The New York State Comptroller as sole trustee of the common retirement fund: a constitutional guarantee?

• Author: Bentley, Andria L.
• Position: COMMENTS

1. INTRODUCTION

   In New York State, members of state and municipal pension funds enjoy a constitutionally protected right to their pensions. (1) As a result, if the pension fund were to see a devastating diminution of any kind, taxes statewide could skyrocket to meet this constitutional guarantee, since an ailing fund would need to seek assistance from the state legislature to meet its constitutional obligations. Many of the pension benefits guaranteed by this clause are drawn from the state's Common Retirement Fund (CRF)--a $156 billion fund (2) managed by the state comptroller as sole trustee. (3) This structure is unusual; most comparable public pension funds are managed by boards of trustees. (4)

   For decades, critics and reformers have expressed concerns that a statewide elected official acting as sole trustee of such an enormous fund used to pay constitutionally guaranteed benefits is a recipe for abuse. (5) In fact, in many instances in New York State and elsewhere, pension fund fiduciaries have abused their authority and used pension fund business for personal and financial gain. (6)

   The performance of public pension funds is also a recurring topic of scrutiny in the legal and financial academic disciplines. (7) There is evidence that public funds do not perform as well as their private counterparts, and although this can be explained in part by lower tolerance for risk, many commentators also suggest that poor performance is caused or exacerbated by inappropriate political influences. (8) For decades commentators have discussed problems involved with management of public funds by elected officials, concerned that "[t]he most obvious conflict of interest is that of the government official" who "would have compelling personal, political, and governmental reasons for favoring an investment of pension funds." (9) The status of the comptroller as an elected official, his or her role as sole trustee of the fund, the size of the Common Retirement Fund, and the fact that it exists to fund a constitutionally protected benefit all work together to emphasize the importance of an earnest and ongoing conversation in state government about CRF governance, including the comptroller's role as sole trustee of the fund.

   The respective roles of the legislature and the comptroller must be addressed as part of any movement toward retirement fund reform. The comptroller's role as sole trustee is clearly laid out in statutory language, but there is some controversy as to whether the sole trustee model is itself guaranteed by the state constitution, which also grants the legislature the power to "define the powers and duties" of the state comptroller. (10) In light of recent scandals, some critics have raised the prospect of reorganizing the fund to include a board of trustees; as a result many news reports have asserted, without analysis, that a constitutional amendment would be required in order to alter the sole trustee model of the Common Retirement Fund. (11) Some of these reports bemoan the difficult process of amending the constitution and discount the prospect of creating a board, referring to the harsh "[p]olitical realities" of the "lengthy and politically daunting" constitutional amendment process. (12) Others call for the change even if it requires a constitutional amendment because they see the problem as so pressing. (13) It is certainly not so clear, however, that a constitutional amendment would be required; indeed it appears that legislation could be enacted to make the change without running afoul of the constitution.

   The purpose of this Comment is to discuss the history and function of the New York State Constitution's nonimpairment clause and address whether it dictates the State Comptroller's role as sole trustee of the Common Retirement Fund. The Comment will discuss some of the events that have caused the decades-old call for reform of the Office of the State Comptroller, and will also briefly survey some of the arguments in favor of alternative approaches to investing the CRF.

   Although the Court of Appeals has held that the Comptroller's independent discretion is an aspect of the constitutional protection of the retirement fund, these holdings have come down in fact-specific contexts dealing with encroachments by the state legislature, or so-called "pension raid" scenarios, where the primary purpose of the legislative mandate interfered with the Comptroller's discretion, for a legislative purpose other than improving the fund. (14) These cases do not foreclose, on constitutional grounds, the creation of a board of trustees to replace the Comptroller as sole trustee. This paper is not intended to advocate for a board of trustees, but rather to clarify the realistic options that should be discussed in the ongoing debate about pension fund reform, defuse the currently popular belief that the creation of a board is politically unrealistic, and emphasize the possibility that a board of trustees could be created to govern the Common Retirement Fund without amending the state constitution.

2. HISTORY OF THE NEW YORK STATE CONSTITUTION'S NONIMPAIRMENT CLAUSE

   Historically, public pensions were characterized as a gift from the sovereign, but even before the constitutional amendment introducing the nonimpairment clause into the New York State Constitution, the treatment of pension funds by courts had been evolving. Prior to the enactment of the nonimpairment clause in 1938, courts regarded state and municipal pensions as legislative "gratuities" that did not vest any contractual right in the recipient, or alternatively, as a right that vested upon retirement. In the 1889 case Pennie v. Reis, for example, the United States Supreme Court denied a due process claim attempting to collect contributions to a public pension fund made from a deceased police officer's salary, where the police officer died before retirement. (15) The Court held that the fund's character as a benefit for the police officer was "subject to change or revocation at any time, at the will of the legislature" and that "It]here was no contract on the part of the State that its disposition should always continue as originally provided." (16) The opinion concluded that there would be no vested right until payments to the police officer had commenced, and characterized the officer's pre-retirement interest in the pension fund as "a mere expectancy created by the law, and liable to be revoked or destroyed by the same authority." (17)

   In the 1935 case of Roddy v. Valentine, the Court of Appeals indicated that a similar outcome was entirely possible in New York State. (18) The court enforced the contractual pension right of a retired police officer who had taken up employment with another police department after his retirement, in spite of a law enacted after the date of his retirement barring pensioners from collecting their pensions in addition to other civil service compensation after retirement. (19) The court also, however, discussed the nature of a participant's interest in the pension fund more generally. Although the court conceded that pension benefits were no longer considered a mere "gratuity," it also stated that this interest "can hardly be deemed contractual." (20) The court suggested that it may be "quasi contractual" but concluded that, under any interpretation, "there seems to be no doubt that it is subject to change or even to revocation at the will of the Legislature." (21)

   Three years after the Roddy case, the New York State Constitution was amended to include the nonimpairment clause, guaranteeing that the dicta from Roddy would not come to fruition and deprive contributors to a pension fund of their accrued interest. (22) The nonimpairment clause of the New York State Constitution, as well as similar provisions in other states' constitutions, guarantees a vested contractual right to pension benefits upon commencement of membership in the state pension system. (23) In a 1958 case, the Court of Appeals indicated that the amendment was intended to guarantee pension rights to the public employee during his or her employment rather than vesting the interest at retirement since public employees forsake the higher wages that might be possible in the private sector in favor of state employment and they are induced to do so by other compensation, such as a guaranteed pension. (24) The record of the constitutional convention suggests a similar intention--to ensure that each state worker receives the "reward or benefit [that] is part of the compensation which he accepts in lieu of the greater rewards of private employment" and to protect public retirement systems from legislative interference. (25)

   Twenty years after the nonimpairment clause was added to the constitution, the New York State Special Legislative Committee on Revision and Simplification of the Constitution characterized the clause as a "Significant Problem Area" and complained that although there may be cause to retain such an amendment guaranteeing benefits, the clause as enacted was inadequate and exceedingly vague regarding what exactly constitutes "benefits" or exactly how such benefits would be impermissibly "impaired." (26) This continuing ambiguity has arguably contributed to the current impression that an amendment to the constitution would be necessary in order to change the fund's management structure.

3. THE ORGANIZATIONAL STRUCTURE OF THE NEW YORK STATE COMMON RETIREMENT FUND

   The New York State Common Retirement Fund was created in 1967 to hold and distribute the assets of the Police and Fire Retirement System (PFRS) and the Employees' Retirement System (ERS), with the State Comptroller acting as sole trustee. (27) For the 2006-07 fiscal year, the pension fund's net assets were valued at $156 billion. (28) Altogether, over one million members participate in the Common Retirement Fund, including employees, retirees, and other beneficiaries. (29) State law...