New York Law Review

Tag: McDermott v. Regan

  • McDermott v. Regan, 82 N.Y.2d 354 (1993): Protecting Pension Benefits Under the New York State Constitution

    McDermott v. Regan, 82 N.Y.2d 354 (1993)

    A law changing the funding method of the New York State Retirement Systems violates the state constitution if it impairs the Comptroller’s independent judgment as trustee or breaches the state’s fiduciary duty to protect pension funds.

    Summary

    This case concerns the constitutionality of a New York law (chapter 210 of the Laws of 1990) that changed the funding method for the state’s retirement systems from an Aggregate Cost (AC) method to a Projected Unit Credit (PUC) method. The plaintiffs argued that this change violated Article V, § 7 of the New York State Constitution, which protects pension benefits from being diminished or impaired. The Court of Appeals affirmed the lower courts’ decisions, holding that the law was unconstitutional because it divested the State Comptroller of his autonomous judgment and potentially destabilized the pension fund, thus impairing benefits. The decision emphasizes the state’s fiduciary duty to protect pension funds and the importance of the Comptroller’s independent judgment in maintaining their security.

    Facts

    The New York State Retirement Systems, including the Common Retirement Fund (CRF), provide retirement, death, and disability benefits to public employees. Until 1990, the CRF was funded using the Aggregate Cost (AC) method, which involved calculating the total funding needed for all expected benefits annually. Chapter 210 of the Laws of 1990 mandated a change to the Projected Unit Credit (PUC) method, funding benefits only when they accrue. This resulted in a surplus that was returned to governmental entities, reducing their annual contributions. The law also prescribed a five-year stock valuation method for certain fiscal years, which differed from the Comptroller’s previous four-year averaging method.

    Procedural History

    The plaintiffs, concerned about the security of their pension funds, filed suit challenging the constitutionality of chapter 210. The Supreme Court granted the plaintiffs’ motions for summary judgment, declaring sections 1 through 7 of chapter 210 unconstitutional. The Appellate Division affirmed this decision. The State of New York appealed to the Court of Appeals.

    Issue(s)

    Whether chapter 210 of the Laws of 1990, which changed the funding method for New York State Retirement Systems, violates Article V, § 7 of the New York State Constitution by diminishing or impairing pension benefits.

    Holding

    Yes, because chapter 210 violates Article V, § 7 of the New York State Constitution by divesting the State Comptroller of his autonomous judgment as trustee of the retirement funds and potentially destabilizing the fund, thus impairing benefits.

    Court’s Reasoning

    The Court of Appeals relied on the constitutional provision that membership in any pension or retirement system of the state shall be a contractual relationship, the benefits of which shall not be diminished or impaired (Article V, § 7). The court emphasized the Comptroller’s role as trustee of these retirement benefits, citing Sgaglione v. Levitt, which upheld the Comptroller’s authority. The court found that chapter 210 divested the Comptroller of his autonomous judgment as to whether the PUC method was preferable to the AC method, violating the Nonimpairment Clause.

    The court also emphasized the State’s fiduciary duty to the participants in the retirement fund, stating that the State must act in a manner consistent with the goal of protecting these funds. The court noted that the only factor the Legislature considered when changing the funding method was the fiscal crisis facing the State, not the protection of pension benefits.

    Regarding the Mercer Report, which the State relied upon, the court found that while the report concluded that both methods were appropriate, it also indicated that the AC method may be preferred for smoother cost increases and warned about the extreme volatility of the PUC method. The court quoted the report: “The current PUC amortization method is one that we believe can do harm to the Systems. Due to the well funded condition of the Systems and the strain on governmental budgets, we are concerned that the amortization method provides a level of risk which is inappropriate.”

    The court concluded that chapter 210 impairs the benefits of the existing pension fund by allowing employers to deplete moneys in the fund and reducing the amount of employer contributions. As such, the reserve moneys would not be available for immediate investment, the return on investment would be decreased, and the additional security provided by the reserve moneys would be impaired.