said the court's reasoning followed the arguments submitted by the retirees.

"We certainly won on the merits of the case, but regret the state has been relieved from the obligation to right the wrong they did in 1999."

The court's ruling prohibits the state from future attempts to divert money like they did in 1999, he said.

INITIATED BY SHOPO

The lawsuit was first filed by the police union, the State of Hawai'i Organization of Police Officers. The challenge was later expanded as a class-action lawsuit representing all state retirees and ERS beneficiaries.

The lawsuit alleged that state lawmakers diverted nearly $350 million in profits from the fund to illegally cover budget shortfalls.

In 2003, Circuit Judge Gary Chang threw out the lawsuits by both the retirees and the ERS trustees.

Lawyers for SHOPO had argued that the Legislature ignored the potential effects on the pension fund in violation of protections in the state constitution. But state lawyers contended that state and county governments are only required to pay the retirees' benefits as they become due.

In the 112-page majority opinion written by Associate Justice Simeon Acoba, the court upheld Chang's ruling rejecting the retirees' suit, but overturned Chang's decision on the trustees and sent the case back to the lower court to declare that the 1999 law violates the state constitution.

Acoba was joined by Associate Justice Paula Nakayama and substitute Justice Michael Town.

In a 14-page dissent, Chief Justice Ronald Moon wrote he cannot agree that the ERS trustees established that the law was unconstitutional. He was joined by Associate Justice Steven Levinson.

Reach Ken Kobayashi at kkobayashi@honoluluadvertiser.com.