Board of Trustees of Employees' Retirement System of City of Baltimore v. Mayor and City Council of Baltimore City

• Decision Date: 01 September 1989
• Citation: 562 A.2d 720,317 Md. 72
• Parties: , 58 USLW 2153, 11 Employee Benefits Cas. 1521 The BOARD OF TRUSTEES OF the EMPLOYEES' RETIREMENT SYSTEM OF the CITY OF BALTIMORE et al. v. MAYOR AND CITY COUNCIL OF BALTIMORE CITY. Yale LUBMAN et al. v. MAYOR AND CITY COUNCIL OF BALTIMORE CITY. 95 Sept. Term 1987 104 Sept. Term 1987.
• Court: Maryland Court of Appeals

Page 72

317 Md. 72

562 A.2d 720, 58 USLW 2153, 11

Employee Benefits Cas. 1521

The BOARD OF TRUSTEES OF the EMPLOYEES' RETIREMENT SYSTEM OF

the CITY OF BALTIMORE et al. v. MAYOR AND CITY COUNCIL OF BALTIMORE CITY.

Yale LUBMAN et al. v. MAYOR AND CITY COUNCIL OF BALTIMORE CITY.

95 Sept. Term 1987

104 Sept. Term 1987.

Court of Appeals of Maryland.

Sept. 1, 1989.

George A. Nilson (Lee Baylin, Piper & Marbury, on the brief) Baltimore, for appellants in Appeal No. 95, Sept. Term, 1987.

Douglas Foster (Martin S. Kaufman, Mid-Atlantic Legal Foundation, both of New York City and James R. Eyler, Stephen J. Hughes, Miles & Stockbridge, Baltimore, all on the brief), for appellants in Appeal No. 104, Sept. Term, 1987.

Melvin J. Sykes and H. Russell Frisby, Jr. (Matthew W. Nayden and Melnicove, Kaufman, Weiner, SMouse & Garbis, P.A. on the brief), Baltimore, for appellee in Appeals Nos. 95 and 104, Sept. Term, 1987.

AMICUS BRIEF of Baltimore Chapter of National Lawyers Guild, American Civil Liberties Union of Maryland, Maryland Chapter of the National Conference of Black Lawyers, Maryland Citizen Action Coalition, Pax Christi/Baltimore, the Archdiocese of Baltimore South Africa Coalition, The Baltimore Anti-Apartheid Coalition, The Johns Hopkins University Coalition for a Free South Africa Coalition, The Lutheran Community Center at Missiah, The Baltimore Emergency Response Network, The Homewood Friends Meeting, Neighborhoods Institute/Community Leadership Center, Baltimore Jobs with Peace, Nuclear

Free America, Central America Solidarity Committee, The Baltimore Local of the Democratic Socialists of America, the UMBC Anti-Apartheid Coalition, and Mankekolo Mahlangu Ngcobo, filed by David Norken, Eleanor Montgomery, C. William Michaels and Deborah Weimer on the brief all from Baltimore.

Amicus Curiae of Lawyer's Committee for Civil Rights Under Law in support of appellees, filed by Martin R. Gold, Robert P. Mulvey, Vicki F. Van Fleet and Gold, Farrell & Marks all from New York City and Conrad Harper, Stuart J. Land, Norman Redlich, William L. Robinson, Judith A. Winston and Gay J. McDougall, Washington, D.C. all on the brief.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS and BLACKWELL, JJ.

ELDRIDGE, Judge.

These cases involve numerous challenges to two Baltimore City ordinances requiring that Baltimore City employee pension systems divest their holdings in companies doing business in South Africa.

The pertinent facts are as follows. The City of Baltimore maintains three employee pension systems: The Elected Officials Retirement System (E.O.S.), the Fire and Police Employees Retirement System (F. & P.), and the Employees Retirement System (E.R.S.). Each system is administered by a Board of Trustees, ¹ which is responsible for ensuring that members and beneficiaries ultimately receive the benefits to which they are entitled. As of December 31, 1986, the total sum accumulated in the three systems was approximately $1.2 billion. ² Virtually all of these assets are invested in either equities or common stocks (40% to 50%), fixed income instruments (40% to 50%), or cash and short-term equivalents.

Under each system, members are entitled to specific future benefits (defined benefits). In addition, the systems include a "variable benefits" program, which provides additional benefits that depend directly on the rate of return on the funds. Under this program, if the rate of return in a given year exceeds 7.5%, then all of the excess between 7.5% and 10% goes toward the payment of additional benefits; in addition, if the rate of return exceeds 10%, then half the excess over 10% goes toward the payment of additional benefits while the City receives the other half. ³

In 1986 the City Council of Baltimore passed, and on July 3, 1986, the Mayor of Baltimore signed, Ordinance No. 765, which amended Baltimore City Code (1976, 1983 Repl.Vol., 1986 Cum.Supp.), Art. 22, §§ (7)(a), (35)(a). Section 1(i) of the Ordinance provides that no funds of the E.R.S. or the F. & P. shall remain invested in, or in the future be invested in, banks or financial institutions that make loans to South Africa or Namibia or companies "doing business in or with" those countries. ⁴ Section 1(ii) of the Ordinance states that entities doing business in or with South Africa, within the meaning of § 1(i), "shall be identified by reference to the most recent annual report of the Africa Fund entitled 'Unified List of United States Companies with Investments or Loans in South Africa and Namibia.' " ⁵ Section 3 of the Ordinance further stipulates that divestiture shall occur within a two-year period. That period began to run on January 1, 1987. See § 2(b). Section 2(d) empowers a Board of Trustees to suspend divestiture during this two-year period, provided that, before acting, the Board adopts a resolution. Under § 2(e), the Board, in adopting such a resolution, must find:

"(1) That the rate of return on the funds [is] substantially lower than the average of the annual earnings on the funds over the past five years, and

(2) That continued divestiture under this ordinance will be inconsistent with generally accepted investment standards for conservators of pension funds notwithstanding the intent of this ordinance, or

(3) That divestiture under the divestiture program will cause financial losses to the funds."

Finally, in § 2(f), the Ordinance specifies that, when adopting a suspension resolution, a Board must state in writing its standards and conclusions, and set forth the duration of the suspension; the period of suspension, however may not exceed 90 days, and the two-year time period for divestiture is tolled during the suspension.

Apparently because Ordinance No. 765 by its terms applies only to the E.R.S. and the F. & P., it was unclear whether the E.O.S. was also required to divest. As a result, the City Council passed and the Mayor signed Ordinance No. 792, which amended Baltimore City Code (1976, 1983 Repl.Vol., 1986 Cum.Supp.), Art. 22, § 23(b), to provide expressly that the City's divestiture program applies to the E.O.S. ⁶

As of November 1987, the two-year period for divestiture had not begun to run for the F. & P. and the E.R.S. For each quarter since the Ordinances' effective date, the Trustees of those systems have found, among other things, that the "rate of return on the funds [has been] substantially lower than the average of the annual earnings on the funds over the past five years." Thus, as for those systems, the divestiture program has been suspended for successive 90-day periods.

On December 31, 1986, the Trustees of each of the City's three employee pension systems, and two employee beneficiaries, filed this action against the Mayor and City Council of Baltimore, asking the Circuit Court for Baltimore City to declare the Ordinances invalid. In support of this request, the Trustees contended: that § (1)(ii) of Ordinance No. 765 impermissibly delegates legislative power to the Africa Fund, a private entity; that the Ordinances unconstitutionally impair the obligation of the City's pension contracts with the systems' beneficiaries; that the federal Comprehensive Anti-Apartheid Act of 1986, Pub.L. No. 99-440, 100 Stat. 1086 (1986), preempts the Ordinances; that the Ordinances intrude on the federal government's exclusive power to conduct foreign policy; and that the Ordinances violate the Commerce Clause of the United States Constitution, Art. I, § 8, cl. 3. On January 9, 1987, four pension fund beneficiaries, raising related arguments, moved to intervene on the side of the Trustees. ⁷

The Trustees moved for summary judgment. ⁸ After hearing argument on March 26, 1987, the circuit court denied the motion for summary judgment, finding it necessary first to determine facts concerning the Ordinances' financial impact. On April 6, 1987, the circuit court denied the motion to intervene. ⁹

During the trial, which took place between June 22 and July 10, 1987, the parties presented a large amount of highly technical evidence concerning the Ordinances' financial impact. Thereafter the circuit court filed an opinion and a declaratory judgment containing numerous findings and conclusions. The circuit court, based on the evidence of financial impact, held that "it cannot be concluded that the Ordinance[s] will impair the performance of the equity funds." ¹⁰ In reaching this decision, the trial judge discounted the parties' evidence detailing the performance of other South Africa free (S.A.F.) equity funds:

"Some have fared better than the unrestricted equity funds of the same money manager; some fared worse. Many did better than the [Standard & Poor 500 Index]. ¹¹ All the experts agreed, however, that the track records of these SAF funds is too short (less than three years) to be statistically significant."

Moreover, the court noted that "not one witness was able to express the opinion that the percentage return on the plaintiffs' equity investment will be reduced because of the Divestment Ordinance[s]."

The circuit court indicated that the Ordinances barred investments in 120 of the 500 companies on the Standard & Poor 500 (S & P 500). The court further recognized that these companies represent approximately 40% of the market capitalization of the S. & P. 500. ¹² Thus, the court found that, under the Ordinances, the pension systems' portfolio will have more investments in relatively smaller companies whose stock prices tend to be more volatile. The court stated, however, that this was not necessarily a disadvantage, reasoning that in the long run such stocks perform as well or better than larger companies' stocks.

The Trustees had attempted to show that the Ordinances would adversely affect their money managers' "active" style, which had proved very successful. Generally, this style emphasizes investments in certain sectors of the economy in an attempt to surpass rather than merely to duplicate...