MO Funds’ Suit against State Street Moved to State Court

The 8^th U.S. Circuit Court of Appeals, after considering the Retirement Systems’ relative lack of independence from the State of Missouri as well as the potential impact that a money judgment in the Systems’ favor could have on the State of Missouri’s treasury, found that the State of Missouri is a real party in interest in this case. Thus, it concluded that the Retirement Systems are merely arms of the State of Missouri and are not “citizens,” meaning State Street failed to prove the U.S. District Court for the Western District of Missouri had original jurisdiction over this case.  

In its discussion, the appellate court noted that state statutes greatly restrict the Retirement Systems’ operational independence. Whereas a typical political subdivision may provide a wide variety of services, the State of Missouri created the Public School Retirement System (PSRS) and the Public Education Employee Retirement System (PEERS) solely to “provid[e] retirement allowances and other benefits” to public-school employees who work in districts with populations of less than 400,000 people.   

In addition, state law greatly regulates the way the Systems carry out their limited purpose.   

The court also noted that the Retirement Systems are financed by contributions from public-school employees and their employing school districts, not by periodic state appropriations. Moreover, the Retirement Systems’ funds are in the Board’s custody and are not to be placed into the Missouri treasury’s custody or commingled with the State’s funds.   

However, the Supreme Court of Missouri found that St. Louis, Missouri’s police board was an “agency of the state” for purposes of the State Legal Expense Fund (SLEF), which makes funds available “for the payment of any claim or any amount required by any final judgment rendered by a court of competent jurisdiction against . . . any agency of the state.” Because the PSRS and PEERS board members were appointed by the governor, the 8^th Circuit found good reason to believe that Missouri law would treat the Retirement Systems as agencies of the state for purposes of the fund.   

Thus, it is likely that judgments obtained against the Retirement Systems could be paid from Missouri’s treasury through the SLEF. Consequently, a money judgment in favor of the Retirement Systems could benefit the State of Missouri’s treasury by increasing the Systems’ solvency.  

In 2008, over $7 billion of the Retirement Systems’ assets were invested in one of State Street’s investment vehicles called the Quality D Fund. Between October 31, 2008, and May 29, 2009, the Board withdrew much of the Retirement Systems’ assets from the fund. State Street claimed this withdrawal was wrongful, so in September of 2009 it ordered the Board to transfer much of the withdrawn funds back into the Quality D Fund.   

The Board refused to make the transfer, however, claiming that doing so would have resulted in a $125 million loss to the Retirement Systems. In response, State Street devalued the Retirement Systems’ remaining interest in the Quality D Fund. According to the Board, this devaluation resulted in a loss of nearly $100 million to the Retirement Systems.