2007-07-23_George_Kahoohanohano_et_al_v._State_of_Hawaii_et_al_-_Opinion_of_the_court_by_Justice_Acoba

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Kaho'ohanohano v. State Page 28 of 46 Trustees also rely on McDermott v. Regan, 624 N.E.2d 985 (N.Y. App. 1993). In that case, a newly enacted statute changed the funding method for several government pension funds. Id. at 986. The fund at issue had been accumulated through an aggregate cost method which resulted in funding some benefits before they actually accrued. Id. at 987. The new legislation, on the other hand, adopted a projected unit credit method which required that benefits need only be funded once they were "accrued." Id. The result of this change would be that "the contributions that have [already] been put into the [fund] exceed benefits actually accrued and become a so-called surplus which [was] returned to the governmental entity making the annual contribution." Id. This allowed governmental entities to pay reduced contributions for a number of years as a way of dealing with the budget crises being experienced in New York State. Id. The New York court concluded that the legislation allowing the reduction of employer contributions violated the state constitution because it impaired the security of the pension fund and divested the funds' trustee of discretion in choosing appropriate funding methods. Said legislation allows employers to deplete moneys in the existing pension fund by reducing the amount of employer contributions. Employers are allowed a credit of a portion of the existing moneys,and need not contribute to the pension until the reserved moneys are drastically reduced. To later replenish the fund,employers and employees must increase their contributions to the pension fund. As such,the reserve moneys will not be available for immediate investment,the return on investment of the moneys in the existing fund will be significantly decreased,and the additional security provided by the reserve moneys in the pension funds will be impaired. Id. at 989-90 (emphasis added). In concluding that the legislation violated the non-impairment clause, it was said that, to the extent that "the Legislature maintains some independent authority regarding the fund . . . [,] concomitant with that authority is the State's duty to act in a manner consistent with the goal of the 'protection' of these funds as required by article V, § 7 of New York's Constitution. The State must show like any other trustee or fiduciary, that it has not breached that duty." Id. at 989. It was uncontroverted that "the only factor the Legislature considered when it chose to alter the funding method was that of the fiscal crisis facing the state." Id. Significantly, the New York court found the legislation unconstitutional despite the New York System's projected actuarial soundness. Id. at 987. Further, as the New York court reiterated in McCall v. State, 219 A.D.2d 136, 142 (N.Y. App. Div. 1996), implicit in New York's constitutional pension provision providing that "pension benefits shall not be impaired[,]" is a protection of the "funds from which these benefits are drawn[.]" Id. McCall examined a statute which, inter alia, "grant[ed] State and municipal employers a credit to be assessed against the [Supplemental Reserve Fund (SRF)], equal to the amount of the contributions they would otherwise have had to make[.]" Id. at 139 (emphasis added). The New York appellate court determined that although the SRF was, arguably, "a separate fund" and not used to pay employee benefits, it was "indisputably an asset of the retirement system[,]" and was subject to the power of the trustee "to hold, manage and invest the assets contained therein for the benefit of the members and beneficiaries of the retirement systems, and for the protection of the taxpayers." Id. at 140 (citations omitted). That court stated that pension beneficiaries are entitled to protection of the benefit funds and the independent judgment of the benefit manager to "maintain[ ] the security of the sources of the benefits." [I]mplicit in the Constitution's assurance that pension benefits shall not be impaired,that the funds from which whose benefits are drawn are to be protected,and that pension beneficiaries are entitled to the independent judgment of the Comptroller in managing the systems'assets,as a"safeguard integral to the scheme of maintaining the security of the sources of the benefits." Id. at 140 (quoting Sgaglione, 337 N.E.2d at 594). Further, that court said that "an infringement such as that occasioned [by legislation at issue] is constitutionally impermissible." Id. (citing McDermott, 624 N.E.2d 985). B. As Trustees maintain, Act 100 similarly "violates the non-impairment clause of the Hawaii Constitution." By retroactively applying the ERS' excess earnings as a credit to employer contributions, Act 100 depleted the protected funds of the ERS and interfered with Trustees' ability to invest those funds. As Trustees argue, they were "entitled to manage one hundred percent of the ERS investment earnings from 1997 on" and "[t]he passage of Act 100 changed the commitments reflected in Act 327, which retroactively denied [T]rustees use of investment earnings, minimized http://www.state.hi.us/jud/opinions/sct/2007/26178.htm 8/12/2008