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March 9, 1978


The opinion of the court was delivered by: CONNER


 In November 1975, the Teachers' Retirement System of the City of New York (the "TRS") and four other municipal pension funds *fn1" agreed to purchase New York City bonds in the principal amount of $2.53 billion over a period of approximately two and a half years as part of a financial plan to stave off the City's potential bankruptcy. The TRS, by authorization of its Board of Trustees, committed $860 million of its retirement fund assets to the purchase. Claiming that the action of the trustees constituted a breach of their fiduciary obligation to the retired beneficiaries of the fund, plaintiffs seek damages and injunctive relief prohibiting the further investment of TRS assets in securities or obligations of the City of New York. Plaintiffs further pray for a declaration of the unconstitutionality of certain state and federal legislation, the enactment of which was made a pre-condition to the pension funds' participation in the November 26 plan of financial recovery.

 The named plaintiffs are retired teachers formerly employed by the Board of Higher Education of the City of New York. Each is a member of and receives a "retirement allowance" (consisting of a pension and annuity) from the TRS. The basis of the Court's subject-matter jurisdiction is diversity of citizenship. In December 1976, the Court denied plaintiffs' motion for a preliminary injunction, and the case later proceeded to trial without a jury. This opinion constitutes the Court's findings of fact and conclusions of law.

 The TRS was established in 1917 as an actuarially reserved pension system. As such, the funds that would be necessary to provide the lifetime pensions and annuities of the members of the System were to be contributed throughout the years of the members' active service by the City of New York as employer and by the members on their own account. The contributions of the City fund the retirees' "pensions" and are held in one of the System's four component funds -- the Contingent Reserve Fund -- until the date of retirement is reached. The members' own contributions fund the "annuity" portion of their retirement allowances and are held in the Annuity Savings Fund. When a member retires, the sum necessary to support his pension is transferred, on the books of the System, from the Contingent Reserve Fund to the Pension Reserve Fund No. 1 and, similarly, the amount necessary to support his annuity is transferred from the Annuity Savings Fund to the Annuity Reserve Fund. These transfers are purely bookkeeping entries, however, and no physical transfer of funds actually occurs.

 The level of the City's annual contribution to the retirement fund is determined by the actuary of the TRS pursuant to statute. N.Y.City Admin. Code § B20-26.0. See also, "Pensions: A Report of the Mayor's Management Advisory Board" (the "Shinn Report") at 1-2; Fifty-Eighth Annual Report of the Retirement Board for the Fiscal Year 1974-1975 at 69. In essence, the actuary estimates the present value of the benefits that the pension plan will pay in the future and allocates their cost on an annual basis to the active working lifetime of plan participants. In theory, therefore, the System is meant to be a "fully funded" one, that is, as explained at trial by Jonathan Schwartz, the chief actuary of the City's five retirement systems, one with sufficient assets on hand to cover the accrued "past service" liability to all active members and also to guarantee benefits for life to those presently on the pension rolls. As of June 30, 1974, the TRS's liability for retired members was $1,615 million, and its accrued liability for active members, $3,008 million.

 In actual practice, however, this liability is far from fully funded. The primary reason is that additional past service liabilities were created in 1970 when the New York State Legislature substantially increased the level of retirement benefits for the System.

 The cash contributions from the City constitute by far the most significant source of TRS income, substantially outweighing income from employee contributions and invested plan assets. For the fiscal years ending June 30, 1974 and June 30, 1975, the City's annual cash contribution constituted 62 percent of total income. *fn2"

 The exclusive management and control of the several "funds" of the TRS is vested in a Board of Trustees. N.Y. City Admin. Code § B20-31.0. The seven-member Board consists of the President of the Board of Education (or his designate), the Comptroller, two mayoral appointees and three members of the retirement association elected from the contributors (the teacher-trustees). At trial, the parties called as witnesses two of the trustees who had served on the Board of the TRS at the time of the negotiation and signing of the November 26 Agreement -- the third deputy Comptroller, William Scott, and one of the teacher-trustees, Joseph Shannon. In addition, depositions of the two remaining teacher-trustees, Reuben Mitchell and Bernard Goldberg, were submitted in evidence.

 Each of the trustees stated that it was the threat of the City's imminent bankruptcy that accounted for his affirmative vote on the question whether to purchase the City's bonds under the terms of the November 1975 Agreement. The trustees had received recurring reports throughout the summer and fall of 1975, in meetings with City, State and Municipal Assistance Corporation ("MAC") officials, of the deteriorating state of the City's finances, in connection with purchases of MAC bonds on behalf of the TRS. These purchases, staggered over the months of August, September and October 1975, totalled $275 million. The trustees had been informed that these purchases were necessary if the City was to avoid bankruptcy.

 In the early part of November 1975, concerned about the City's ability to continue its annual cash contributions to the TRS, the teacher-trustees initiated meetings with MAC officials and Jack Bigel of Program Planners, Inc., consultant to several of the City's unions, to review long-range plans that were being developed to meet the City's fiscal crisis. They reviewed figures on the income needs and projected income of the City and on the current and projected levels of the City's annual contributions to the TRS. There were also frequent meetings among the trustees and the New York City Comptroller and Corporation Counsel, to discuss the projected short-falls in the City's budget and the need for long-term financial assistance.

 In mid-November, Goldberg obtained from the office of the Comptroller a draft of the proposed three-year plan for the financial recovery of the City. He studied the plan with his fellow teacher-trustees and consulted with Jack Bigel. On or about November 24, 1975, the trustees were formally asked in a meeting called by the Mayor at City Hall to subscribe to the plan. They were told by officials of MAC (Felix G. Rohatyn, George D. Gould and Herbert Elish) and by the third-deputy Comptroller, William Scott, that, without the pension funds' participation in the plan, the City would go into bankruptcy. Scott, who was then serving on a "contingency committee" concerned with the threat of the City's bankruptcy, testified at trial that had the plan not been adopted, the City would have had to default on its obligations on December 11, 1975 or shortly thereafter.

 The predominant concern of the trustees was the effect that a bankrupt City would have on the solvency of their own retirement fund. In their testimony, the trustees acknowledged that it would have been impossible for them to predict with certainty how City funds would be allocated in bankruptcy. Their considered judgment at the time, however, was that essential services and bondholders would have a prior claim to the City's funds and that the City's annual payments to the TRS would cease. The conclusion of Scott's contingency committee, which was passed on to the trustees, was that there would not be sufficient cash flow for the City to be able to continue its contributions to the pension funds in bankruptcy and that City funds would rather have to be devoted to those services immediately necessary to the health and welfare of the City, including hospitals and the Police and Fire Departments. The office of the Corporation Counsel advised similarly.

 In the absence of City contributions, and if the TRS continued to pay full benefits to current and future retirees as they fell due, Schwartz calculated that it would be immediately necessary to invade capital and that the reserves of the TRS would then be depleted in 8 to 10 years, *fn3" even if there were a continuation of employee contributions and a relatively constant rate of retirement. *fn4" Schwartz advised several of the trustees individually of his calculations prior to their entering into the November 26 Agreement. *fn5"

 The trustees were unanimously of the view that their fiduciary obligation was to safeguard the interests of all of the members of the TRS -- those still in active service and therefore dependent upon the long-term viability of the fund for their retirement incomes, as well as those already retired. Their major concern, therefore, was to prevent the depletion of the assets of the System by protecting what was, according to the information available to them, the major and indispensable source of the TRS's funding -- the City of New York. Scott emphasized in his testimony that the trustees went to great lengths to satisfy themselves of the absence of any reasonable possibility that the City would be able to obtain the needed money from other sources. Only when they were convinced that the pension funds were the lenders of last resort did they authorize the investment in City bonds. *fn6"

 In the tense November 24 meeting at City Hall, the trustees were informed that the other retirement systems had already approved the proposed Agreement. Their own approval was urgently sought. Despite pressure from the Governor's office and from City Hall, however, the teacher-trustees voted initially to reject the Agreement. They insisted first upon the incorporation of a number of provisions that, in their view, were necessary to secure the necessary protection for the beneficiaries of the TRS. For several reasons, the trustees' inclination was to accept the Agreement if their conditions were met. Primarily, they reasoned that if they committed the $860 million of TRS funds to the purchase of City or MAC bonds, this amount would be approximately equal to the amount that the City would contribute to their System during the 2-1/2 year period to follow. The TRS thus could be no worse off under the plan than it would be in bankruptcy without City funds. Moreover, the plan provided the prospect that the City would remain a viable institution and that the bonds, backed by the full faith and credit of the City and yielding 9-percent interest annually, would be paid when due.

 To insure, however, that their participation in the plan would not be a futile gesture, with bankruptcy to follow nonetheless, the trustees obtained a provision conditioning the pension funds' investment in the City bonds on the enactment of federal legislation providing for the seasonal financing needs of the City for the 2-1/2 year period of the Agreement. *fn7" They further conditioned the investments on the passage of state legislation concerning the legal status of the pension funds and the responsibilities of the trustees. The legislation, enacted as Chapter 890 of the Laws of New York of 1975, effective December 5, 1975, contained provisions (1) authorizing the City pension funds to purchase City or MAC obligations without regard to the percentage of the assets of the fund invested therein; (2) authorizing the trustees of the funds to consider, "in addition to other appropriate factors recognized by law," the extent to which their investments in such obligations would

"(a) maintain the ability of the city of New York (1) to make future contributions to such systems and funds and (2) to satisfy its future obligations to pay pension and retirement benefits to members and beneficiaries of such systems and funds and (b) protect the sources of funds to provide retirement benefits for members and beneficiaries of such systems and funds."

 (3) making the City of New York the indemnitor of the trustees for losses arising out of claims for alleged negligence, waste or breach of fiduciary duty resulting from the purchase of City or MAC obligations or the sale of any assets of the fund to produce sufficient revenues for such purchase; (4) making the payment of pension benefits an essential service; and (5) immunizing the funds of the retirement systems from the claims of the general creditors of the City.

 Before voting their approval of the Agreement, the trustees also negotiated the reduction of the TRS's commitment from $1 billion to $860 million so that, in respect to the other retirement systems, the TRS would ...

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