Opinion ID: 773394
Heading Depth: 2
Heading Rank: 4

Heading: Whether the Retirement System Is an Arm of the State

Text: 40 We pass now to the question of whether defendant Retirement System is an arm of the state entitled to assert sovereign immunity as a defense to this suit against it. The Eleventh Amendment extends immunity not only to a state, but also to entities considered arms of the state. Posr v. Court Officer Shield #207, 180 F.3d 409, 414 (2d Cir. 1999); see also Mt. Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U.S. 274, 280 (1977) (asking whether the defendant board of education was an arm of the state, in which case sovereign immunity would be extended to it). Plaintiffs argue that the Retirement System falls outside this category. 41 In determining whether an entity is an arm of a state, six factors are initially considered. See Mancuso v. N.Y. State Thruway Auth., 86 F.3d 289, 293 (2d Cir. 1996). Those factors, identified in Feeney v. Port Authority Trans-Hudson Corp., 873 F.2d 628, 630-31 (2d Cir. 1989), aff'd on other grounds, 495 U.S. 299 (1990), are derived from Lake Country Estates, Inc. v. Tahoe Regional Planning Agency, 440 U.S. 391, 401-02 (1979). They are: (1) how the entity is referred to in its documents of origin; (2) how the governing members of the entity are appointed; (3) how the entity is funded; (4) whether the entity's function is traditionally one of local or state government; (5) whether the state has a veto power over the entity's actions; and (6) whether the entity's financial obligations are binding upon the state. Mancuso, 86 F.3d at 293. If these factors point in one direction, the inquiry is complete. If not, a court must ask whether a suit against the entity in federal court would threaten the integrity of the state and expose its treasury to risk. Id. If the answer is still in doubt, a concern for the state fisc will control. Hess v. Port Auth. Trans-Hudson Corp., 513 U.S. 30, 48-49 (1994) (quoting Feeney, 873 F.2d at 631, with approval). 42 We examine the six factors. 43
44 The Retirement System was formed under New York statute, now codified at Article 2 of N.Y. Retire. & Soc. Sec. Law §§ 2-119 (McKinney 1999 & Supp. 2001), and has the powers and privileges of a corporation, id. § 10. In Mancuso, we noted that the phrase public corporation is of little help in determining whether an entity is an arm of the state, and looked to New York case law for clarification. See 86 F.3d at 294. 45 The New York Court of Appeals has stated that the Retirement System is the kind of state instrumentality that is clothed with the sovereign immunity of the state. Glassman v. Glassman, 309 N.Y. 436, 440 (1956). Notwithstanding that the State Retirement System is a corporation, endowed with the powers and privileges that inhere to that kind of entity, Glassman said this fact had no effect on the agency's immunity. See id. at 441. Plaintiffs say this conclusion was dicta since the Retirement System was only an incidental party to the real controversy between a husband and wife over the wife's entitlement as creditor to reach funds deposited by the husband in the System. Id. at 442. Even granting that, still, New York's highest court tells us how New York courts view the Retirement System, and because plaintiffs point to no contrary authority, this factor favors granting immunity to the System. 46
47 Retirement System officers are designated by statute. The state comptroller serves as administrative head, N.Y. Retire. & Soc. Sec. Law § 11(a), as well as trustee, id. § 13(b). The state attorney general serves as legal advisor, id. § 14, and the System is subject to supervision by the state superintendent of insurance, id. § 15. The superintendent of insurance is in turn appointed by the governor with the advice and consent of the senate. N.Y. Ins. Law § 201 (McKinney 2000). The custody of the Retirement System's funds is vested in the head of the division of the treasury of the Department of Taxation and Finance. N.Y. Retire. & Soc. Sec. Law § 13(d). Given that the state legislature and the governor ratified the statutes by which these officers were designated, this factor too leans in favor of immunity. See Glassman, 309 N.Y. at 441 (The close relationship between the Retirement System and the state government is apparent throughout the Civil Service Law provisions [from which the Retirement and Social Security Law was derived] which create and govern the affairs of the System.). 48 It makes no difference that the comptroller and the attorney general are elected officials because, regardless of that fact, the state has named them to positions of authority in the Retirement System. Cf. Mancuso, 86 F.3d at 295 (holding that the appointment of Thruway Authority members by the governor with the advice and consent of the state senate leans toward immunity); Feeney, 873 F.2d at 631 (noting that the state appointment of commissioners to the Port Authority Trans- Hudson Corporation favors immunity).
49 The Retirement System consists of four funds titled annuity savings, annuity reserve, pension accumulation, and pension reserve. N.Y. Retire. & Soc. Sec. Law § 20. Monies are provided by several sources. The state as an employer makes an annual appropriation, id. § 16(a), as do other participating employers, id. § 17. Employee members of the Retirement System also make contributions via payroll deductions. Id. § 21(b) & (d). An exception exists however, for state employees who became members prior to July 1, 1973, in which case no further contributions are required. Id. § 75-a(a). Their contributions are covered by the state in its annual appropriation. Id. § 75-a(b). 50 Ascertaining the particular funds where these contributions are deposited and from which benefits are paid is equally important. Payroll deductions from a Retirement System member, once remitted to the comptroller, are deposited in the annuity savings fund. Id. § 21(f). Upon retirement, contributions to that fund are transferred to the annuity reserve fund, from which all annuities and all benefits in lieu of annuities are paid. Id. § 22(a) & (b). An annuity is defined as [t]he annual allowance for life, payable in monthly installments and derived from a member's accumulated contributions. Id. § 2(3). 51 The state and other employers make contributions to the pension accumulation fund. Id. §§ 16(a), 23(a)(1). Expenses incurred by the Retirement System are covered by monies contributed to this fund, in addition to monies appropriated in the state executive budget. Id. §§ 16(b), 23(b)(3). When a pension becomes payable, monies are transferred from the pension accumulation fund to the pension reserve fund. Id. § 24(b). Ordinary death benefits, however -- such as those received by plaintiff James Nash -- are payable wholly out of the pension accumulation fund. Id. §§ 24(a), 60(b). 52 Even with the payroll deductions of member employees, the state makes significant payments each year to the Retirement System for the payment of benefits and expenses. In particular, death benefits are payable out of a fund to which only the state and other participating employers presently contribute. These facts distinguish Mancuso where we ruled the state was not required to fund the Thruway Authority's operations since such funding was limited by law to a guarantee on the initial bond offering and to isolated instances of allocated funds for specific projects advocated by the state. See 86 F.3d at 295. Hence, the third factor also weighs in favor of immunity. 53 D. Whether the Function of the Retirement System Is Traditionally One of State or Local Government 54 Glassman described the Retirement System as taking part in an important governmental function by providing retirement pensions, annuities and other employment benefits for its personnel, comparable to those received by the employees of private industry. 309 N.Y. at 440-41. In so doing, it assists and promotes the efficient operation of the affairs of the state itself. Id. at 441. 55 The fact that the Retirement System also facilitates pension benefits for municipal employees does not mean it is not serving state employees, since it was originally created as a plan for state employees. Only later was it extended to cover county, city, town and village employees. McDermott v. Regan, 82 N.Y.2d 354, 358 (1993). Moreover, by way of analogy, we said in Mancuso that since the State Thruway covered the entire state, the Thruway Authority performed a function that a state would normally provide, even though the construction and operation of roads and bridges could be seen as either a state or local function. 86 F.3d at 295. Although the Retirement System does not service state employees exclusively, it assists in the business of the state by enabling the state to meet its pension and benefits obligations, and immunity should accordingly be extended to the Retirement System. 56 E. Whether the State Has Veto Power Over the Actions of the Retirement System 57 The comptroller as the administrative head and trustee of the funds of the Retirement System is thereby authorized to adopt and amend... only such rules and regulations as he determines to be for the best interests of the retirement system. N.Y. Retire. & Soc. Sec. Law § 11(g). 58 There are certain legal restraints on the Retirement System. For example, funds are to be invested only in accordance with state law. Id. § 13(b). Without specifying exactly how funds may be invested, the statutory scheme includes percentage limits, and identifies permissible and impermissible investments. See generally id. § 13 (entitled Management of funds); id. §§ 176-179-a (entitled Investments of Public Pension Funds). Further, the System is subject to the supervision of the superintendent of insurance, id. § 15, who may require the comptroller to file an annual report and to respond to inquiries related to transactions or to the condition of the Retirement System, N.Y. Ins. Law § 314(b)(1). The superintendent may promulgate standards with respect to a number of financial practices including investment policies and financial soundness. Id. § 314(b)(2). He is required to conduct an examination into the affairs of the Retirement System at least once every five years and to incorporate his findings in a report made available for public inspection and filed with the governor, the comptroller and the legislature. Id. § 314(b)(3). While these provisions do not constitute a veto power, they subject the comptroller to strong oversight protections limiting his discretion. 59 At the same time, New York's Court of Appeals has held that the state legislature does not have unfettered power over the Retirement System. Sgaglione v. Levitt, 37 N.Y.2d 507 (1975), struck down § 14 of the New York State Financial Emergency Act for the City of New York, which was enacted in 1975. Sgaglione ruled that this section of the law violated the state constitution because implicit in the constitution is protection for the source of funds for retirement benefits. Id. at 511- 12. Thus, although the legislature reserved to itself some flexibility in shaping the Retirement System, it is not unlimited. Id. at 512. 60 These concepts were reaffirmed in McDermott v. Regan, where the court stated that [w]here the State maintains [some independent] authority in regard to the [comptroller],... concomitant with that authority is the State's duty to act in a manner consistent with the goal of the 'protection' of [the Retirement System] funds as required by article V, § 7 of New York's Constitution. 82 N.Y.2d at 362. Thus, any changes the legislature proposes for the Retirement System must be enacted for the purpose of protecting the interests of its beneficiaries. 61 As a consequence, while it does not appear from the above discussion that absolute veto power exists over decisions made by the comptroller in his capacity as administrator and trustee of the Retirement System, nonetheless the acts of the legislature, the oversight of the superintendent of insurance, and the contractual relationship created by New York's constitution restrain the comptroller from the exercise of unfettered discretion. 62 We think this case, contrary to plaintiffs' contentions, is unlike Mancuso. In that case we held the decisions of the Thruway Authority were essentially unreviewable. See 86 F.3d at 295. Moreover, our statement in Mancuso that monies deposited with the Comptroller are not under the state's control, id., is inapplicable to the pending appeal. In Mancuso we were refuting an argument that the Thruway Authority was subject to state control because it deposited all receipts with the comptroller and could issue bonds only with the comptroller's permission. See id. The monies referred to were monies belonging to the Thruway Authority -- not all monies deposited with the comptroller. We also noted that the comptroller lacked discretion to refuse payment on the Thruway Authority's debts and had no duty to supervise the Authority. See id. at 295-96. The same clearly cannot be said with respect to the Retirement System. The fifth factor therefore tips toward immunity. 63 F. Whether the Obligations of the Retirement System Are Binding Upon the State 64 The relevant question with respect to this sixth factor is whether a judgment against the [Retirement System] would have the practical effect of requiring payments from New York. Mancuso, 86 F.3d at 296. In Mancuso, this factor worked against a finding of immunity because the Thruway Authority was self-sustaining and produced no evidence that it could not satisfy a judgment. Id. In contrast, the Retirement System is not self-sustaining as it requires contributions from employees, the state and other participating employers. 65 Further, employers utilizing the Retirement System -- including the state -- are obligated for interest charges that are payable, the creation and maintenance of reserves in the pension accumulation fund, the maintenance of annuity reserves and pension reserves, the payment of all pensions, annuities and benefits, plus the expenses of the System. N.Y. Retire. & Soc. Sec. Law § 18 (entitled Guaranty). Since the state constitution mandates that the benefits of the Retirement System not be diminished or impaired, the state will become responsible for replenishing monies used from the pension accumulation fund and the other reserve funds to pay a judgment increasing the amount of death and/or disability benefits owed. Cf. Cabell v. New York, No. 84 Civ. 1062, 1985 WL 2313, at  (S.D.N.Y. Aug. 14, 1985) (finding judgment against Retirement System to compensate for discriminatory monthly retirement benefits amounts to judgment against the state, since state must cover annuity payments to non-contributory members and Retirement System must remain actuarially sound). 66 In finding the Retirement System was cloaked with sovereign immunity, the New York Court of Appeals applied similar reasoning. It said that as an employer the state is obligated to maintain the various reserves and funds of the System, and is also obligated for the expenses and payment of employee benefits. See Glassman, 309 N.Y. at 441 (relying on the statutory predecessor to § 18 of the Retirement and Social Security Law). 67 This final factor provides the greatest weight in favor of immunity. See Feeney, 873 F.2d at 631 ([W]hether liability will place the state treasury at risk, although not exclusively determinative, is the single most important factor.). As stated at the outset of our discussion, the Supreme Court has recognized that the vulnerability of the State's purse [is] the most salient factor when deciding whether sovereign immunity applies. Hess, 513 U.S. at 48. Indeed, we once remanded a case precisely for clarification as to what extent the state would be required to satisfy a judgment entered against the defendant, the City University of New York. See Pikulin v. City Univ. of N.Y., 176 F.3d 598, 600-01 (2d Cir. 1999) (per curiam). 68 Satisfied that we have properly resolved this factor, and being persuaded that all of the factors identified in Feeney and Mancuso point in the same direction, we conclude the Retirement System is cloaked with Eleventh Amendment immunity from plaintiffs' claims.