Case ID: ny-2d_37/html/0507-01.html
Source: Caselaw Access Project
Author: {"author": "Chief Judge Breitel. Cooke, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Al Sgaglione et al., Individually and on Behalf of All Others Similarly Situated, et al., Appellants, v Arthur Levitt, as Comptroller of the State of New York, Respondent. Civil Service Employees Association, Inc., et al., Appellants, v Arthur Levitt, as Sole Trustee and Administrative Head of the Employees’ Retirement System and Comptroller of the State of New York, Respondent.
    Argued September 26, 1975;
    decided September 29, 1975
    
      
      Arthur J. Harvey for Al Sgaglione and Police Conference of New York, Inc., appellants in the first above-entitled action.
    I. Having the funds of the New York State Policemen’s and Firemen’s Retirement System managed by someone in a fiduciary capacity is a benefit to the system’s members, and as such, is protected by article V (§7) of the New York State Constitution. (Matter of Fisher v New York State Employees’ Retirement System, 199 Misc 685, 279 App Div 315, 304 NY 899; Matter of Donner v New York City Employees’ Retirement System, 33 NY2d 413; Kranker v Levitt, 30 NY2d 574; Kleinfeldt v New York City Employees’ Retirement System, 73 Misc 2d 310, 43 AD2d 914; Birnbaum v New York State Teachers’ Retirement System, 4 Misc 2d 356, 3 AD2d 815, 5 NY2d 1; Brown v New York State Teachers Retirement System, 48 Misc 2d 805, 25 AD2d 344, 19 NY2d 779; Matter of Bond & Mtge. Guar. Co., 303 NY 423.) II. Having the funds of the New York State Policemen’s and Firemen’s Retirement System managed by someone in a fiduciary capacity is a contractual obligation of the State, and as such, is protected from legislative impairment by article I (§ 10) of the United States Constitution. (Indiana ex rel. Anderson v Brand, 303 US 95; Strauss v Union Cent. Life Ins. Co., 170 NY 349; 
      People ex rel. City of N. Y. v Nixon, 229 NY 356; Worthen Co. v Kavanaugh, 295 US 56; Colonial Motor Coach Corp. v City of Oswego, 126 Misc 829, 217 App Div 816.) III. Section 14 of the "New York State Financial Emergency Act for the City of New York” clearly impairs plaintiffs’ right to have the funds managed in a fiduciary capacity and is thus unconstitutional. (Matter of Durstan, 297 NY 64; King v Talbot, 40 NY 76; Matter of Clarke, 257 NY 132.) IV. Section 14 of the "New York State Financial Emergency Act for the City of New York” should not be validated as a proper exercise of the police power of the State. (Panhandle Co. v Highway Comm., 294 US 613; Schlesinger v Wisconsin, 270 US 230; Georgia Power Co. v Decatur, 281 US 505; Southern Ry. Co. v Virginia, 290 US 190; Treigle v Acme Homestead Assn., 297 US 189; Pennsylvania Coal Co. v Mahon, 260 US 393; Perry v United States, 294 US 330; Union Pacific R. R. Co. v United States, 99 US 700; El Paso v Simmons, 379 US 497.) V. That only 1.6% of the common fund of New York State Policemen’s and Firemen’s Retirement System and the Employees Retirement System are to be invested in MAC securities has no bearing on the constitutional question of whether plaintiffs have a right to management of New York State Policemen’s and Firemen’s Retirement System funds in a. fiduciary capacity. VI. Section 14 of the New York State Financial Emergency Act will directly affect and impair the monetary benefits of New York State Policemen’s and Firemen’s Retirement System members and is thus unconstitutional.
    
      James W. Roemer, Jr., for appellants in the second above-entitled action.
    I. The management of funds of the retirement system by a trustee acting in a fiduciary capacity and relationship to the members of the retirement system is a benefit protected by section 7 of article V of the New York State Constitution. (Birnbaum v New York State Teachers’ Retirement System, 5 NY2d 1; Matter of Ayman v Teachers’ Retirement Bd. of City of N. Y., 9 NY2d 119; Kranker v Levitt, 30 NY2d 574; Matter of Donner v New York City Employees’ Retirement System, 33 NY2d 414; Kleinfeldt v New York City Employees’ Retirement System, 36 NY2d 95; Brown v New York State Teachers’ Retirement System, 48 Misc 2d 805, 25 AD2d 344, 19 NY2d 779.) II. The pension fund of the Employees Retirement System is the property of its members and as such it may not be taken without due process of law.
    
      
      Louis J. Lefkowitz, Attorney-General (Jean M. Coon and Ruth Kessler Toch of counsel), for respondent in the first and second above-entitled actions.
    The Legislature has the authority to direct the trustee of a statutorily-created retirement fund as to the management of that fund, including the investment of its assets. A direction to invest a small portion of the assets of the retirement fund in MAC bonds does not, per se, constitute an impairment of the benefits of the members of the retirement system. (Seagram & Sons v Hostetter, 16 NY2d 47, 384 US 35; I. L. F. Y. Co. v Temporary State Housing Rent Comm., 10 NY2d 263, 369 US 795; Wiggins v Town of Somers, 4 NY2d 215; Lincoln Bldg. Assoc. v Barr, 1 NY2d 413; New York State Thruway Auth. v Ashley Motor Ct., 12 AD2d 223, 10 NY2d 151; Queenside Hills Co. v Saxl, 328 US 80; Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293, 368 US 12; Matter of Ahern v South Buffalo Ry. Co., 303 NY 545, affd sub nom. South Buffalo Ry. Co. v Ahern, 344 US 367; Brown v New York State Teachers Retirement System, 48 Misc 2d 805, 25 AD2d 344, 19 NY2d 779; Matter of Moore v Board of Educ., Union Free School Dist. No. 1, Town & City of Canandaigua, 274 App Div 403, 299 NY 666.)
    
      Martin Kleinbard and Dean B. Allison for the Municipal Assistance Corporation for the City of New York, amicus curiae.
    
   Chief Judge Breitel.

These are direct appeals (NY Const, art VI, § 3, subd b, par [2]; CPLR 5601, subd [b], par 2) from judgments at Special Term, on summary judgment declaring section 14 of the New York State Financial Emergency Act for the City of New York (L 1975, chs 868, 869, 870) not violative of section 7 of article V of the State Constitution and therefore valid. Plaintiffs, who urge that section 14 was unconstitutional, are civil service employees’ organizations and their principal officers. Defendant is the State Comptroller and by statute law the trustee of certain employees’ retirement funds with which plaintiffs are concerned.

Under the statutes applicable to the employees’ retirement systems involved in these actions, since their inception and at the time of the adoption of the nonimpairment clause of the State Constitution (art V, § 7), the State Comptroller is the "trustee” of the retirement funds vested with discretion to invest in such securities as are authorized by statute (Retirement and Social Security Law, §§ 13, 313; State Finance Law, §98). The statute under attack would, among other things, mandate the State Comptroller to purchase at face value bonds of the recently-created Municipal Assistance Corporation for the City of New York (MAC) in the amount of $125,000,000 from the retirement funds of the State Employees’ Retirement System and the State Policemen’s and Firemen’s Retirement System. To this extent the State Comptroller would be divested of discretion in determining how to invest funds under his charge.

MAC, a complicatedly designed, intermediate financing agency, is one of the executive and legislative responses to the dire financial condition of the City of New York, which has been found to be not only a threat to the welfare of the metropolis, but also to the State, if not indeed the Nation, of which it is a part. The governmental problem with which the executive and legislative branches have been deeply enmeshed in recent months is to make provision immediately for sources of funds to be available to MAC to stave off default by the city on its financial obligations, with unpredictable ramifications beyond the city.

The issue on these appeals is whether the legislative device of mandatory investment of retirement funds entrusted to the charge of the State Comptroller, despite the obviously compelling and urgent stringency with which the city and State are faced, violates the constitutional nonimpairment clause. The problem is novel and close precedents nonexistent. It is concluded that the legislative device is in violation of the nonimpairment clause, because the means designed to assure benefits to public employees and those already retired will be impaired by the offending device. Hence, the judgments must be modified to declare section 14 unconstitutional.

The Attorney-General, and MAC appearing as amicus curiae, urge that the nonimpairment clause (NY Const, art V, § 7) is limited to the "benefits” to which members and retired members of the retirement systems are entitled. This is literally true, as a reading of the clause makes plain: "After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.” It is equally true, however, that necessarily implied in this constitutional, albeit perhaps limited, protection of the underlying "contract” providing for benefits is the protection of the sources of funds for those benefits, whether by way of continuing contributions by employees, employers, or the reserve funds required to be maintained under the retirement plan. Although not essential to this conclusion is the salient fact that the reserve funds contain sums at some time paid regularly or specially by contributing employees. These employee-contributed funds, therefore, are not any longer State or municipal funds raised solely by the tax-levying power. Hence, assuming, as one should, that there has always been reserved by the Legislature (in light of the contemporaneous statutes in force when the constitutional amendment was adopted) flexibility to change the manner of paying contributions, to fund deficiencies in actuarial reserve, and to authorize the investment of the funds, a problem still occurs with respect to changes not falling within these categories. The same might be said about management of the funds: there is flexibility reserved to the Legislature, but it is not unlimited (cf. Brown v New York State Teachers Retirement System, 19 NY2d 779, affg on opn at App Div, 25 AD2d 344). Close examination is therefore required of any radical change in means chosen to maintain the integrity and security of the sources from which the concededly protected benefits are to be paid.

The persuasive contention by plaintiffs is that: however it might have been provided otherwise, and however it might be true that anyone might exercise his sound discretion unfortunately in the investment of the retirement funds, it is still true that, under the retirement plans, an independent, or at least a separate person is vested with discretion to make what he determines to be wise investments. To strip this person, in this instance the State Comptroller, an independently elected official it so happens, of his personal responsibility and commitment to his oath of office, is to remove a safeguard integral to the scheme of maintaining the security of the sources of benefits for over a half century. There is no quarrel, as indeed there could not be, with the exercise of legislative power to expand the kinds of investments he might make, including MAC securities (see State Finance Law, §§ 98, 98-a, as added by L 1975, chs 868, 870), or to restrict the classes of investments he might make from time to time (see Retirement and Social Security Law, §§ 13, 313, and its amendments from time to time). But it is nevertheless concluded that the Legislature is powerless in the face of the constitutional nonimpairment clause to mandate that he mindlessly invest in whatever securities they direct, good, indifferent, or bad. The ultimate difference is between authority to invest and a mandatory direction to invest in certain securities, and in certain minimum amounts, whether or not the State Comptroller deems it advisable.

The comments last made have a special significance. They mean that neither plaintiffs nor the courts, simply because a constitutional provision is involved, are entitled in the present context to assess the market worthiness of securities in which the State Comptroller may invest. That discretion is his solely except as limited by the continuing power of the Legislature to expand or restrict the classes and kinds of investment in which he may place the funds in his care. It is not without significance, if not indeed particularly revealing, that the Legislature found it necessary to mandate the independent "trustee”, rather than to rely on his discretion.

On this analysis, it is immaterial whether the mandate is a small one, as Special Term reasons, and is addressed to what some might consider a miniscule proportion (1.6%) of the funds in the State Comptroller’s charge, or to a substantial part or all of the funds in his care. Moreover, it should be evident that if a little mandate is good, a slightly larger one would be good too, and then later, still a larger one would also be good. The resulting dissolution of principle by degree would be consummated.

Nor is it material to this analysis to accept plaintiffs’ argument that the State Comptroller is a trustee as that word is used in the context of private or even some public fiduciaries.

The issue as viewed by this court is a narrower one, and simpler to articulate, although one which places upon the court a heavy burden of decision because of the obvious implications for the city, the State, and undoubtedly for municipalities throughout the Nation.

In similar vein it is immaterial to consider whether the retirement benefits will be sufficiently protected by the assigned existing taxes to secure MAC bonds, or whether the benefits will be amply protected by the future tax levies of the State and its subdivisions. The fact is that the benefits are already protected by the tax-levying power (Retirement and Social Security Law, §§ 16, 316). What is involved is whether in any significant degree the additional security provided by reserve funds, even if some may believe they are not economically or fiscally necessary, will be impaired by depriving the State Comptroller of freedom to exercise his independent judgment whether to invest in MAC bonds.

An issue raised by the court during the argument in probing the purpose of the reserve funds offers no escape from the conclusion it reaches. That issue was whether the purpose of the fund was to benefit not the members or retired members of the retirement systems, but to protect future taxpayers against burdens engendered by past generations of taxpayers in providing for retirement benefits of former public employees. Such legislative history, as has been made available by MAC, as amicus curiae, demonstrates what could have been inferred anyway. The purpose was twofold: to protect the receivers of benefits and to protect future taxpayers by use of actuarially sound retirement funds (NY Legis Doc, 1920, No. 92, Reports of Commission on Pensions, pp 58-61).

The duty of a neutral court is clear even when it be utterly understanding of the extraordinary and troubled efforts by the officials of New York City, the State administration and the Legislature. As this court said in Birnbaum v New York State Teachers Retirement System (5 NY2d 1, 11), in a context converse to that here but involving identical principles: "[The retirement system] argues that if this court [so] holds * * * the system will be plunged into bankruptcy. The answer to that argument must be that * * * we are not at liberty to hold otherwise”.

Indeed, it should be said that that is the primary role of the courts in the American system in reviewing the constitutional validity of executive and legislative acts even if they bear the guise, and the courts are convinced that the guise reflects a reality, of necessity, distress and emergency. The courts did not make the Constitution; the courts may not unmake the Constitution.

Accordingly, the judgments should be modified, without costs, to declare section 14 of the New York State Financial Emergency Act unconstitutional to the extent indicated as in violation of section 7 of article V of the State Constitution.

Cooke, J.

(dissenting). I dissent and vote to affirm the judgment of Special Term, which declared that section 14 of the New York State Financial Emergency Act for the City of New York (L 1975, chs 868, 869, 870) is constitutional and valid and does not violate the provisions of section 7 of article V of the Constitution of the State of New York.

Section 7 (subd 2, par [f]) of chapter 868 of the Laws of 1975, as amended by section 14 of chapter 870 of said laws, authorizes and directs the trustee (Comptroller of the State of New York) of the New York State Policemen’s and Firemen’s Retirement System and the New York State Employees’ Retirement System to purchase $125,000,000 of bonds of the Municipal Assistance Corporation for the City of New York. In effect, the plaintiffs in each action seek declaratory judgment that said section as so amended be declared unconstitutional, as violative of section 7 of article V of the Constitution of this State which provides: "After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.” They contend, and the majority agrees, that the mandate of this legislation, divesting the Comptroller of discretion in this respect, is an impairment of benefits constitutionally prohibited.

Initially, we must recognize that this constitutional challenge, as all others, must be weighed with full recognition of certain thoroughly settled principles. Every legislative enactment is clothed with an exceedingly strong presumption of constitutionality (I. L. F. Y. Co. v Temporary State Housing Rent Comm., 10 NY2d 263, 269, app dsmd 369 US 795), accompanied by a further presumption that the Legislature has investigated and found facts necessary to support the legislation (Lincoln Bldg. Assoc. v Barr, 1 NY2d 413, 415; East N. Y. Sav. Bank v Hahn, 293 NY 622, 628, affd 326 US 230). The party alleging unconstitutionality has a heavy burden, one of demonstrating the infirmity beyond a reasonable doubt, and only as a last resort will courts strike down legislative enactments on the ground of unconstitutionality (Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293, 303, app dsmd 368 US 12; Wiggins v Town of Somers, 4 NY2d 215, 218-219; Matter of Ahern v South Buffalo Ry. Co., 303 NY 545, affd sub nom. South Buffalo Ry. Co. v Ahern, 344 US 367). In Matter of Taylor v Sise (33 NY2d 357, 364-365), it was stated: "There is generally a very strong presumption that the Legislature has investigated and found the existence of a situation showing or indicating the need for or desirability of the legislation’ * * * More specifically, the situation under consideration affirmatively demonstrates that the Legislature responded to a then generally acknowledged need * * * Assuming that there weré other effective methods by which to accomplish the same end, this court should not substitute its judgment for that of the Legislature in determining the particular method to meet a given need”.

There is no basis for the finding of the majority that the discretion of the Comptroller, as "trustee”, is a benefit within the contemplation of the Constitution. Rather, all prior pertinent case law would lend support to the conclusion that section 7 of article V of the Constitution is not a bar to the legislative measure under scrutiny, since the term "benefits”, in this context, refers only to pecuniary benefits (see Birnbaum v New York State Teachers Retirement System, 5 NY2d 1 [adoption of mortality table, which reduced the amount of money payments by about 5%, unconstitutionally effected a diminution and an impairment of the benefits of the retirement system]; Matter of Ayman v Teachers’ Retirement Bd. of City of N. Y., 9 NY2d 119 [mortality tables in effect immediately prior to July 1, 1940 to be used to calculate annuity]; Kranker v Levitt, 30 NY2d 574 [cash payments for accumulated vacation credits properly included in computation of retirement benefits]; Matter of Weber v Levitt, 34 NY2d 797 [termination pay attributable to last three years of service properly includable in the final average salary for pension purposes]; Kleinfeldt v New York City Employees’ Retirement System, 36 NY2d 95 [statutory limitation of amount of increased compensation, which may be considered in determining final average salary for retirement purposes, not to be applied retroactively]). Within this decade, it has been determined with a degree of definiteness that "said constitutional provision created a contractual right to protect the members of the retirement system in pecuniary matters — i.e., prohibiting any action which would impair or diminish the member’s right to payment of pensions, annuities and related monetary advantages” (Brown v New York State Teachers Retirement System, 25 AD2d 344, 345, affd on opn of App Div 19 NY2d 779). In Brown, it was held that the term "benefits” in this constitutional provision did not include representation on the Retirement Board of the New York State Teachers Retirement System and that the decrease in teachers’ voting strength could not make it easier for the board to reduce or impair their pecuniary benefits.

Since "benefits” as employed in the constitutional provision are pecuniary in nature, the legislation in question does not, by authorizing and directing the purchase by the Comptroller of bonds of the Municipal Assistance Corporation, impair the benefits of members of the retirement systems. Absent a showing that there will be an impairment, either in abolition or diminution of pensions, annuities or related monetary advantages, a conclusion of unconstitutionality is impermissible. Under chapter 169 of the Laws of 1975, effective June 10, 1975, section 98 of the State Finance Law was amended, by the addition of subdivision 17 thereto, so as to authorize the Comptroller to invest in "[b]onds and notes issued for any of the corporate purposes of the municipal assistance corporation for New York City.” Contrary to the unestablished premise upon which the majority relies, the legislative mandate to invest funds would not result, in and of itself, in a reduction in or depletion of the assets of the pertinent retirement systems. The ultimate value of the specific bonds designated for purchase is a question of fact and is not germane to the consideration of the legislation’s constitutionality.

There is no express provision in our State Constitution which limits the Legislature’s power in directing the Comptroller in respect to the investment of retirement system funds, nor is there any warrant that such a restriction be "necessarily implied” from section 7 of article V of the Constitution. The practical construction put upon a constitutional provision by the Legislature is entitled to great weight, if not controlling influence, when such construction has continued in operation over a long period of time (Matter of Kolb v Holling, 285 NY 104, 112; Broderick v Weinsier, 278 NY 419, 425-426). The Legislature has imposed restraints on investments by the Comptroller ever since the adoption of said section of the Constitution and even prior thereto (see, inter alia, L 1920, ch 741; L 1940, ch 593; L 1957, ch 841), thus supporting the interpretation that section 7 does not yield a limitation by implication upon the Legislature’s right to oversee investments of retirement funds. Subject only to the restrictions contained in the State and Federal Constitutions, the power of the Legislature is plenary (Village of Kenmore v County of Erie, 252 NY 437, 441; People ex rel. Peaks v Voorhis, 243 NY 420, 423), and, in the absence of a constitutional bar to the authority of the Legislature regarding such investments, it must be concluded that the power exists.

In order to accept the majority’s position, however, that the discretion of the Comptroller is a benefit of membership in either retirement system, it must be presumed that sections 13 and 313 of the Retirement and Social Security Law have been read into section 7 of article V of the Constitution. These statutes, containing similar provisions, establish the framework within which the funds of the New York State Employees’ Retirement System (§ 13) and the New York State Policemen’s and Firemen’s Retirement System (§ 313) shall be managed and name the Comptroller as "trustee” of both funds. Explicitly in the statutes are situations where the discretionary power of the Comptroller is circumscribed and limited, both as to the type and amount of the investment permitted. For example, the maximum amount that can be expended in certain obligations of industrial corporations or even railroads is 30% of the assets of the funds, irrespective of how great the rate of return on the investment. This discretion is further limited by the legislative directive that the Comptroller "shall * * * be subject to all terms, conditions, limitations and restrictions imposed by this article and by law upon the making of such investments” (Retirement and Social Security Law, § 13, subd b; § 313, subd b). Thus, it appears clear that the discretionary authority granted to the Comptroller in the investment of retirement funds is a creature of legislative origin, subject to those "terms, conditions, limitations and restrictions” like the instant directive enacted by the Legislature. This is not, therefore, a matter of constitutional stature, nor was this power intended or even contemplated as a "benefit” when section 7 of article V was promulgated. If this were not so, then any curtailment of the Comptroller’s discretion in the investment of funds of the systems, being a "benefit” that cannot be diminished or impaired, would, of necessity be likewise unconstitutional. Surely, the majority would be unwilling to strike down as unconstitutional other existing statutory enactments limiting or enlarging the Comptroller’s discretion as trustee (see Retirement and Social Security Law, §§ 13, 313; State Finance Law, § 98).

The declaration of unconstitutionality here is contrary to accepted canons of constitutional construction, inconsistent with existing case law, and violative of the doctrine of separation of powers.

Judges Jasen, Gabrielli, Jones, Wachtler and Fuchsberg concur with Chief Judge Breitel; Judge Cooke dissents and votes to affirm in a separate opinion.

In each case: Judgment modified, without costs, in accordance with the opinion herein.