Court Moves PA Funds’ Suit to State Court

May 24, 2011 ( - The Commonwealth of Pennsylvania Public School Employees’ Retirement System (PSERS) and the Pennsylvania Municipal Retirement Board’s (PMRB) suit against Citigroup for alleged undisclosed exposure to mortgage-backed securities has been sent back to state court.

The U.S. District Court for the Eastern District of Pennsylvania found that Pennsylvania’s financial interest in the outcome of this case, PSERS’ status under state law, and the system’s lack of autonomy all indicate that PSERS is an arm of the state for jurisdictional purposes.  

In its opinion, the court noted that Pennsylvania guarantees the maintenance of PSERS’ reserve fund and its payment of interest charges, annuities and other benefits. The state also must appropriate funds from Pennsylvania’s General Fund if PSERS’s annual earnings do not exceed five and one-half percent, less administrative expenses and earnings credited to the system.   

In addition, the court pointed out that Pennsylvania has undertaken to pay many of the PSERS’ debts through its commitment to keep PSERS solvent. All of this suggests that PSERS is an arm of the state.  

The district court also found that while PSERS is run by an independent administrative board within the Pennsylvania government, and enjoys the “power and privileges of a corporation,” the Pennsylvania Office of General Counsel must serve as its legal adviser. In addition, its fifteen-member board must include the state’s secretary of education, the state treasurer, two state senators, two state representatives, and two members appointed by the governor.  

The state treasurer also serves as custodian of PSERS’s funds, and PSERS’ board must submit a budget for the system’s administrative expenses to the state General Assembly for approval. The Pennsylvania State Insurance Department supervises the system’s fund and ledger accounts.  

The court concluded PSERS is thus subject to a great degree of state influence and control.  

The case is Pennsylvania School Employees’ Retirement System v. Citigroup Inc., E.D Pa., No. 11-2583.