Who Owns Public Pension Fund Assets? New York Supreme Court Ruling

By Johnson, Lawrence E.; Lantry, Terry L. et al. | Government Finance Review, June 1993 | Go to article overview
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Who Owns Public Pension Fund Assets? New York Supreme Court Ruling

Johnson, Lawrence E., Lantry, Terry L., Parrish, Barbara K., Government Finance Review

Pension funds of public employees have become increasingly visible in recent years with memberships currently estimated at more than 15 million people. These funds provide retirement benefits for state and local government workers, school teachers, college professors, police officers, firefighters and judges, among others. The importance of public pension funds for their members' financial security in retirement cannot be understated. In most states, the public pension is a supplement to Social Security; however, because of the uncertainty attached to the Social Security system, public employees have become more reliant, psychologically if not in fact financially, upon their retirement income from public pension funds.

In those states where public employees do not pay into the Social Security system, the dependency on public pension funds is even more acute. For public employees everywhere who are concerned about the financial integrity of their pension system, any threat to pension funds is unacceptable. Despite the fact that nearly all pension plans are established as trusts for the sole benefit of their members, pension funds recently have begun to feel the effects of economic hard times, as governmental officials search for innovative ways to balance the budget.

At the extreme, pension plans have been viewed as providing governmental financial resources rather than requiring them. A case in point is in California. In 1991, the governor, with the acquiescence of the state legislature, used part of the state's public pension fund to help close a budget gap. To aid in the state's budget problem, the governor used $1.9 billion from the California Public Employees Retirement System (CALPERS) special trust fund. These monies, which were already in the system, were applied to pay a required employer contribution to the general trust fund. Moreover, an attempt was made to abolish CALPERS' 13-member autonomous board and replace it with a nine-member board under the control of the governor. This effort failed, but the governor obtained the right to appoint his own actuary for the fund.

Opposition to these actions led to passage of Proposition 162, "The California Pension Protection Act of 1992," in California's November 1992 general election. Proposition 162 vests exclusive authority over investment decisions and administration of CALPERS with its elected board of administration and prohibits reconstitution of that board without voter approval. As a result of Proposition 162, the operations of CALPERS are now insulated from the influences of the executive and legislative branches of California state government.

The New York Court Case

Another way in which state and local governments have diverted money from pension funds has been by reducing employer contributions, either temporarily or permanently. A precedent-setting decision in a consolidation of three cases(1) (the subject of this article) involved a constitutional challenge by parties interested in New York State's Common Retirement Fund (CRF) to prevent the New York legislature from reducing contributions to the CRF. Specifically, the plaintiffs successfully challenged the state legislature's attempt to change from the aggregate cost method (AC) to the projected unit credit method (PUC) as the actuarial funding method used to determine the annual contributions to be made by New York public employers to the CRF.

The individual plaintiffs were 1) working and retired members of the New York State and Local Retirement System and the New York State and Local Police and Fire Retirement System and 2) officers of the major unions representing public employees. The defendants were the Comptroller of the State of New York, who serves as trustee of the CRF; the New York State and Local Retirement System; and the New York State and Local Police and Fire Retirement System.

The Facts. Prior to July 1, 1940, state and municipal employees participating in the various retirement systems had found their benefits and funding to be at the mercy of legislatures, both state and local, with the guarantee of benefits occurring only at the time of actual retirement; only at retirement did a contractual relationship between the retiree and the former employer come into being.

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Who Owns Public Pension Fund Assets? New York Supreme Court Ruling


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