High court right in ruling against pension-fund windfall

THE ISSUE The Hawaii Supreme Court ruled that a law allowing diversion of employer contributions to the state pension fund was unconstitutional.

THE state and its four counties have survived a class-action lawsuit stemming from the diversion of nearly $347 million from the public employees' pension fund but are on notice to find other ways to get through the next budget downturn. Doing so again could have serious economic repercussions.

The state Supreme Court ruled this week that the Legislature usurped the state Constitution in 1999 when it reduced employer contributions to the 93,000-member Employment Retirement System of public employees and retirees. However, the court ruled members could demonstrate no out-of-pocket damage so the diverted money need not be replaced.

The decision came in a 3-2 vote of the court, although all five justices agreed that the public employees could show no damage to themselves. The majority found that the retirement system was impaired by the diversion, but the system's trustees did not ask for the return of any funds.

The diversions were made retroactively from 1997 through 1999, as the state and counties continued to struggle through that decade's economic slump. The reduced employer contributions to the fund "undermined the retirement system's continuing security and integrity," Justice Simeon Acoba wrote in the court's majority opinion.

Acoba said the justices "recognize that difficulties faced by the Legislature in the midst of a budget crisis are palpable," but the diversions were unconstitutional.

That is anything but clear-cut. The state Constitution states that membership in the pension system at the state or county level "shall be a contractual relationship, the accrued benefits of which shall not be diminished or impaired." However, as Chief Justice Ronald Moon pointed out in the dissent, the contractual relationship is between the employee and the pension system, not between the employee and the state or county.

Moon agreed with legislators that no damage had been done. Rep. Joe Souki, speaker of the House in 1999, said the diverted money was used to pay for retroactive union pay raises without raising taxes or putting retirees at risk.

The retirement system's own actuary concluded by mid-2002 that "the present assets plus future required contributions will be sufficient to provide the benefits specified in the law."

The Employment Retirement System's trustees "do not point to anything in the record to suggest otherwise," Moon wrote. "In other words, the ERS trustees have not shown that accrued benefits have been 'diminished or impaired.'" No harm, no foul.