Court: Use of pension funds inappropriate

RALEIGH -- Gov. Mike Easley was wrong to intercept $225 million headed to North Carolina state employee pension funds to help cover the 2001 budget shortfall because the state and federal constitutions protect them, an appeals court ruled Tuesday.

Though all of the money ultimately was repaid to the retirement system funds and pension benefits didn't suffer, the 14 former and current state workers who first sued in 2002 want to ensure that future governors can't divert pension benefits during a fiscal crisis.

GOP Gov. Jim Martin also withheld pension money, to patch a 1991 shortfall.

"It's a great ruling for the teachers and the state employees," said Hardy Lewis, an attorney representing the plaintiffs. "It essentially says the government can't use the pension fund as a rainy-day fund."

Easley has said he took the money appropriated by the legislature for the N.C. Teachers' and State Employees' Retirement System and two other public employee funds because the state constitution required that he keep the budget balanced.

The governor scoured state government in his first year in office for money to cover a budget that was off by $850 million. Some of the money was repaid by the end of the 2001, but $130 million was not immediately returned.

Easley continued to defend his actions Tuesday, with spokesman Seth Effron pointing out that the shortfall reached a combined $2.5 billion by mid-2003.

"For the court to say the governor's action was not necessary is not only legally wrong but mathematically impossible," Effron said in a prepared statement.

Early last year, Superior Court Judge Joseph John ruled that the retirement funds can only be used for retirement purposes. He cited both the contracts clause of the U.S. Constitution and the state's constitutional prohibition against using retirement system funds for other things.

Defining 'diverted'

On appeal, attorneys for the state representing Easley, outgoing State Controller Robert Powell, Treasurer Richard Moore and others argued the $225 million had never been actually "diverted" because the money wasn't actually transferred to the pension funds.

Writing the unanimous opinion for the three-member panel, Judge Linda McGee said the plain meaning of "diverted" also applied to money earmarked by lawmakers but hadn't been deposited.

"Instead of seeking a tax increase or cuts in other state programs that did not enjoy special constitutional protection, defendants diverted the employer contributions to the retirement system," McGee wrote in the opinion, agreed to by Judges Jim Wynn and Ann Marie Calabria. "Our court cannot say that this diversion ... was reasonable."

Lawyers from Attorney General Roy Cooper's office represented the state, and they will review the ruling with Easley's office before deciding what to do next, Cooper spokeswoman Noelle Talley said. The case could be appealed to the state Supreme Court.

The legislature ultimately returned the $130 million to the retirement system in five installments, the last one approved in 2007. The state employees who sued still want the state to pay interest on the intercepted money for the time it was held.

The State Employees Association of North Carolina, a 55,000-member union, filed a similar lawsuit that was delayed until the current case was resolved. Tuesday's decision "keeps retirement funds where they should be -- with retirees who have dedicated their careers to serving the public," association Executive Director Dana Cope said.