State wins ERS suit

A judge ruled the Legislature was
within its rights to divert $346.9 million
in contributions from the fund

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By Dave Segal
dsegal@starbulletin.com

A state Circuit Court judge ruled this morning that the state was within its rights when it diverted $346.9 million in contributions from Hawaii's Employees' Retirement System.

Judge Gary Chang said in a summary judgment that although concern was voiced by the 1950 constitutional framers, there was no specific language guaranteeing ERS pensioners the right to an actuarial sound retirement system.

"This court is still of the mind that the phrase 'accrued benefits' refers to that bundle of benefits to which an employee is entitled to enjoy upon retirement and also includes the vested benefits that accrued during the employee's period of employment," Chang said. "I believe that there has been an insufficient showing that the constitutional convention of 1950 intended to restrict the state's power and flexibility to enact future legislation as long as it did not diminish or impair those benefits. The phrase 'accrued benefits' does not include the right of the members to an actuarial sound retirement system."

The plaintiffs, represented by the State of Hawaii Organization of Police Officers and the ERS, said they would appeal the decision.

Act 100, which took effect June 30, 1999, permitted the state to use all of ERS' investment earnings over 10 percent to reduce state and county employer contributions over a two-year period. Act 100 was enacted at a time when the stock market was near its peak and the state was trying to make up a budget shortfall. The plaintiffs had argued that there was no provision for the state to make up any shortfalls, or "valleys."

However, attorney Archie Ikehara, who was representing the state, said legislation passed in 2002 extended an amortization period for the state to make up shortfalls in the pension fund.

"That's what we found in the statutes, and every five years the (ERS) actuary will report on whether there should be any changes in any of the assumptions," Ikehara said. "I think what he did was look at the constitutional provision and construed it correctly in terms of what it stated and as far as what the plaintiffs wanted in terms of a statute covering funding matters."

SHOPO attorney Peter Gruenstein said that the constitutional framers guaranteed all the public employees in Hawaii the right to have a pension based on sound actuarial principles and that he thought that sentiment was clearly reflected in the constitutional debates and case law from other jurisdictions.

"Of course, we have a different view than Judge Chang does and everyone recognizes the Supreme Court will be asked to make a final judgment on it," Gruenstein said. "But I was very impressed with Judge Chang's attention and the time and effort he spent on it. The Supreme Court will, of course, determine the constitutionality of the provision of Act 100 and will be the final word on this."

About a year after Act 100 passed, the stock market and the pension fund's assets began tumbling.

The ERS fund, which had $9.7 billion in assets at the end of the fiscal year that ended June 30, 1999, peaked at $9.9 billion at the end of fiscal 2000. Then it fell to $8.8 billion in 2001, and $7.9 billion in 2002, leaving it 16 percent underfunded, according to ERS' actuary. The fund's assets dropped further to $7.1 billion as of Sept. 30, 2002 but rebounded slightly last quarter to $7.3 billion.

The class-action suit was filed in April 2002 when retired Maui police Capt. George Kaho'ohanohano, Honolulu police Detective Loren Andrade and SHOPO claimed that legislators violated pensioners' constitutional rights to a financially sound retirement system by diverting funds from 1999 through 2001 from the pension fund. The defendants asked that Act 100 be declared unconstitutional and that $346.9 million be restored to the fund. The ERS subsequently intervened in the suit in November but only requested that the court rule on the constitutionality. The ERS did not request that any funds be returned.

The state was subsequently joined as defendants by the City and County of Honolulu and the counties of Hawaii, Maui and Kauai.

The ERS fund provides retirement, disability and survivor benefits for 96,000 city, county and state employees, retirees and their beneficiaries.