Opposition Brief — Lubman v. Mayor of Baltimore City

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No. 89-889

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

YALE LUBMAN, THOMAS J. MURPHY,

JOHN S. SEISS AND JOSEPH STEWART,

Petitioner

—V.—

MAYOR AND CITY COUNCIL OF

BALTIMORE CITY,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

RESPONDENT’S BRIEF IN OPPOSITION

AND IN THE ALTERNATIVE

REQUEST FOR SUMMARY AFFIRMANCE

MELVIN J. SYKES

Counsel of Record

310 Maryland Bar Center

520 West Fayette Street

Baltimore, Maryland 21202

(301) 727-3078

H. Russell Frisby, Jr.

George F. Pappas

W. Warren Hamel

Venable, Baetjer and Howard

1800 Mercantile Bank & Trust Building

Two Hopkins Plaza

Baltimore, Maryland 21201

(301) 244-7400

Attorneys for Respondent

QUESTIONS PRESENTED

1. Are the Baltimore City Ordinances (the ‘‘Ordi-

nances’’) valid under the Contracts Clause and Takings

Clause of the Federal Constitution, and do they accord to

the beneficiaries of the pension funds the due process of

law?

2. Are the Ordinances a valid exercise of state powers,

consistent with the Interstate Commerce Clause of the Fed-

eral Constitution?

3. Are the Ordinances a valid exercise of state and local

powers, not preempted by federa! statute or regulation?

_ 4. Are the Ordinances consistent with the federal

authority over foreign affairs, and with the Foreign Com-

merce Clause of the Federal Constitution?

Questions Presented

Table of Contents

Argument

TABLE OF CONTENTS

The Baltimore City Ordinances Do Not Violate

the Contracts Clause of the Federal

Constitution and Do Not Take Petitioners’

Property Without Just Compensation or Deny

Petitioners Due Process of Law .............

A. The Ordinances Do Not Violate the

Contracts CD 5 Ao eee lc kcces

The Ordinances Do Not Change Any

Contractual Rights or Obligations ......

Even if the Ordinances Impaired

Petitioners’ Contract Rights, the

Contracts Clause Would Not Be Violated,

Because the Impairment Would Be

ee Re Ap.

In Any Event, the Ordinances Are a

Justified Exercise of Local Legislative

Power Because They Are Reasonable

and Necessary to Serve an Important

Public PRNES oink.

B. The Ordinances Do Not take Petitioners’

Property Without Just Compensation or

Deny Petitioners Due Process of Law .....

The Ordinances Do Not Take Petitioners’

Property Without Just Compensation ...

The Ordinances Do Not Deprive

Petitioners of Due Process of Law ......

TABLE OF CONTENTS—(Continued) ~

Page

Il. The Ordinances Do Not Violate the Interstate

Commerce Clause of the Federal Constitution... 12

A. The Ordinances Are a Valid Exercise of

State Sovereign Power Exempted From the

Strictures of the Interstate Commerce

Clause by the ‘‘Market Participant’’

SS rok oh eee PERE EP Eade Vee 12

B. Even if the Market Participant Doctrine

Were Not Applicable, the Ordinances

Would Not Violate the Interstate Commerce

RE ie ae ee ere 13

III. The Ordinances Are Not Preempted by Federal

eg 14

A. No Federal Statute Expressly or Impliedly

Preempts the Ordinances ................ 15

B. No Congressional Legislation Occupies

EE Se ee ee 16

C. The Ordinances Are Not Preempted by

Conflict or Inconsistency with Federal Law

Aaa Tepe suet eraere wetnn se er ae eee 17

IV. The Ordinances Do Not Contravene the Foreign

Relations Power or the Foreign Commerce

Clause of the Federal Constitution ........... 18

A. The Ordinances Do Not Infringe the

Federal Foreign Relations Power ......... 18

B. The Ordinances Do Not Contravene the

Foreign Commerce Clause ............... 22

soe De oy duh od #84 4m Re aR 23

EE Goin 64 dp oe 3S CASO CS Se ee ee eh ee eS A-1

iil

TABLE OF AUTHORITIES

CASES Page

Allied Structural Steel Company v. Spannaus,

ee ee ED skh 9s OSs Swed ole ess eer oe

Board of Regents v. Roth, 408 U.S. 564 (1972) ..... 11

Board of Trustees of the Employees’ Retirement

System of the City of Baltimore, et al. v. Mayor

and City Council of Baltimore City, 317 Md. 72,

Pe PED oreo eRe gaa eee babes 1

Bond v. Hume, 243 U.S. 15 (1917) .............0. 19

City of El Paso v. Simmons, 379 U.S. 497 (1965) ... 9

Clark v. Allen, 331 U.S. 508 (1947) ............. 18,19,20

Commonwealth Edison Co. v. Montana,

I So ve hoe ca os adeevsctes 18

Connolly v. Pension Benefit Guaranty Corp.,

ee Re ee os oils pereeb a s ba sey es 9

Container Corp. of America v. Franchise Tax

Boara, 468 U.S. 160 (3968)... 26. 6......... 17,21,22,23

Crown v, Patrolmen’s Variable Supp. Fund

Trustees, 659 F. Supp. 318 (S.D.N.Y.),

aff'd, $19 F.2d 47 (2d Cir. 1967) ............... 9

DeCanas v. Bica, 424 U.S. 351 (1976) ............ 17,21

Energy Reserves Group, Inc. v. Kansas Power and

Light Co., 459 U.S. 400 (1983) ................;. 8,9,10

East New York Savings Bank v. Hahn,

Se ee Ure hos ax vedenes 10

Exxon Corp. v. Governor of Maryland,

Pe A RUE hehe das sce ivekoevceees 14,18

Garcia v. San Antonio Metropolitan Transit

Authority, 471 U.S. 1049 (1985) ............... 13

Gorun v. Fall, 393 U.S. 398 (1969),

aff'g 287 F. Supp. 725 (D. Mont. 1968) .......... 21

Harris v. McRae, 448 U.S. 297 (1980) ............ 13

Hillsborough County, Fla. v. Automated Medical

Laboratories, Inc., 471 U.S. 707 (1985) ........ 16,17,18

Hines v. Davidowitz, 312 U.S. 52 (1941) ......... 17,18,19

TABLE OF AUTHORITIES (Continued)

CASES Page

Hughes v. Alexandria Scrap Corp.,

Po Ae 2 rere ey ree oe 12

International Paper Company v. Ouellette,

Py Bie ee | ee eee ee errs 18

Japan Line, Ltd. v. County of Los Angeles,

eee re ee) ee ee 22,23

K.S.B. Technical Sales Corp. v. North Jersey

Water Supply Comm’n, 75 N.J. 272,

eB reer rT er 21

Maher v. Roe, 432 U.S. 464 (1977) ............... 13

Maine v. Taylor, 477 U.S. 131 (1986) ............. 13

Michigan Canners & Freezers Ass’n v.

Agricultural Marketing and Bargaining Bd.,

407 UB SES IG ies MT 14,17

New York State Dept. of Social Services v. Dublino,

413 US. GEGSED Ais vccnesed Ziv eae enawls 15,17

New York Tel. Co. v. New York State Dept. of Labor,

446-U.B. GIS (IGT) ook cccdanvsvuse eee 15

New York Times Co. v. City of New York Comm’n on

Human Rights, 41 N.Y.2d 345, 393 N.Y.S.2d 312,

961 N.E.Ge SOR COTE) 65 5c dberevenlaeesseaess 22

Pacific Gas & Electric Co. v. State Energy

Resources Conserv. & Dev. Comm’n,

461 U.S. 200 CD kn ci vas cceaeneaaee 18

Pension Benefit Guaranty Corp. v. R.A. Gray Co.,

467 US. TITEINBO oiivcascesxcceeieeeeees 11

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) .... 13

Reeves, Inc. v. Stake, 447 U.S. 429 (1980) ........ 12,21,22

South-Central Timber Development, Inc. v.

Wunnicke, 467 U.S. 82 (1984) ..........0eeee. 13,22

Springfield Rare Coin Galleries, Inc. v. Johnson,

115 Ill.2d 221, 503 N.E.2d 300 (1986) ........... 22

Tron v. Condello,

427 F. Supp. 1175 (S.D.N.Y. 1976) ............. 9

TABLE OF AUTHORITIES (Continued)

CASES Page

United States v. Curtiss-Wright Export Corp.,

SOO UA. BOO CII. 6 <occansevicoasaweetescn 19

United States v. Pink, 315 U.S. 203 (1942) ........ 18,19

United States Trust Company v. New Jersey,

Gl UB. LGR ik tise esse ees 7,8,9,10,11

Wickard v. Filburn, 317 U.S. 171 (1942) .......... 5

Withers v. Teachers’ Ret. Sys. of New York, 447 F.

Supp. 1248 (S.D.N.Y. 1978), aff'd, 595 F.2d 1210

(Od Car, BBF0b .. cnsvdavaiecssensss eee 9,11

White v. Mass. Council of Construction Employers,

Fuc., 4B UB. SRG GIIG 5 ke Cictin eae a eens es 12

Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda),

Ltd., 37 N.Y.2d 220, 371 N.Y.S.2d 892, 333

N.E.2d 168 (1975), cert. denied, 423 U.S. 866

(UOTE) ..0useceg 0d cece ub eens eee eee 19

Zschernig v. Miller, 389 U.S. 429 (1968),

reh’g denied, 390 U.S. 974 (1968) ........... 18,20,21,22

U.S. CONSTITUTION

article I

§ 8, cl. 3 (Interstate Commerce Clause) ......... 13

§ 8, cl. 3 (Foreign Commerce Clause) ........... 22

$ 10, cl. 1 (Contracts Comme) . cs. cece cteacs 19,20

article VI

cl. 3 (Gepreneay CO 6 os hc ns soa eens 14

amendment V (Due Process Clause).............. 11

Be a Bere irre see rene 11

SE Te os Ss oak oa ce ea ee Oe 12,13

amendment XIV (Due Process Clause) ........... 11

STATUTES AND ORDINANCES

Comprehensive Anti-Apartheid Act of 1986

' (“CAAA”) 100 Stat. 1086 et seg., 22 U.S.C. § 5001

ot seg. (10GD BR ck iortis Saas 14,15,16,17,18,20

§ 314, 22 U.S.C. § 5064 (1989 Supp.) ........... 16

§ 316, 22 U.S.C. § 5066 (1989 Supp.) ........... 16

§ 606, 22 U.S.C. § 5116 (1989 Supp.) ........... 15

TABLE OF AUTHORITIES (Continued)

STATUTES AND ORDINANCES

22 U.S.C. § 262-d(aX1) (1989 Supp.) ...........0..

Baltimore City Charter

article II, §§ 24-26 (1964 Rev.) ................

Baltimore City Code

er i, coins db eoo see eb ebnwes

6 iy ns abs Uhemecanbnkeaeee

§ 17(eXii) (1983 Repl. Vol.) ..................

Ssh sodas 0084 ce een eee

BP PS

CIE So wide ses cok caknvvevegcens

Baltimore City Ordinances

nic nus te boaeadeees

SS EER erry rer

i Ne oie ene ceiwec anes peece

REGULATIONS, RULES AND

ADMINISTRATIVE DECISIONS

Supreme Court Rules

tr ree he a a oe es

OTHER AUTHORITIES

132 Cong. Rec. $9306 (July 17, 1986) ............

132 Cong. Rec. $12533 (Sept. 15, 1986) ..........

132 Cong. Rec. H6767 (Sept. 12, 1986) ...........

Hearing and Markups Before the Subcommittee on

Fiscal Affairs and Health of the Committee on the

District of Columbia, House of Representatives,

99th Cong., 2d Sess. on H. Con. Res. 216;

Se, ss sd Oc Rete heer

Vii

TABLE OF AUTHORITIES (Continued)

OTHER AUTHORITIES

House Resolution 549 (1986) ....................

Restatement (Second) of Foreign Relations Law

Sree GIN © kw ba wk ees bavects betters

Uniform Foreign Money Judgment Recovery Act

Eo ie SG oe xo eV hb ae8 bod oe ROR OR

Madison, The Federalist No. 51 .........00 cece ee

Note, The Supreme Court 1967 Term, 82 Harv. L.

adh seh eceice ieee CAO ALA YOO

Stern, Gressman and Shapiro, Supreme Court

Pe ee

Vill

No. 89-889

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

YALE LUBMAN, THOMAS J. MURPHY,

JOHN S. SEISS AND JOSEPH STEWART,

Petitioner

—V.—

MAYOR AND CITY COUNCIL OF

BALTIMORE CITY,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

RESPONDENT’S BRIEF IN OPPOSITION

AND IN THE ALTERNATIVE

REQUEST FOR SUMMARY AFFIRMANCE

Respondent Mayor and City Council of Baltimore urges that the

Petition for Writ of Certiorari filed herein which seeks review of

the Maryland Court of Appeals’ decision in Board of Trustees of

the Employees’ Retirement System of the City of Baltimore, et al. v.

Mayor and City Council of Baltimore City, 317 Md. 72, 562 A.2d

720 (1989) be denied, or in the alternative, that this Court sum- -

marily affirm the decision of the Maryland Court of Appeals pur-

suant to Rule 16.1 of the Supreme Court Rules.

STATEMENT OF THE CASE

The Maryland Court of Appeals unanimously affirmed a ruling

of the Circuit Court for Baltimore City! sustaining the validity of

Baltimore City Ordinances Nos. 765 and 792 of 1986 (‘‘the Ordi-

nances’”’). The Ordinances require that the Boards of Trustees

(“Trustees”) of the Baltimore City Employee Pension Funds?

divest their holdings in companies doing business in South Africa

and Namibia (““SA” companies) within two years, plus such exten-

sions as the Ordinances permit.? The Court of Appeals concluded

that the Ordinances represent a moderate attempt by the City of

Baltimore ‘“‘simply to ensure that the City’s pension funds would

not be invested in a manner that was morally offensive to many

Baltimore residents and many beneficiaries of the pension funds.”’

P. App. at D-61. The Ordinances ‘‘permit the City and its citizens

to distance themselves from the moral taint of co-venturing in

firms that in the view of many, help to maintain South Africa’s

system of racial discrimination.” P. App. at D-82.

The Court of Appeals held, as a matter of Maryland law, that

the Trustees are agencies of Baltimore City, P. App. at D-16, to

administer retirement systems “established” and ‘‘maintained’”’

by the City pursuant to its general charter powers. Baltimore City

Charter, art. II, 24-26 (1964); Respondent’s Appendix (“‘R. App.’’)

at A-1 to A-7. The Funds’ annual reports acknowledge that each

Fund is a ‘“‘component unit” of the City because of, inter alia,

financial interdependency with the City, the City’s right to desig-

nate management, the City’s ability to significantly influence

'The Circuit Court opinion is printed in Petition Appendix (“P. App.’’)

at E-1 to E-31.

“Employees’ Retirement System of the City of Baltimore (“ERS”); Fire

and Police Employees Retirement System of the City of Baltimore

(‘“F&P"’); and the Elected Officials Employees Retirement System of the

City of Baltimore (““EOS’’) --hereinafter collectively ‘‘the Funds.”’ The

Funds have a stipulated value of $1.2 billion, and are pooled for invest-

ment purposes.

*The Trustees were empowered to suspend the operation of the rdi-

nances in order to make doubly sure that the performance of the F'unds

would not suffer. The standards and procedures prescribed for suspension

are summarized at P. App. D-4 and D-5. The two year period has been

continuously suspended and has not yet begun to run with respect to the

ERS and the F&P. As to the EOS, which amounts to only approximately

$2.7 million, the operation of the Ordinances was suspended until Febru-

ary 1, 1989.

operations, and the Funds’ accountability to the City for fiscal

matters. R. App. at C-1 to C-6.

The powers of the Trustees with regard to investment have

been closely regulated by the City from the inception of the

Funds. Baltimore City Code, art. 22, §§ 7, 23 & 35 (1989 Supp.);

R. App. at B-1 to B-14, B-16 to B-30. The Ordinances amended

these sections of the City Code by adding to the limitations on the

Trustees’ investment powers a provision that at the expiration of

two years after the Ordinances’ effective date, plus applicable

extensions, the Trustees shall be divested of holdings in SA com-

panies. The Ordinances did not change any provisions relating to

benefits.

In December, 1986, the Trustees filed this action in the Circuit

Court for Baltimore City seeking to have the Ordinances declared

invalid. P. App. at D-6. Petitioners unsuccessfully attempted to

intervene.’ After a lengthy trial, during which ‘‘the parties pre-

sented a large amount of highly technical evidence concerning the

Ordinances’ financial impact’, P. App. at D-7, the trial court

upheld the validity of the Ordinances. The Maryland Court of

Appeals affirmed this holding in a painstaking and exhausting

opinion. P. App. at D-1 to D-88.° The Court of Appeals reversed

the denial of intervention, but Petitioners waived any right to a

remand for additional evidence, declaring themselves content with

“the status of parties” before the Court of Appeals “‘and for all

future proceedings in the case. .. .”’ P. App. at D-18. Both the trial

court and the Maryland Court of Appeals closely examined and

then rejected the crux of Petitioners’ argument—the contention

that the Ordinances significantly impact on the assets of the

Funds and on interstate and foreign commerce. It was conceded

during the course of the trial that the Ordinances would not

impair the performance of the fixed income investments of

the Funds. P. App. at E-26. Similarly, no expert for either side

could opine that the Ordinances would adversely affect

‘Counsel for Petitioners did not participate in the evidentiary phase of

the trial; however, Petitioners were represented by the Trustees acting in

their fiduciary capacity, and Petitioners’ counsel were permitted to par-

ticipate in legal argument.

*After reviewing the Court of Appeals decision, the Trustees voted not

to seek certiorari.

the Funds’ equity investments, and the evidence did not permit

the conclusion that such an adverse effect would occur. Jd.; P.

App. at D-8.®

After exacting examination, the cost of divesting to the Funds

was found to be miniscule. The trial court fixed the total of the

one-time initial divestment cost for the Funds’ equity and fixed-

income portfolios at $750,000. P. App. at E-30. It fixed the annual

incremental cost of trading SAF stock at $300,000, id. at E-28,

and the reduction of the annual return on the Funds’ short term

investment at $900,000. It found that ‘“‘[rJealistically . . . the initial

cost to the pension system as a result of the Ordinance{s] is one

thirty-second of 1%, and the ongoing annual cost is one-twentieth

of 1%.” Id. at E-31. The Court of Appeals agreed. Jd. at D-11.

Neither the Trustees nor the Petitioners have challenged these

figures. Maryland’s Court of Appeals affirmed the trial court’s

finding of fact that ‘‘nothing in the evidence suggests that the

Ordinance will jeopardize . . . one iota’’ the defined benefits pay-

able to present or future retirees. Jd. at E-29-30.7

®*Petitioners’ attempt to use the the market capitalization of the SA

companies on the Standard & Poor 500 list as a measure of the impact of

divestiture, see Petition at 4, is specious. For example, eliminating the

half of the United States east of the Mississippi River from the area of

the United States to be searched for the highest mountain in the United

States would not diminish the statistical probability of finding the highest

mountain in a search confined to the remaining area. Similarly, as found

below, the universe of equities left after divesting holdings in SA compa-

nies permits the selection of investment portfolios which will perform as

well if not better than undivested portfolios, P. App. at D-32-33, and will

have appproximately the same level of exposure to market risk. As the

Court of Appeals stated, under the divestiture program, ‘economically

competitive, substitute investments remain available.’’ P. App. at D-33.

At most, divestment simply involves more frequent stock transactions, P.

App. at D-11—clearly not a barrier to commerce.

A significant portion of the SA companies’ market capitalization cited

by Petitioners is represented by one company, IBM. P. App. at E-23.

Further, although South-Africa-Free (‘‘“SAF’’) companies tend to have a

smaller capitalization than do SA companies, the average capitalization of

a company in a SAF portfolio is still $3.7 billion, id. at E-24, and in the

long run such stock performs as well or better than that of companies

with larger capitalization. P. App. at D-9. “[A]dequate SAF replacement

stocks can-be-found even though the SAF companies will be replacing

larger companies.” P. App. at E-25.

‘Consequently, Petitioners’ assertion that the rate of return on the

pension trust funds will decline, Petition at 18 n.4, is absolutely incorrect.

See P. App. at D-8, D-32-33.

The scope of the Ordinances is tightly circumscribed. The Ordi-

nances simply direct how and in what securities public funds

should be invested by a public instrumentality. They apply only to

the Trustees. They do not curtail any rights or impose any obliga-

tions on individuals or on the companies themselves. They do not

require private parties to do anything. They do not affect direct

transactions in the regular course of any SA company’s business.

They are not a boycott. They do not threaten any SA company

with the loss of revenue in the operation of its business, or impose

any penalty or restriction on any company.® They do not favor

residents of the City of Baltimore or the State of Maryland or any

other state. They do not reflect an intention on the part of Balti-

more City to secure economic advantages for local businesses at

the expense of businesses situated elsewhere. They cover only a

“discrete, identifiable class of economic activity,” P. App. at D-74,

8Petitioners’ contention that if the decision of the Maryland Court of

Appeals is allowed to stand, “‘any state or city in this country could adopt

legislation that penalized American companies for doing business in any

foreign nation with whose internal policies that particular city or state

administration disagreed,’ Petition at 12 (emphasis added), strays

beyond the record in this case and exceeds the bounds of fair argument.

So does Petitioners’ contention that the Ordinances are “prescriptive

legislation that purports to have binding impact on the activities of Amer-

icans abroad or on the conduct of foreign governments.”’ Petition at 7.

Similarly, Petitioners’ reliance, Petition at 14 n.3, on Wickard v.

Filburn, 317 U.S. 171 (1942), is misplaced. First, the Ordinances cannot

be fairly lumped with exclusionary procurement laws which prevent sales

or contracts with the companies targeted by such laws, or lumped with

other divestment ordinances or statutes much differently drafted, or with

ordinances pertaining to Northern Ireland, nuclear free zones, etc. Peti-

tion at 8-10. Second, Wickard held that the triviality of any individual

farmer’s production did not preclude Congress, in the exercise of its

plenary power over interstate commerce, from including that farmer’s

production in an overall regulation covering the total crop of all farms,

whereas the instant case involves the validity, under the “dormant”

commerce and foreign relations powers, of the Ordinances of a single

city. In the instant case, Petitioners’ ‘aggregate effect’’ argument proves

too much. It would overturn all the well-settled cases on this subject ever

decided by this Court. If the test of validity of local legislation with

“foreign resonances” were the speculative aggregate effect of all the

laws with foreign resonances that could conceivably be enacted through-

out the country, then not one of the precedents of this Court upholding

such laws, when the effect of the law before the Court was only indirect

and incidental, could have been decided as it was. Wickard has no rele-

vance here. .

namely, the City’s sale and purchase of a limited class of securi-

ties.

SUMMARY OF ARGUMENT

The Petition for Writ of Certiorari should be denied, because

this case does not raise or implicate any substantial issue of fed-

eral constitutional or statutory law. The Ordinances are a valid

exercise of a local government’s well-settled power over the

investment of its funds. The Ordinances no more offend federal

statutory or constitutional law than would the decision of any

investor to select one security rather than another.

The ‘‘Questions Presented”’ as framed in the Petition mischarac-

terize the nature and effect of the Ordinances, and there are no

‘“‘special and important reasons’ (which Rule 10 of the Rules of

this Court requires) why the questions actually raised by the

record in this case should be reviewed by this Court.

If, however, notwithstanding the legal insubstantiality of the

issues presented by this record, the political significance of the

Ordinances disposes the Court to pronounce upon this case,

Respondent urges summary affirmance of the decision of the

Maryland Court of Appeals pursuant to Supreme Court Rule

16.1.9 That decision below upholding the Baltimore City Ordi-

nances is compelled by the facts established at trial and by well-

settled federal law.

The Ordinances are not an unconstitutional impairment of con-

tract because: (a) there is in fact no contractual right or obligation

impaired by the Ordinances; (b) even if a contract right could be

said to be impaired, the impairment is not substantial; and (c) any

conceivable impairment would be not only minimal but also a

justified exercise of local powers.

The Ordinances do not deprive the Petitioners of due process of

law or take property without just compensation, because Petition-

ers have no property interest in the Funds themselves; they have

only a contract interest (which the Ordinances do not change) in

certain benefits provided pursuant to Article 22 of the Baltimore

City Code.

*TJhe Court may summarily affirm when it believes that the decision

below is not only correct but that the issue is sufficiently important to

need the added weight of Supreme Court approval.” Stern, Gressman

and Shapiro, Supreme Court Practice 287 (6th ed. 1985).

The Ordinances do not violate the Interstate Commerce Clause

because they are a valid exercise of state or loca! power exempted

from the strictures of the Interstate Commerce Clause by the

“market participant’”’ doctrine; and even if the “market partici-

pant”’ doctrine did not apply, the Ordinances would be valid under

the Commerce Clause because their effect on commerce is inciden-

tal and non-discriminatory, and they effectuate legitimate local

public interests. The Ordinances have not been preempted under

the Supremacy Clause by an express federal statute or regulation,

by Congressional occupation of the field or by conflict with federal

law or regulation; in fact, Congress has indicated that state and

local divestment ordinances are expressly permitted and fully con-

sistent with federal policy toward South Africa. Finally, the Ordi-

nances do not infringe upon either the federal foreign relations

power or the Foreign Commerce Clause; the Ordinances are a

proper exercise of state sovereignty, they concern investment by a

local governmental instrumentality—a matter traditionally within

state power—and they have only slight, indirect and incidental ~

effect on foreign affairs or foreign commerce.

ARGUMENT

I. The Baltimore City Ordinances Do Not Violate the Con-

tracts Clause of the Federal Constitution and Do Not

Take Petitioners’ Property Without Just Compensation

or Deny Petitioners Due Process of Law.

A. The Ordinances Do Not Violate the Contracts Clause.

The Ordinances do not change any contractual obligation, their

effect on benefits from the Funds is insubstantial, and they are

‘reasonable and necessary to serve an important public purpose.”’

Allied Structural Steel Company v. Spannaus, 438 U.S. 234

(1978); United States Trust Company v. New Jersey, 431 U.S. 1

(1977).

1. The Ordinances Do Not Change Any Contractual Rights

or Obligations.

Petitioners do not identify any specific contractual right or obli-

gation impaired by the Ordinances. Petition at 20-21. In fact, the

Ordinances do not alter or impair any contract rights. The Court

of Appeals properly concluded, and Petitioners have pointed to

nothing that would detract from that conclusion, that the Ordi-

nances do not “alter the provisions in the law concerning the

amount of benefits that a retiree is entitled to receive, [and thus]

do not directly change the City’s pension contracts with the sys-

tem’s beneficiaries.”’ P. App. at D-28. No direct financial obliga-

tion of the City has been changed. No existing appropriation has

been rescinded. No trust or pledged funds have been diverted to

other uses. Cf. United States Trust Company v. New Jersey, 431

U.S. at 20-21.

Petitioner’s only ground for complaint under the Contracts

Clause is that the initial and ongoing costs of divestiture may

slightly diminish future variable benefits. However, the Baltimore

City Code has at all material times made clear that these benefits

“shall not become an obligation of the City of Baltimore.” See

Baltimore City Code, art. 22, § 17(e) (ii) (1983 Repl. Vol.); R. App.

at B-15. As the Court of Appeals pointed out, this provision means

that while Petitioners have contract rights to whatever variable

benefits are earned, they have no such rights to any particular

level of earnings or to any variable benefits beyond the prescribed

percentage of whatever the earnings are. P. App. at D-28 n. 26.!°

2. Even if the Ordinances Impaired Petitioners’ Contract

Rights, the Contracts Clause Would Not Be Violated,

Because the [mpairment Would Be Insubstantial.

Impairment of a contractual obligation is not constitutionally

invalid under the Contracts Clause unless it is ‘‘substantial’’, and

the burden of establishing substantiality is on Petitioners. Energy

Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S.

400, 411 (1983). In the instant case, there is no gainsaying the

triai judge’s findings, affirmed by the Maryland Court of Appeals,

that the cost of the Ordinances to the retirement systems, and

thus to the systems’ beneficiaries in terms of future variable bene-

fits, “‘is so minimal that it does not approach the constitutional

Variable benefits already accrued are funded by Guaranteed Invest-

ment Contracts (in the nature of annuities) and are in no way affected by

the Ordinances. The Petitioners’ assertion that the Court of Appeals

found that ‘“‘there was no impairment of contract because the change in

variable benefits would be insubstantial’’, Petition at 6, is incorrect.

Instead, the Court below actually held that variable benefits were by

definition “‘speculative and uncertain’, and therefore the beneficiaries

could have no ‘“‘distinct expectation” as to the amount of variable benefits

they would receive. P. App. at D-44-45.

standard for impairment.” P. App. at E-29-30. Also weighing

heavily against any contention that the Ordinances work a sub-

stantial impairment is the fact that investment of Fund assets has

aiways been closely regulated by ordinance, and the permissibility

of particular investments has been readily changed by legislation

as deemed appropriate. Energy Reserves Group, Inc. v. Kansas

Power and Light Co., 459 U.S. at 411; United States Trust Co.,

431 U.S. at 21 n.17.'! The frequent changes traditionally made by

the City in the Trustees’ investment authority are notice that

further changes are to be anticipated; and that anticipation blunts

the impact, and thereby reduces the substantiality of the impact of

any particular change. Cf. City of El Paso v. Simmons, 379 U.S.

497, 514 (1965) (as in the case of the variable benefits here, any

impairment was not substantial because the asserted covenant

‘“‘was not the central undertaking”’ of the city ‘‘nor the primary

consideration’”’ for the alleged contractual undertaking).

Because, as the Maryland Court of Appeals correctly stated,

variable benefits are ‘‘as their name suggests, speculative and

uncertain”, P. App. at D-45, any impairment of these benefits is

not substantial; to the extent the Ordinances affect such benefits,

the Ordinances do not interfere with ‘‘distinct investment-backed

expectations.”’ Connolly v. Pension Benefit Guaranty Corp., 475

U.S. 211, 224-25 (1986).

3. In Any Event, the Ordinances Are a Justified Exercise of

Local Legislative Power Because They Are Reasonable

and Necessary to Serve an Important Public Purpose.

This Court has recognized that even a substantial impairment of

contract will not violate the contract clause if it is justified as

reasonable and necessary to advance an important and legitimate

‘As the Maryland Court of Appeals pointed out, the Petitioners’ con-

tractual right to receive benefits does not give them a right to direct or

control the investment of funds in the pension systems. P. App. at D-43.

See also Withers v. Teachers’ Ret. System, 447 F. Supp. 1248, 1260

(S.D.N.Y. 1978), aff'd, 595 F.2d 1210 (2d Cir. 1979) (beneficiaries of a

public retirement fund “have no entitlement to, or right to direct the

retention of, the particular assets that are held for investment purposes

in the pension fund’’); Crown v. Patrolmen’s Variable Supp. Fund Trust-

ees, 659 F. Supp. 318, 320 (S.D.N.Y.), aff'd, 819 F.2d 47 (2d Cir. 1987);

Tron v. Condello, 427 F. Supp. 1175, 1189-90 (S.D.N.Y. 1976) (beneficiary

“thas a vested right in receiving his pension benefits, but not in regulating

the investment policy set by the legislature and the retirement board”’).

public purpose.'* United States Trust Company v. New Jersey, 431

U.S. at 21-26; Allied Structural Steel Company v. Spannaus, 438

U.S. at 244; Energy Reserves Group, 459 U.S. at 411-12. An

impairment of contract is reasonable if it responds to develop-

ments that were unforeseen and unintended when the contract

provision in question was made, United States Trust Co., 431 U.S.

at 31 n.30, or if it addresses a broad social problem in an effort to

protect the public morals or otherwise promote the public welfare.

Allied Steel, 438 U.S. at 241-42. It is “‘necessary’”’ when there is no

less drastic or restrictive measure appropriate to resolve the prob-

lem. Energy Reserves Group, 459 U.S. at 412.

The Ordinances here meet these criteria. Divestment of proprie-

tary interests in SA companies is both reasonable and necessary

for Baltimore City. The majority of Baltimore City’s citizens are

African-American. The use of city funds to invest in companies

helping to support the economic base of discrimination and

oppression in South Africa is of particular concern to the growing

number of African-American members and beneficiaries of the

pension funds and to all the citizens of Baltimore sensitive to the

legacy of slavery from which America is still struggling to free

itself. The effectuation of the highest and best moral standards of

Baltimore City is precisely the kind of important public purpose

that the cases contemplate as a basis for permitting even substan-

tial impairments of contractual obligations under the Contracts

Clause. See Hast New York Savings Bank v. Hahn, 326 U.S. 230,

233-34 (1945).!%

"The Maryland Court of Appeals made no finding as to whether any

impairment would be justified as reasonable and necessary, because it

concluded that there was no direct impairment of any contract right or

obligation, and that any potential indirect impairment of variable future

benefits was so insubstantial as to fail to implicate the Contracts Clause

at all. ~

'8The Trustees of the pension funds have properly taken social consider-

ations into account in the past, even where this has cost the pension fund

money. They made long-term mortgage loans of approximately 35 million

dollars in 1983-84 at 12 to 2 percent below the going interest rate to

provide assistance to would-be home owners in a tight market. The

“cost” to the fund has been approximately $525,000 per year.

The Ordinances are not the first instances in which the Trustees have

been regulated by ordinances on the basis of social policies having foreign

resonances, which work in tandem with federal policy. The pension funds’

portfolio of investments includes an investment valued at $2,269,507.50

in the International Bank for Reconstruction and Redevelopment.

The City Council’s inclusion of this type of security and of

B. The Ordinances Do Not Take Petitioners’ Property

Without Just Compensation or Deny Petitioners Due

Process of Law.

1. The Ordinances Do Not Take Petitioners’ Property

Without Just Compensation.

The Ordinances do not affect any property of Petitioners. Peti-

tioners have no property interest in the Funds themselves but

only contract interests in the benefits provided by Article 22 of

the Baltimore City Code, and only subject to the limitations pre-

scribed by that legislation and discussed above. See Board of

Regents v. Roth, 408 U.S. 564 (1972); Withers v. Teachers Ret. Sys.

of New York, 447 F. Supp. 1248, 1259-60 (S.D.N.Y. 1978), affd,

595 F.2d 1210 (2d Cir. 1979). Thus, there is no property interest

affected by the Ordinances, and accordingly, the Maryland Court

of Appeals was correct in holding that the Ordinances do not work

a taking without just compensation.

2. The Ordinances Do Not Deprive Petitioners of Due

Process of Law.

The Due Process Clause does not prohibit even retrospective

civil legislation unless the consequences are “particularly "harsh

and oppressive’.’’ United States Trust Co., 431 U.S. at 17 n.13.

Consequently, “‘less searching standards [are] imposed on eco-

nomic legislation by the Due Process Clauses’’ than those

“imposed on the States by the Contract Clause’. Pension Benefit

Guaranty Corp. v. R.A. Gray Co., 467 U.S. 717, 733 (1984). Since

the Ordinances do not impair Petitioners’ contracts, Petitioners

have certainly not been denied due process.

securities in the InterAmerican Development Bank as permissible invest-

ments demonstrates that the instant Ordinances by no means pioneer in

social investments of the funds. These investments were authorized by

Ordinance 424 (1964) enacting art. 22 §§ 7(a) (2) and 34(a) (2) of the

Baltimore City Code. By statute, the policy of the United States regard-

ing those two institutions is to ‘‘advance the cause of human rights,

including by seeking to channel assistance towards countries other than

those whose governments engage in ... [a] consistent pattern of gross

violations of internationally recognized human rights, such as torture or

cruel, inhuman, or degrading treatment or punishment, prolonged deten-

tion without charges, or other flagrant denial to life, liberty, and the

security of person.’’ 22 U.S.C. § 262 d(a) (1) (1989 Supp.).

II. The Ordinances Do Not Violate the Interstate Com-

merce Clause of the Federal Constitution.

A. The Ordinances Are a Valid Exercise of State Sov-

ereign Power Exempted From the Strictures of the

Interstate Commerce Clause by the ‘‘Market Partic-

ipant’”’ Doctrine.

‘‘”.. [W]hen a state or local government enters the market as a

participant it is not subject to the restraints of the Commerce

Clause.”’ White v. Mass. Council of Construction Employers, Inc.,

460 U.S. 204, 208 (1983) (upholding executive order of mayor that

city would fund only those construction projects on which 50% of

the jobs were filled by bona fide city residents); Hughes v. Alexan-

dria Scrap Corp., 426 U.S. 794, 808 (1976) (upholding law provid-

ing subsidies to local residents for scrapping abandoned motor

vehicles); Reeves, Inc. v. Stake, 447 U.S. 429, 436-37 (1980)

(upholding refusal to sell to out-of-state buyers cement produced

at state-owned plant).'* The Court of Appeals correctly described

the City’s role as a market participant:

In mandating the divestment of municipaily administered

pension funds, the City of Baltimore acted ‘as a market

participant .... [T]he ordinances do not attempt to inter-

fere with private, commercial transactions between per-

sons engaged in foreign commerce. Rather, the

Ordinances simply represent Baltimore City’s decision

concerning the proper way of investing funds which the

City has the authority to administer and which therefore

‘‘belong’’ to the City, although as a Trustee.

‘The market participant doctrine is based on: (a) ‘‘core notions of state

sovereignty’, Blackmun, J. concurring in White, 460 U.S. at 218; (b) the

background of the Commerce Clause as a response “‘principally to state

taxes and regulatory measures [such as embargoes, customs, duties and

exclusion of imports] impeding free private trade in the national market

place,’ Reeves, 447 U.S. at 436-37 (emphasis supplied); (c) the feeling

that in fairness a state acting as proprietor should “‘share existing free-

doms from federal constraints, including the inherent limits of the Com-

merce Clause”’ to the same extent as any other trader, who is permitted

“freely to exercise his own independent discretion as to parties with

whom he will deal,”” Reeves, 447 U.S. at 438-39; and (d) a “healthy regard

for federalism and good government”’, id. at 441, rooted in the residual

powers of the States under the Tenth Amendment. Deference is due the

state or municipality in a case involving state proprietary action because

competing considerations in such cases ‘‘often will be subtle, complex,

politically charged, and difficult to assess under traditional commerce

clause analysis.’’ Jd. at 439.

P. App. at D-78. The Ordinances are more benign than those

measures upheld in this Court’s cases applying the market partici-

pation doctrine; they do not discriminate in any way in favor of

local citizens or against foreign enterprises. They involve only the

City’s determination of where to invest its funds.

Autonomous fiscal management is the core of state sovereignty,

and is a reserved power under the Tenth Amendment. Absent

specific congressional legislation exercising a power granted to

the federal government by the Constitution (and there is no such

legislation here), there is no basis for striking down the decision of

the City as to the investments its portfolio should contain. See

Garcia v. San Antonio Metropoliten Transit Authority, 471 U.S.

1049 (1985). State and local governments have wide latitude to

determine how to allocate the resources under their control, even

though these allocations may reflect decisions based on social

policies and controversial choices. See Harris v. McRae, 448 U.S.

297 (1980); Maher v. Roe, 432 U.S. 464 (1977). As the Maryland

Court of Appeals concluded, based upon the statements of this

Court, “just as a private merchant may elect not to deal with

companies doing business in South Africa, the City too may make

the same choice unhindered by the constraints of the Commerce

Clause.”’ P. App. at D-71.

Petitioners’ reliance on South-Central Timber Development, Inc.

v. Wunnicke, 467 U.S. 82, 96 (1984) is misplaced. Wunnicke

involved a state requirement that any buyer of-state timber also

process the timber within the state. The requirement was struck

down as constituting a regulatory attempt to control the separate

timber processing market after the timber was sold; the state was

not merely acting as a market participant by selling, but was

regulating timber processing that occurred after the State’s own

market transaction.

B. Even if the Market Participant Doctrine Were Not

Applicable, the Ordinances Would Not Violate the Inter-

state Commerce Clause. =

The Ordinances pass muster under the Commerce Clause pursu-

ant to the criteria set out in Pike v. Bruce Church, Inc., 397 U.S.

137, 142 (1970), as elaborated in Maine v. Taylor, 477 U.S. 131

(1986). Any effect of the Ordinances on interstate commerce is

incidental, and they in no wise discriminate against interstate

commerce. Maine v. Taylor, 477 U.S. at 138. The Ordinances I

aii italiani

evenhandedly effectuate legitimate local public interests; and the

Maryland Court of Appeals correctly affirmed the trial court’s

finding that any burden on interstate commerce caused by the

Ordinances is certainly not ‘‘clearly excessive’ in relation to the

City’s legitimate local interest. P. App. at D-81.

The fact that the Trustees will not buy or hold securities of

certain corporations is not a cognizable burden on interstate com-

merce. The Commerce Clause does not protect particular inter-

state firms but rather the interstate market. See Exxon Corp. v.

Governor of Maryland, 437 U.S. 117, 127 (1978). The interstate

market is not affected by the Ordinances: ‘‘interstate commerce is

not subjected to an impermissible burden simply because an other-

wise valid regulation causes some business to shift from one inter-

state supplier to another.’ Jd. The pension funds will have no

difficulty in making alternative investments. P. App. at D-33.

Any minimal burden on interstate commerce is not excessive in

relation to the City’s legitimate locai interests as identified by the

Maryland Court of Appeals and above discussed.

III. The Ordinances Are Not Preempted by Federal Statute

or Regulations.

The Ordinances are not preempted by federal law under any of

the three bases of preemption recognized by this Court, namely:

(1) that a federal statute expressly provides for preemption, (2)

that Congress has occupied an entire field of regulatory activity or

(3) that state or local legislation actually conflicts with a federal

statute or regulation. See Michigan Canners & Freezers v. Agri-

cultural Board, 467 U.S. 461, 469 (1983) (federal preemption

under Supremacy Clause of state agricultural act).

Petitioners’ preemption argument is based essentially on the

Comprehensive Anti-Apartheid Act of 1986 (the ‘‘Act’’ or

“CAAA’”), 22 U.S.C. § 5001, et. seg. In fact, the structure of the

Act, and congressional statements and actions at the time of

passage of the Act, including a resolution of the House of Repre-

sentatives passed contemporaneously, make clear that Congress

not only had no desire to preempt local and state SA divestment

legislation, but actually had every intention of permittiag such

legislation to supplement the CAAA. In no event can Congress be

fairly said to have occupied the field. Nor is there such a conflict

between federal laws or regulations and the Ordinances as to give

rise to preemption.

A. No Federal Statute Expressly or Impliedly Preempts the

Ordinances.

Petitioners admit, Petition at 22, that the Act itself contains no

language that would expressly preempt the Ordinances. The only

preemptive language in the Act is found in Section 606, 22 U.S.C.

§ 5116, in which the preemptive effect, as the Court of Appeals of

Maryland recognized, ‘“‘is limited to state or local procurement

legislation which, as applied, might cause a federally funded con-

tract not to be awarded to the lowest bidder.” P. App. at D-51.

This limited preemptive provision indicates that Congress’ atten-

tion was directed to the question of preemption and that, so far

the CAAA was concerned, when Congress intended to preempt, it

said so. This conclusion is reinforced by the fact that Congress

was fully aware of the existence of state and local divestment

legislation.!° New York State Dept. of Social Services v. Dublino,

413 U.S. 405, 413-14 (1973) (no preemption where Congress aware

of state legislation and does not unambiguously express intent to

preempt). It is further buttressed by the rule stated in New York

Tel. Co. v. New York State Dept. of Labor, 440 U.S. 519, 540

(1979), that with respect to laws ‘‘deeply rooted in local feeling

and responsibility, in the absence of compelling congressionai

direction, we should not infer that Congress has deprived the

States of the power to act.”

The instant case involves a stronger indication of congressional

intent than mere absence of express language of preemption.

House Resolution 549 (1986), passed at the same time as the

CAAA, declared affirmatively that the House intended that the

CAAA not preempt even legislation with far more bite than

See, e.g., 1382 Cong. Rec. $9306 (July 17, 1986) (remarks of Senator

Moynihan) (‘‘[S]tates and localities should have the right to make their

own decisions regarding their own individual involvement with the South

African regime.’’); 182 Cong. Rec. $12533 (Sept. 15, 1986) (remarks of

Senator Kennedy).

Additionally, in 1984 the Congress rejected a resolution to exercise its

power to disapprove, pursuant to its plenary powers over the District of

Columbia, the divestment ordinances of the District of Columbia Council.

See Hearing and Markups Before the Subcommittee on Fiscal Affairs and

Health of the Committee on the District of Columbia, House of Represen-

tatives, 99th Cong., 2nd Sess. on H. Con. Res. 216; H. Res. 372.

the Ordinances considered here.'® When Representative Wheat

introduced the Senate-passed bill that became the CAAA along

with House Resolution 549, he said:

. . . [I]t is not the intent of this body to pass any legislation

which grants any new constitutional authority. It is merely

our intent to make it clear that this legislation does not

impact upon the authority that the States and local govern-

ments already have.

132 Cong. Rec. H6767 (Sept. 12, 1986) (emphasis supplied).

B. No Congressional Legislation Occupies the Field.

In light of the foregoing facts, Petitioners’ argument that the

CAAA “occupies the field”, Petition at 23, ‘leaving no room’”’,

Petition at 22, for the Ordinances, has no substance. Petitioners

make much of the word ‘“‘Comprehensive”’ in the Act’s title. The

preamble and the text of the Act itself, however, indicate that

Congress intended the Act to be ‘‘comprehensive” only to the

extent of the federal government’s own actions relating to South

Africa. Thus, for example, all of the provisions dealing with gov-

ernment procurement refer solely to the ‘“‘United States Govern-

ment’, see CAAA §§ 1314 & 1316, 22 U.S.C. §§ 5064 & 5066, and

do not address the subject of investment by local government in

securities of SA companies. As this Court said in Hillsborough

County, Fla. v. Auto. Med. Labs, 471 U.S. 707 (1985):

...[MlJerely because the federal provisions were suffi-

ciently comprehensive to meet the needs identified by

Congress does not mean that states and localities were

barred from identifying additional needs or imposing fur-

ther requirements in the field. . . .

'’The resolution stated:

Section 2. Upon the adoption of the motion provided for in Sec-

tion 1, the House shall be considered to have adopted a House

resolution containing the text: ‘Resolved, that in passing the bill,

H.R. 4969, as amended by the Senate, it is not the intent of the

House of Representatives that the bill limit, preempt, or affect, in

any fashion, the authority of any state or local government or of

the District of Columbia or of any commonwealth or any territory

or possession of the United States or political subdivision thereof

to restrict or otherwise regulate any financial or commercial

activity in South Africa."’ (Emphasis supplied).

See also DeCanas v. Bica, 424 U.S. 351, 359-60 (1976) (to the

same effect, in a foreign relations power case); New York State

Department of Social Services v. Dublino, 413 U.S. at 415 (pre-

emption not to be inferred merely from comprehensive character

of federal statute, because modern social and regulatory legisla-

tion often by its very nature requires intricate and complex

responses from Congress); cf. Container Corp. of America v.

Franchise Tax Board, 463 U.S. 159, 187-88 (1983) (that a course

of action neither requiring nor prohibiting certain measures might

be preferred on the federal level does not establish intent to

preempt the right of states and localities to make their own choice

as to whether to employ those measures themselves).

C. The Ordinances Are Not Preempted by Conflict or Incon-

sistency With Federal Law or Policy.

Preemption by reason of conflict with federal statute or regula-

tion requires either that there be ‘‘a physical impossibility” of

“compliance with both federal and state regulations”, or that the

state law constitute ‘‘an obstacle to the accomplishment and exe-

cution of the full purposes and objectives of Congress.”’ Hillsbo-

rough County, Fla. v. Auto. Med. Labs, 471 U.S. 707, 713 (1985),

quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941). Only when

the local legislation authorizes conduct that the federal law for-

bids, or vice versa is there a conflict giving rise to preemption.

Michigan Canners & Freezers, 467 U.S. at 478. There is no such

conflict—or indeed any conflict at all—here. The CAAA does not

limit public or private bodies in connection with divestment of

securities of SA companies. It prohibits outright certain activities,

e.g., new investment by American companies in South Africa, and

certain imports from and exports to South Africa. It neither

requires any company to continue doing business in South Africa

nor prohibits any company from continuing to do so. It does

require those American companies that choose to remain in South

Africa to adhere, at a minimum, to certain standards known as

the “Sullivan principles’. It neither requires nor prohibits divest-

‘ment by anyone. Compliance with both the CAAA and the Ordi-

nances presents no “physical impossibility’’; nor do the

Ordinances stand as an obstacle to the accomplishment and execu-

tion of the full purposes and objectives of the Act.'*

IV. The Ordinances Do Not Contravene the Foreign Rela-

tions Power or the Foreign Commerce Clause of the

Federal Constitution.

A. The Ordinances Do Not Infringe the Federal For-

eign Relations Power.

Petitioners’ “foreign relations power’ argument, like their

other arguments, suffers from the basic flaw of being premised on

a misstatement of the Ordinances’ nature, force and effect. The

law in this area is bounded by two cases: Clark v. Allen, 331 U.S.

503 (1947) (no infringement) and Zschernig v. Miller, 389 U.S. 429

(1968), reh'g denied, 390 U.S. 974 (1968) (infringement). Zschernig

is the only case decided by this Court invalidating a state action

not violative of a federal statute, treaty or executive agreement.

Cf. United States v. Pink, 315 U.S. 203 (1942) (U.S.-Soviet treaty);

Hines v. Davidowitz, 312 U.S. at 67 (federal law on aliens); see

also Note, The Supreme Court 1967 Term, 82 Harv. L. REV. 63,

245 (1968). The instant case is far over on the Clark v. Allen side

of the line; the Ordinances are even less intrusive than the state

statute in Clark v. Allen upheld by this Court.

Petitioners’ quotation of Reagan administration officials on the policy

of ‘“‘constructive engagement’, Petition at 24 & n.7, is no basis for

arguing preemption. Such general expressions by executive appointees

preempt nothing. The only conflict that can preempt is conflict with a

specific federal statute. See International Paper Company v. Ouellette,

479 U.S. 481 (1987); Hillsborough County, Fla. v. Auto. Med. Labs, 471

U.S. 707 (1985) (federal regulations); Pacific Gas & Electric v. State

Energy Resources Conserv. & Dev. Comm'n, 461 U.S. 190, 220-22 (1983)

(‘national policy’’ to promote commercial use of nuclear power did not

preempt traditional state utility regulation); Commonwealth Edison Co. v.

Montana, 453 U.S. 609, 634 (1981); Exxon Corp. v. Governor of Mary-

land, 437 U.S. 117, 129-34 (1978) (“national policy” in favor of competi-

tion did not preempt state requirement that oil companies get out of

service station business where that requirement was not in conflict with

any federal statute); Madison, The Federalist No. 51 (‘In government,

the legislative authority necessarily predominates’’). If the pronounce-

ments relied on by Petitioners ever had any force, the subsequent enact-

ment of the CAAA has sapped that force and repudiated ‘“‘constructive

engagement” by applying sanctions on a nationwide basis.

Traditionally, there has been a substantial body of valid state

and local law “‘that involves matters of significant concern to

foreign relations.”” Restatement (Second) of Foreign Relations

Law §2(1) (c). Comment d to the Restatement, Section 2, states:

Relation between federal and state law. The Foreign Rela-

| tions Law of the United States is not confined to federal

law. The domestic law referred to in this Section includes

the law of the several states of the United States. Where

the Constitution does not vest exclusive jurisdiction in the

federal government, and where Congress has not acted to

“occupy the field,’’ a state may prescribe and enforce

rules of law involving matters of significant concern to

foreign relations.

Thus, state courts traditionally examine judicial proceedings of

foreign countries to determine whether to enforce a foreign judg-

ment, and may refuse to enforce any foreign law that offends the

forum’s public policy. See Bond v. Hume, 243 U.S. 15, 21 (1970)

(state need not enforce contract founded upon foreign law “‘where

to do so would be repugnant to good morals’); United States v.

Pink, 315 U.S. at 230-31 (in absence of contrary federal law or

treaty, states may refuse to enforce rights based on foreign law

which runs counter to the public policy of the forum); Zeevi &

Sons, Ltd. v. Grindlays Bank (Uganda), Ltd., 37 N.Y.2d 220, 371

N.Y.S.2d 892, 333 N.E.2d 168 (1975), cert. denied, 423 U.S. 866

(1975) (confiscation by Uganda not recognized as defense); Uni-

form Foreign Money Judgment Recovery Act §4(a) (1) Gudgments

not recognized if ‘‘rendered under a system which does not pro-

vide impartial tribunals or procedures compatible with the

requirements of due process of law’’).

l Clark v. Allen, 331 U.S. 503 (1947), held that a state may condi-

tion the right of foreign nationals to inherit property on the recip-

rocal grant by the foreign country of the same right to U.S.

citizens. After noting that rights of succession to property are~

essentially matters of local law and that there was no applicable

conflicting federal treaty or policy, as there was in Hines v. Davi-

dowitz, 312 U.S. 52 (1941) (upon which Petitioners rely), the Court

said in Clark, 331 U.S. at 517:

Nor has California entered the forbidden domain of

negotiating with a foreign country, United States v.

Curtiss-Wright Export Corp., 299 U.S. 304, 316, 317,...

or making a compact with it contrary to the prohibition of

Article 1, Section 10 of the Constitution. What California

has done will have some incidental or indirect effect in

foreign countries. But that is true of many state laws

which none would claim cross the forbidden line.

Zschernig, on the other hand, involved an Oregon statute

escheating the inheritance claims of a non-resident alien if the

alien’s country of origin did not give a reciprocal right of inheri-

tance to U.S. citizens, or if the alien’s inheritance would be subject

to “confiscation” by the foreign government. The Court struck

the statute down, noting that Oregon, in applying its statute,

passed judgment on, inter alia, the relationship between foreign

countries and their nationals, the bona fides of representations of

fact by foreign nations, and the credibility of foreign officials. The

Court expressly pointed out that statutes of this kind had in fact

provoked foreign protest. Zschernig, 389 U.S. at 347 n.7. The

Court concluded that the application of the statute ‘“‘affects inter-

national relations in a persistent and subtle way’’, 389 U.S. at 440,

and permits the ‘‘state, speaking through its probate courts to

establish its own foreign policy.” 389 U.S. at 441.

Zschernig explicitly acknowledged the correctness of Clark v.

Allen, and distinguished it on the basis that the Zschernig statute

represented a much more vigorous intrusion into foreign affairs

than the California statute.

The Maryland Court of Appeals in the instant case affirmed the

trial court’s application of the teachings of this Court’s cases. The

courts below spelled out the absence here of the intrusive features

that were the bases for the holding in Zschernig. Unlike the stat-

ute in Zschernig, the Ordinances here “‘represent ‘a single general

decision’’”’ by the City, P. App. at D-61, and require no case-by-

case investigation or assessment of, or commentary on, the laws

or operations of any foreign government by local government

officials or employees. P. App. at E-13-14. Unlike Zschernig, which

involved the exercise of ‘‘a state’s regulatory power’’; the Ordi-

nances here “‘involve[d] the exercise of a local government’s pro-

prietary power.” Jd. at E-14. Unlike Zschernig, where the statute

operated directly on foreign nationals, the Ordinances operate

directly only on the Trustees. Jd. at E-15. The effect of the Ordi-

nances on South Africa is indirect, minimal, and less than a feath-

erweight when compared to the direct sanctions enacted by

Congress in the CAAA, with which the Ordinances operate not in

conflict but in tandem.

Cases after Zschernig have established that Zschernig is a prece-

dent of limited force and the product of a particular period in the

Cold War. In Container Corp. of America v. Franchise Tax Board,

463 U.S. 159, 197 (1983), this Court upheld a California franchise

tax on a multinational corporation. The tax was based on the

unitary business concept reflecting payroll, property and sales of

the taxpayer’s foreign subsidiaries. The Court found that the tax,

with its possibility of double taxation (which actually occurred in

that case) and the possibility of foreign retaliation have ‘‘foreign

resonances but do not implicate foreign affairs.’’ 463 U.S. at 194.

The Court reasoned, inter alia, that (a) the threat of retaliation

was not “‘significant’’, id., and (b) the tax was imposed, not on a

foreign entity but on a domestic corporation”’, id. at 195, although

income arguably attributable to foreign corporations was

“‘counted”’ in calculating the taxable income of the domestic corpo-

ration. Jd.

Again, Reeves, Inc. v. Stake, 447 U.S. 429, 445 (1980) cited with

approval K.S.B. Technical Sales Corp. v. North Jersey Water Sup-

ply Comm’n, 75 N.J. 272, 381 A.2d 774 (1977), which upheld New

Jersey’s ‘“‘Buy-American”’ statute requiring state government

agencies to purchase only American-made products. Also, in

DeCanas v. Bica, 424 U.S. 351 (1976), this Court, without even

citing Zschernig, upheld state regulation of the employment of

foreign nationals, pointing out that even if “local regulation has

some purely speculative and indirect impact” on foreign affairs,

‘it does not thereby become a constitutionally proscribed regula-

tion.”’ 424 U.S. at 355-56.

Finally, in Gorun v. Fall, 393 U.S. 398 (1969), this Court sum-

marily affirmed the decision of a three-judge district court, Gorun

v. Fall, 287 F. Supp. 725 (D. Mont. 1968), which dismissed a

complaint attacking a Montana reciprocal inheritance statute that

- conditioned the inheritance rights of Romanian nationals on a

showing that Romania allowed United States citizens to receive,

and enjoy in the United States, property bequeathed in Romania.

The Court declined to invalidate the statute, because Zschernig

provided guidelines for the Montana court to “fashion a procedure

for applying ... [the Montana statute] in a manner not offensive

to the federal Constitution.”” 287 F. Supp. at 728. The district

court correctly perceived that what made the Oregon statute in

Zschernig invalid was the way it was administered. Gorun is dis-

positive here, and in the event this Court is disposed to grant

certiorari, this Court’s disposition of the instant case should be the

same as its disposition of Gorun.

Interestingly, none of the foreign relations power cases decided

by this Court after Zschernig is even mentioned in the Petition.

The state cases relied upon by Petitioners are inapposite because

they involve regulation, taxation or direct denial of rights of for-

eign and/or American nationals.'®

B. The Ordinances Do Not Contravene the Foreign Com-

merce Clause.

The U.S. Constitution, art. I, § 8, cl. 3 provides that ‘‘the Con-

gress shall have power ... to regulate commerce with Foreign

Nations. ...’’ (Emphasis supplied). This clause bars state laws

that ‘“‘prevent ... the federal government from speaking with one

voice when regulating commercial relations with foreign govern-

ments.”’ Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434,

451 (1979) (emphasis supplied). The short answer to Petitioners’

argument is that the Ordinances do not regulate, or even purport

to regulate, any aspect of foreign commerce. They merely govern

the investment of City funds.!®

Even if the Ordinances could be said to regulate foreign com-

merce, and regardless of how rigorous the scrutiny to which they

are subjected, they would survive review under the standards set

forth by this Court.

The two leading cases on the Foreign Commerce Clause are

Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979)

and Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983).

Both cases involved state taxes that implicated foreign commerce.

In Japan Line, this Court invalidated a California tax that fell on

a Japanese vessel engaged entirely in foreign commerce even

though the tax was formulated on the basis of the vessel’s con-

tacts with California ports. The tax conflicted with a treaty

'SSpringfield Rare Coin Galleries, Inc. v. Johnson, 115 Ill.2d 221, 503

N.E.2d 300 (1986) (discriminatory use tax on South African coins); New

York Times Co. v. City of New York Comm'n on Human Rights, 41 N.Y.2d

345, 393 N.Y.S.2d 312, 361 N.E.2d 963 (1977) (prohibition of advertise-

ment in New York of employment opportunities in South Africa).

'9The questions raised in Reeves, Inc. v. Stake, 447 U.S. 429 (1980) and

in South Central Timber Development Co. v. Wunnicke, 467 U.S. 82, 96

(1984) as to whether the market participant doctrine applies to foreign as

well as interstate commerce, and whether laws regulating foreign com-

merce are subject to ‘“‘more rigorous” scrutiny than laws regulating

interstate commerce are irrelevant because the Ordinances do not regu-

late commerce at all.

between the United States and Japan and thus prevented this

country from ‘‘speaking with one voice” in the regulation of for-

eign commerce. Japan Line, 441 U.S. at 453. By comparison, in

Container Corp., this Court upheld a franchise tax imposed on a

Delaware corporation engaged in domestic and foreign commerce.

The Court distinguished Container Corp. from Japan Line on the

basis that Container Corp. involved a tax on a domestic corpora-

tion, with only indirect and speculative effects on foreign com-

merce, whereas the tax in Japan Line was applied directly to a

foreign national corporation and contravened a federal treaty.

The Maryland Court of Appeals correctly concluded that the

instant case is closer to Container Corp. than to Japan Line. In

fact, the state tax upheld in Container Corp., as attenuated and

speculative as this Court found its effect on foreign relations to

be, was far more intrusive than the Ordinances challenged here by

Petitioners.

CONCLUSION

For the foregoing reasons, the Petition for a Writ of Certiorari

should be denied. In the alternative, should this Court issue the

Writ, Respondent suggests that the issues raised by the Petition

are appropriate for summary disposition, and urges summary

~ affirmance of the decision of the Maryland Court of Appeals.

Respectfully submitted,

Melvin J. Sykes

Counsel of Record

310 Maryland Bar Center

520 West Fayette Street

Baltimore, Maryland 21201

(301) 727-3078

H. Russell Frisby, Jr.

George F. Pappas

W. Warren Hamel

Venable, Baetjer and Howard

1800 Mercantile Bank and Trust Building

Two Hopkins Plaza

Baltimore, Maryland 21201

(301) 244-7400

Attorneys for Respondent

A-l

APPENDIX A

CHARTER OF BALTIMORE CITY

ARTICLE II

Art. II, § 1

GENERAL POWERS

The Mayor and City Council of Baltimore shall have full

power and authority to exercise all of the powers heretofore or

hereafter granted to it by the Constitution of Maryland or by

any Public General or Public Local Laws of the State of Mary-

land; and in particular, without limitation upon the foregoing,

shall have power by ordinance, or such other method as may

be provided for in its Charter, subject to the provisions of said

Constitution and Public General Laws:

* * *

(24) PENSIONS.

(a) To establish and maintain a general system of pen-

sions and retirement benefits for the officers and employees of

the City, the Police Department of Baltimore City, the Enoch

Pratt Free Library, the Walters Art Gallery, the Baltimore

Museum of Art, the Municipal Museum of Baltimore City, and

the officers and employees, by whatever authority appointed,

whose compensation is paid by the City; to fix the terms of and

restrictions on admission to such system and the classifications

therein; to provide for the separate maintenance, or inclusion

in such general pension system, of any existing pension system

(with the consent of a majority of its participants) for officers

and employees, by whatever authority appointed, whose com-

pensation is paid by the City; to provide that persons eligible

for admission in such general pension system shall not be

eligible, except as hereinafter provided, for admission to any

other pension system, the revenues of which are derived

wholly or in part from appropriations made by the City, from

license fees or from fines and forfeitures imposed under laws

or ordinances in force in Baltimore City; to provide, in connec-

| |

A-2

tion with such general pension system, a system of benefits

payable to the beneficiaries and dependents of any participant

in such general pension system after the death of such partici-

pant (whether accidental or otherwise and/or whether occuring

in the actual performance of duty or otherwise, subject to such

exceptions, conditions, restrictions and classifications as may

be provided by ordinance; provided, however, (1) that upon the

adoption of an ordinance providing for their participation-in

the general pension system, officers and employees of said

Police Department who do not elect to participate in such

general pension system shall be entitled to pensions, benefits

or allowances for themselves, their widows or dependents,

under laws or ordinances in force immediately prior to the

adoption of such ordinance; and (2) that nothing in this subsec-

tion shall operate or be construed to diminish in any way the

rights of any members of the Fire Department who are not

participants in the presently existing general pension system

of the City, their widows or dependents, to pensions, benefits

or allowances provided for by laws or ordinances in force as of

January 1, 1926.

(a-1) To establish and maintain a separate system of

pension and retirement benefits for elected officials of Balti-

more City; to fix the terms of and restrictions on admission to

that system and the classifications therein; to provide that

persons eligible for admission in that pension system shall not

be eligible to receive credit for the same years of service for

which they received credit in any other pension system sup-

ported wholly or in part by the City of Baltimore or State of

Maryland; to provide for the optional transfer to that pension

system of any elected official who is eligible to join it, from any

other system of pensions and retirement benefits operated and

maintained by the Mayor and City Council of Baltimore; to

provide in connection with that pension system, benefits pay-

able to the beneficiaries and dependents of any participant in

that pension system after death of that participant (whether

accidental or otherwise occuring in the actual performance of

duty or otherwise), subject to any exceptions, restrictions and

classifications that may be provided by ordinance; provided,

however, chat upon the adoption of an ordinance providing for

A-3

their participation in that pension system, eligible elected offi-

cials who do not elect to participate in that pension system,

shall be entitled to the pensions, retirement benefits and other

benefits or allowances, for themselves, their widows and

dependents, under the laws or ordinances in force immediately

prior to the adoption of that ordinance.

(b) To establish and maintain a new system of pen-

sions and retirement benefits applicable to all future entrants

into the service of the City of Baltimore, whose entrance

therein occurs after the establishment of such new system who

desire to be covered by the provisions of the Federal Social

Security Act and who are not specifically excluded therefrom

may elect to enter such new system, during which members of

the existing system may transfer to such new system; to pro-

vide for the transfer to such new system of the reserves help

in the existing system on account of members who so transfer;

provided, however, that the benefits of any member of the

existing system shall not be changed by reason of his coverage

under Social Security without his consent; and provided fur-

ther that except as this paragraph specifically provides other-

wise, and except where inconsistent herewith, the provisions

of paragraph (a) of this subsection (24) concerning the existing

system shall apply to such new system.

pension system of the City shall remain in force. (Ch. 702,

1982 Acts of the General Assembly)

(25) PENSIONS FOR SCHOOL CAFETERIA EMPLOYEES. To

grant to any and all persons regularly employed in, or associ-

ated with, any cafeteria system or department operated in

connection with the public school system of the Mayor and

City Council of Baltimore, such of the benefits and advantages

of the Employees’ Retirement System of the City of Balti-

more, established by Ordinance No. 553, approved February 1,

1926, and amendments thereto, as the Mayor and City Council

of Baltimore may by ordinance provide, except the the Retire-

ment System shall not be liable for the payment of any any

pensions or other benefits on account of said persons, for

A-4

which reserves have not been previously created from funds

contributed specifically for such benefits by the City or said

persons. Provided, that any ordinance passed under authority

of this paragraph may provide that every such person shall be

entitled to credit for all service rendered prior to January 1,

1926, and for one half of all service rendered between January

1, 1926, and the date of admission of the said Employees’

Retirement System; provided, further, that any ordinance

passed under authority hereof shall provide that any such

person who shall become employed in, or associated with, any

such cafeteria system or department after the passage of said

ordinance shall, before becoming a member of the said

Eniployees’ Retirement System of the City of Baltimore, first

submit to a medical examination similar to that required for

employees in the Classified Service of the City of Baltimore.

(26) PENSIONS FOR POLICEMEN AND FIREMEN. To estab-

lish and maintain a separate system of pensions and retire-

ment benefits for such officers and employees of the

Department of Aviation, of the Police Department and of the

Fire Department of Baltimore City as may be designated or

described by Ordinance of the Mayor and City Council of Balti-

more; to fix the terms of and restrictions on admission to such

system and the classifications therein; to provide that persons

eligible for admission in such pension system shall not be eligi-

ble except as hereinafter provided for admission to any other

pension system, the revenues of which are derived wholly or in

part from appropriations made by the City, from license fees

or from fines and forfeitures imposed under the laws or ordi-

nances in force in Baltimore City; to provide for the optional

transfer to such pension system of any officer or employee of

either the Department of Aviation, the Police Department or

the Fire Department of Baltimore City who is eligible to join

such separate pension system, from any other system of pen-

sions and retirement benefits operated and maintained by the

Mayor and City Council of Baltimore; to provide in connection

with such pension system, a system of benefits payable to the

beneficiaries and dependents of any participant in such pen-

sion system after the death of such participant (whether acci-

dental or otherwise and/or whether occuring in the actual

A-5

performance of duty or otherwise), subject to such exceptions,

conditions, restrictions and classifications as may be provided

by ordinance; provided, however, (1) that upon the adoption of

an ordinance providing for their participation in such pension

system, eligible officers and employees of the Department of

Aviation, of the Police Department and of the Fire Depart-

ment who do not elect to participate in such pension system,

shall be entitled to the pensions, retirement benefits, other

benefits or allowances for themselves, their widows or depen-

dents, under the laws or ordinances in force immediately prior

to the adoption of sich ordinance; (2) nothing in this subsec-

tion shall operate or be construed to diminish in any way the

rights of any eligible members of the Police Department or of

the Fire Department who are not participants in the presently

existing general pension system of the City of Baltimore, their

widows or dependents, to pensions, retirement benefits, other

benefits or allowances provided for by laws or ordinances in

force as of January 1, 1926. Until amended by ordinance, the

presently existing pension and retirement systems of the City

shall remain in force. The provisions of this subsection shall be

deemed to be in addition to and not in substitution of any other

powers or authorizations now conferred upon the Mayor and

City Council of Baltimore.

[1964 Revision]

B-1

APPENDIX B

BALTIMORE CITY CODE

ARTICLE 22

RETIREMENT SYSTEMS

*x* * * *

7. Management of funds.

(a) Trustee of funds.

The Board of Trustees shail be the trustees of the several

funds of the Employees’ Retirement System of Baltimore cre-

ated by Article 22 under this subtitle as provided in Section 8.

The Board of Trustees shall have the power to invest and

reinvest such funds in the following types or classes of assets

subject to the limitations, if any, as set forth with regard to

each type or class of investment.

* * *

(1) Deposits in savings accounts, or other evidences of

deposit in national or state banks and trust companies. To the

extent that such an investment or account is insured by the

Federal Savings and Loan Insurance Corporation, or by the

Maryland Savings Share Insurance Corporation, said Trustees

may invest in shares of savings and loan associations or build-

ing and loan associations in the State of Maryland.

(2) Interest-bearing bonds, notes, certificates of indebted-

ness, bills or other direct interest-bearing obligations fully

guaranteed both as to principal and interest by the United

States of America, or by Canada, and obligations of the

Internation Bank for Reconstruction and Development and

obligations of the Inter-American Development Bank.

(3) Interest-bearing bonds of any state, District of Colum-

bia, territory or possession of the United States of America, or

ee ee

B-2

of any province of Canada, or of any county, or incorporated

city of any state, District of Columbia, territory or possession

of the United States of America, or any Canadian municipality.

(4) Interest-bearing bonds on any commission, instrumen-

tality, authority or political subdivision having legal authority

to issue the same of the the United States of America, Canada,

any state, District of Columbia, territory or possession of the

United States of America or of any province of Canada, or of

any county or incorperated city of any state, District of Colum-

bia, territory or possession of the United States of America or

of any province of Canada.

(5) Interest-bearing bonds, notes or other interest-bearing

obligations of any corporation organized under the laws of the

United States of America or of Canada or province thereof, or

under the laws of any state, District of Columbia, territory or

possession of the United States of America. Equipment trust

obligations or certificates or other secured instruments evi-

dencing an interest in transportation or other equipment

wholly or in part within the United States of America or

Canada with a right to receive determined portions of rental,

purchase price or other fixed obligatory payments for the use

or purchase of such transportation or other equipment.

(6) Publicly-traded preferred or common stock or shares

of any corporation created or existing under the laws of the

United States of America, Canada or province thereof, or of

any state, District of Columbia, territory or possession of the

United States of America; provided however, that such invest-

ments in stock shall not exceed fifty percent (50%) of the total

market value of all the assets of the funds of the Employees’

Retirement System referred to herein. An evaluation of the

total assets of the Retirement System shall be made at least

once in every three (3) months, for the purposes of maintain-

ing this fifty percent (50%) limitation.

(7) Covered call options may be sold by the Employees’

Retirement System when the underlying common stock is held

in the equity portfolio and when such options are actively

™ B-3

traded on a public exchange, provided, however, that options

are not sold on more than twenty-five percent (25%) of the

total market value of common stocks held in the portfolio.

Purchase of options will be permitted only when closing out a

previously written covered call option.

* * *

(8Xi) Loans secured by first mortgages, or deeds of trust,

or unencumbered fee-simple or improved leasehold real estate

in the District of Columbia or in any state of the United States

of America or province of Canada. Whenever such loans are

made upon fee-simple, or leasehold real estate which is

improved by a building or buildings, the said improvements

shall be incurred against loss by fire and such other casualties

as are included in extended coverage policies, and the said

insurance policies shall contain the New York or Massachu-

setts standard mortgage clause or one equivalent thereto and

shall be delivered to the mortgagee as additional security for

the said loans. Bonds, notes, or other evidence of indebtedness

secured by mortgages or deeds of trust which are guaranteed

or insured by an instrumentality of the United States pursuant

to acts of Congress, as heretofore and hereafter amended,

known as the National Housing Act, Servicemen’s Readjust-

ment Act of 1944, and Bankhead-Jones Farm Tenant Act; and

neither the limitations of this section nor any other law of this

State requiring security upon which loans shall be made, or

prescribing the nature, amount or forms of such security, or

limiting the interest rates upon loans, shall be deemed to apply

to such insured or guaranteed mortgage loans. Provided, how-

ever, that such investments in mortgages shall not exceed

twenty-five percent (25%) of the total market value of all the

assets of the funds of the Employees’ Retirement System

referred to herein and evaluation of the total assets of the

Retirement System shall be made at least once in every three

(3) months, for the purpose of maintaining this twenty-five

percent (25%) limitation. Upon a foreclosure of its own mort-

gages or an acceptance of a deed in lieu of foreclosure by the

Trustees, the said Trustee shall have the right to purchase,

hold, operate, lease, manage and/or sell the subject real estate.

B-4

(ii) Open and closed-end real estate investment pools,

direct real estate investments, and unrestricted mortgage

investments with equity participation. Such investments shall

be included in the twenty-five percent (25%) restriction of

market value of assets provided for in Section 7(aX8\i), with

the further limitation that these investments shall not exceed

ten percent (10%) of the market value of all the assets of the

Retirement System Funds.

Provided, however, if any such investment is in the

nature of a ‘‘real estate investment pool,’’ as defined hereinaf-

ter, then such investment shall be subject to the following

restrictions:

1. With the exception of an insurance company,

the investment manager shall either be registered as an

investment advisor or function through an investment advisor

registered with the Securities Exchange Commission under

the Investment Advisors Act of 1940.

2. With the exception of an insurance company, all

funds of the real estate investment pool shall be held in a trust

wherein the investment manager, trustees, and all persons or

entities responsible for the management, control, custody,

maintenance, or investment of the funds, or having any similar

responsibility in the pool, shall function in a fiduciary capacity

in their relationship to the unit holders or investors in the pool.

3. If the investment is in a insurance company’s

real estate investment pool, the insurance company shall have

the highest rating of A.M. Best Co., and all persons or entities

responsible for the management, control, custody, mainte-

nance or investment of the funds, or having any similar

responsibility, shall function in a fiduciary capacity in their

relationship to the unit holders or investors in the pool.

4. The trust agreement shall be tax exempt under

the applicable provisions of the Internal Revenue Code, Sec-

tions 401 and 501(a) or subsequent amendments or revisions

thereto. In the case of insurance company pools, the pools shall

satisfy the applicable requirements of the Internal Revenue

Code, as amended, so that the insurance company does not pay

B-5

federal income tax on the earnings of the separate accounts of

such pools.

5. The trust funds of the real estate investment

pool shall be immune from suit, and exempt from attachment

by any creditors of any person, corporation or other entity

that is responsible for the management, custody, control,

maintenance, or investment of the funds, or having any similar

responsibility in said pool, under any local, state, or federal

law. Title to all assets of a separate account of an insurance

company’s real estate investment pool shall be held solely in

the corporation name of the insurance company itself, and

under applicable law such assets shall not be chargeable with

liabilities arising out of any other business which the insurance

company may conduct.

6. The real estate investment pool trust or any

other agreement for such investment shall not violate the pro-

visions of Internal Revenue Code Sections 401 and 501(a) or

any subsequent revisions or amendments thereto, under which

the Employees’ Retirement System is qualified.

7. All unit holders or qualified investors in such a

pool shall be pension or employee benefit plans or trusts quali-

fied under Internal Revenue Code, Section(s) 401 and/or

501(a), or a governmental plan under Sections 414(d) and/or

818(aX6).

8. For the purposes of this section, a real estate

investment pool shall mean any investment wherein the

Retirement System places certain funds into a commingled

trust, or a commingled separate account of a life insurance

company, and wherein the trust or insurance company utilizes

said funds to make certain real estate investments in the Dis-

trict of Columbia, or in any state of the United States of

America or province of Canada, and wherein each investor

owns through units a certain equity in the investments.

*x* * *

B-6

(9) Ground rent in the State of Maryland.

(10) Interest, rents or other fixed income due and

accrued on any of the investments authorized in the preceding

subsections.

The Board of Trustees shall have the duty and respon-

sibility of periodically determining investment policies consis-

tent with the above limitations, the capital »market

environment, and the actuarial characteristics of the Employ-

ees’ Retirement System and to publish such investment policy

guidelines by filing a copy thereof with the Department of

Legislative Reference of Baltimore City, and after January 1,

1979, also by publication in the Municipal Journal.

All contributions from time to time paid into the sev-

eral funds, and the income thereof, without distinction

between principal and income, shall be held and administered

by the Board of Trustees or its agents in the funds, and the

Board shall not be required to segregate or invest separately

any portion of the funds.

Provided, however, that nothing in this amendatory

ordinance shall be deemed to render illegal or to invalidate the

making and holding of any investment heretofore made and

now remaining in said funds where such investment when

made was authorized by law prior to the enactment of this

amendatory ordinance; and provided further, that nothing

herein shall be deemed to prevent the Board of Trustees from

accepting, in lieu or substitution of securities representing

investments heretofore validly made, other securities not of

the kind enumerated but authorized by ordinance as invest-

ments for the said Board prior to the enactment of this amend-

atory ordinance, where the Board shall deem such substitution

of securities desirable to preserve the investment of the funds.

Subject to the terms, provisions and conditions con-

tained herein, said Trustees shall have full power to hold,

purchase, sell, assign, transfer, and dispose of any of the secu-

rities and investments in which any of the funds created herein

B-7

shall have been invested, as well as the proceeds of said invest-

ments and any moneys belonging to said funds.

(11) Short Term Investment Funds established, oper-

ated and maintained by the contract custodian of the assets of

the Employees’ Retirement System, for the collective invest-

ment and re-investment of funds received and held by it as

Trustee, Co-Trustee, or in any other fiduciary capacity

described in Subtitle 5 of Title 3 of the Financial Institutions

Article of the Annotated Code of Maryland (1980 Volume), or

any amendment, supplement, or successor thereto or recodifi-

cation thereof, which Short Term Investment Fund has been

qualified under the provisions of Section 401(a) and exempt

from Federal income taxation under Section 501(a) of the

Internal Revenue Code of 1954, as amended, and which is used

as a temporary investment/cash management vehicle; provided

that investment in such Short Term Investment Fund may be

made from uninvested cash reserves held by the contract cus-

todian, or from funds designated by the Investment Managers

of the Employees’ Retirement System funds. In connection

with the participation of the Employees’ Retirement System in

Short Term Investment Fund, where required by law or the

terms of the Short Term Investment Fund, the Declaration of

Trust establishing such Short Term Investment Fund is hereby

adopted and made a part of the Employees’ Retirement Sys-

tem to the extent such instrument does not violate the Inter-

nal Revenue Code or other applicable law and does not affect

the tax qualification of the Employees’ Retirement System,

and any funds of such System invested in the Short Term

Investment Fund shall be subject to all the provisions thereof,

as the same may be amended from time to time.

(12) Asset Lending of securities which are under the

custody of the contract custodian of the assets of the Employ-

ees’ Retirement System, provided that: (i) such securities are

loaned in accordance with the procedures set forth in the

Department of Labor Prohibited Transaction Exemption 81-6

Ruling (PTE 81-6), or applicable successor regulations; (ii) the

Board of Trustees shall approve or authorize the designated

Investment Managers to approve the securities to be loaned,

B-8

the brokers to whom such securities are loaned, and the collat-

eral to secure assets loaned; and provided further, that before

any such assets are loaned, the Board of Trustees and the

Director of Finance shall, pursuant to PTE 81-6 procedures

enter into a master loan agreement with the contract custo-

dian setting forth the procedures to be followed; the broker to

whom such securities will be loaned; collateral arrangements;

fees; and other applicable prior to execution by the Board of

Trustees, by the Director of Finance as the designated custo-

dian of the assets of the Employees’ Retirement System, by

the City Solicitor and the Board of Estimates; provided, how-

ever, that the market value of securities loaned shall not

exceed twenty-five percent (25%) of the total market value of

all assets of the Employees’ Retirement System on any day.

* * *

(13)! (i) On the first day of the third quarter of fiscal

year 1987, no monies or funds held under any provisions of the

Retirement System shall remain invested or hereinafter be

invested in the stocks, securities or other obligations of any

bank or financial institution which makes loans to the Republic

of South Africa or Namibia, or to a national corporation of the

Republic of South Africa or Namibia, or in the stocks, securi-

ties, or other obligations of any company doing business in or

with the Republic of South Africa or Namibia, or whose subsid-

iary or affiliate does business in or with the Republic of South

Africa or Namibia.

‘Sections 2 and 3 of Ord. 765, 1986 provide as follows: >

“Sec. 2. And be it further ordained,

(a) That, subject to the provisions of this section, the divestiture

required by Section 1 of this ordinance shall be completed with the time limit

established in this ordinance.

(b) That the time limit shall begin on the first day of the third quarter of

fiscal year 1987.

systems shall make quarterly reports to the Mayor and City Council con-

cerning the progress of divestiture.

(d) That, during the time limit, the Board of Trustees of the retirement

systems may from time to time suspend the divestiture program provided

the suspending Board adopts a resolution pursuant to this section.

B-9

(ii) Business entities doing business in or with the

Republic of South Africa shall be identified by reference to the

most recent annual report of the African Fund entitled ‘‘Uni-

fied List of United States Companies with Investments or

Loans in South Africa and Namibia’.

(iii) Business entities doing business in or with the

Republic of Namibia shall be identified through correspon-

dence with the United Nations’ Office of the Commissioner for

Namibia and the United Nations’ Center for Transnational

Corporations.

(b) Interest. As of July 1, 1978, the Trustees will deter-

mine the “carrying value’’ of the Fund in accordance with the

asset valuation method theretofore employed and the

‘‘adjusted market value”’ of the Fund representing an average

fair market value of that date.

During the 1979 fiscal year, the Trustees will establish a

“Reserve for Book Value’’ as of July 1, 1978, equal to the

difference as of that date between the carrying value and the

(e) That when a Board of Trustees of either retirement system adopts a

resolution suspending the divestiture program under this section, the sus-

pending Board shall find as follows:

(1) That the rate of return on the funds are 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 inconsis-

tent with generally accepted investment standards for conservators of pen-

sion funds notwithstanding the intent of this ordinance, or

(3) That divestiture under the divestiture program will cause finan-

cial losses to the funds.

(f) That when a Board of Trustees of the retirement systems adopts a

resolution suspending the divestiture program under this section, the resolu-

tion shall:

(1) State the standards and conclusions for the suspension; .

(2) Set forth the duration of the suspension and the time of resump-

tion of the divestiture program; however, the period of suspension shall not

exceed 90 days and the time limit shall be tolled for the period of suspension;

and

(3) Be in writing and shall be sent to the Mayor, President of the

City Council, and the Department of Legislative Reference.

Sec. 3. And be it further ordained, That the time limit for divestiture

under this ordinance is 2 years.”

B-10

adjusted market value of the Fund. On that date and on each

annual valuation date thereafter, the value of the Fund assets

for actuarial valuation purposes will be carried at (1) the then

current adjusted market value, plus (2) the Reserve for Book

Value.

The Board of Trustees annually shall credit regular inter-

est less the investment management, custodian and invest-

ment adviser costs on the mean amount for the preceding year

in each of the funds. After payment of pension fund manage-

ment, custodian, and investment adviser services as provided

in Section s 7(g) and 43 (a), any excess of the earnings of the

funds of this Retirement System as determined in accordance

with an appropriate asset investment adviser services as pro-

vided in Sections 7(g) and 48 (a), any excess of the earnings of

the funds of this Retirement System as determined in accor-

-dance with an appropriate asset valuation method giving

effect to actual earnings of the funds, over the earnings based

on the regular interest rate used for valuation purposes, shall

first be applied by the Board of Trustees to meet the condi-

tions of any asset averaging method then in use under the

System.

An additional amount equal to one and one-half percent of

the mean amount for the preceding year in each of the funds

will be deducted from the remaining excess earnings, if any,

and applied by the Board of Trustees to reduce the remaining

balance, if any, in the ‘Reserve for Book Value’; to the extent

that excess earnings are less than one and one-half percent per

annum, the City of Baltimore shall contribute the difference to

the ‘‘Reserve for Book Value’, averaged over a five year

period in accordance with the asset valuation method hereto-

fore employed. The remaining excess earnings, if any, shall

next be applied by the Board in such amount or amounts as

they determine (1) to decrease the amount contributed by the

City of Baltimore, and/or (2) to decrease the period over which

the unfunded accrued liability will be amortized as provided in

Section 8(c\3), and/or (3) to reduce the remaining balance, if

any, in the ‘Reserve for Book Value’. Any deficiency of the

earnings of the funds of this Retirement System, as deter-

B-11

mined in accordance with an appropriate asset valuation

method giving recognition to actual earnings of the funds,

below the required earnings based on the regular interest rate

used for valuation purposes shall first be applied to meet the

conditions of any asset averaging method then in use under

the System; the remaining deficiency in earnings, if any, shall

be applied by the Board of Trustees in such amount or

amounts as they determine either (1) to increase the amount

contributed by the City of Baltimore, and/or (2) to increase the

period over which the unfunded accrued liability will be amor-

tized as provided in Section 8(c\3).

The increase or decrease of contribution and/or the

increase or decrease in length of amortization period shall be

determined by the Board after receiving the advice of the

actuary engaged by the City, on the basis of regular interest

rate used for valuation purposes, and of such mortality and

other tables as shall be adopted by the Board of Trustees.

The Board of Trustees shall use such portion of the net

unallocated interest surplus (if any), which has not been used

to reduce the City’s contribution or the unfunded actuarial

liability, as is deemed necessary by the actuary to cover the

cost to the City of Baltimore which may result from the imple-

mentation of Ordinance 988, 1987, (City Council Bill No. 1598)

effective July 1, 1987 as it affects benefits for current mem-

bers as of the date of enactment of the ordinance. All other

costs of Ordinance 988, 1987, shall be provided for in the same

manner as otherwise described in this section.

* * *

ments for pensions, annuities, and other payments, there may

be kept available cash on deposit in one or more banks or trust

companies located in the City of Baltimore, organized under

the laws of the State of Maryland or of the United States, in

such amount as the Trustees may by resolution from time to

time adopt, not exceeding a sum equal to the estimated dis-

bursements projected for a period of fifteen days. The sums on

B-12

deposit in bank shall be secured by collateral posted by the

depositories of such type and amount as the Commissioners of

Finance may prescribe, but in no event shall the market value

of such collateral be less than one hundred percent of the

amount on deposit according to the depositories’ records. In

exercising this authority for bank deposits, the Trustees shall

endeavor to minimize the amount of such deposits, and shall

consider appropriate money management techniques, includ-

ing wire transfers of funds and the zero-balance-fee-for-service

method of maintaining bank accounts. In no event shall the

bank accounts be used as the basis for, or form part of the

basis for fees for the investment administrators or be used to

provide supplementary compensation for such investment

administrators.

(d) Securities Handling. The Custodian designated in the

Charter of Baltimore City (1964 Revision, as amended) may

cause any investment in securities held by the Trustees to be

registered in or transferred into the name of the Trustees or

into the name of such nominee as the Custodian may direct,

including a nominee partnership created by the Board of

Trustees, or the Custodian may retain them unregistered and

in form permitting transferability, and further may authorize

its contractual agents to deposit securities with “clearing cor-

porations” as defined in Section 8-102 of Article 95B of the

Annotated Code of Maryland for the express purpose of hav-

ing such clearing corporations act as centralized depositories

for such securities, but the books and records of the Custodian

and its contractual agents shall at all times show that all such

investments are part of the several funds of the Employees’

Retirement System. The authority to make use of a clearing

corporation shall include the authority to utilize the “book

entry” system of the United States Government, and agencies

thereof, for which the Federal Reserve Bank is the authorized

fiscal agent.

—— Se =

B-13

(e) Conflicts of Interest. Except as otherwise herein pro-

vided, no trustee and no employees of the Board of Trustees

shall have any direct interest in the gains or profits of any

investment made by the Board of Trustees or their designees,

nor as such receive any pay or emolument for his services,

except as authorized from time to time by the Board of Esti-

mates. No trustee or employee of the Board shall, directly or

indirectly, for himself or as an agent in any manner use said

gains or profits, except to make such current and necessary

payments as are authorized by the Board of Trustees; nor shall

any trustee or employee of the Board of Trustees become an

endorser or surety or in any manner an obligor for moneys

loaned by or borrowed from the Board of Trustees.

(f) Trustee Fiduciary Liability. Neither the Board of Trust-

ees nor any agent, person or other entity acting on behalf of

the Board of Trustees shall be liable for the making, retention

or sale of any investment or reinvestment made as herein

provided, nor for any loss or diminution of the funds, except

that due to his or its own gross negligence, wilful misconduct

or lack of good faith.

(g) Custodian and Supervision of Funds. The City official

designated in the Charter of Baltimore City (1964 Revision, as

amended) shall be the custodian of the several funds of the

Employees’ Retirement System. Supervision of the several

funds of the Employees’ Retirement System shall be vested in

the Board of Trustees. Subject to the approval of the Board of

Estimates, the Board of Trustees may hire and appoint such

persons, agents or entities (including corporate fiduciaries) as

in its discretion may be required or advisable to enable it to

perform such pension fund investment management duties

hereunder; provided further, that subject to the approval of

the Board of Estimates the Board of Trustees may enter into

agency and pension fund investment management agreements

with one or more qualified pension fund managers for the

purpose of obtaining pension fund investment management for

the Employees’ Retirement System and the several funds

thereof. Payment for such investment management services

shall be made from the resources of the pension fund or funds.

* * *

B-14

(h) Prudent Investment of Funds. The Board of Trustees

shall discharge its duties, with respect to the investment of the

funds of the Employees’ Retirement System, solely in the

interest of the members and beneficiaries and:

(1) For the exclusive purpose of:

(i) providing benefits to members and beneficia-

ries; and

(ii) defraying reasonable expenses of administer-

ing the Retirement System;

(2) With the care, skill, prudence, and diligence under

the circumstances then prevailing that a prudent person acting

in a like capacity and familiar with such matters would use in

the conduct of an enterprise of a like character and with like

aims;

(3) By diversifying the investments of the Retirement

System’s funds so as to minimize the risk of large losses,

unless under the circumstances it is clearly prudent not to do

so; and

(4) In accordance with the provisions of Section 7 of

this subtitle. (Ord. 492, 1985; Ord. 765, 1986; Ord. 779. 1986;

Ord. 988, 1987°; Ord. 58, 1988; Ord. 275, 1989).

[1983 Repl. Vol.; 1989 Supp.]

* * * *

“Sections 2 and 3 of Ordinance 988, 1987 provide as follows:

“Sec. 2. And be it further ordained, That notwithstanding the provisions

of Section 42 of this Article 22, the provisions and benefits of this Ordi-

nance 988, 1987, shall be repealed or modified by future ordinances, if

necessary, in order to comply with Federal law and/or regulations. Such

changes may result in the restructuring of the provisions of this ordinance

which could result in reduced benefits to members, retirees and/or benefi-

ciaries of retirees.

Sec. 3. And be it further ordained, That this Ordinance shall take effect on

July 1, 1987 and shall apply only with respect to members who are employ-

ees after June 30, 1987.”

Pep Bi stn ott ere ne Da

ee .

B-15

(17Xe) Benefit increases to be paid only from Paid Up

Benefit Fund and Contingency Reserve Fund.

(i) Any benefit increase provided under this section

shall be funded on a single premium paid up annuity basis. The

words “Single Premium paid up annuity basis’’ shall have the

common actuarial meaning of spreading the amount available

to provide a benefit over the lifetime of an individual in the

form of an annuity. It is intended that any such benefit

increase shall continue for the lifetime of the eligible member

and any beneficiary, consistent with any option elected under

Sections 6 or 9. The foregoing Contingency Reserve Fund has

been established to insure payment of previously accrued bene-

fit increases for any year in which the Paid Up Benefit Fund

does not meet its interest assumption.

(ii) The granting of any benefit increase under this

section is contingent on the performance of the retirement

system’s investment funds. The continuation of any benefit

increase previously accrued under this section is specifically

made contingent on the ability of the Paid Up Benefit Fund

and the Contingency Reserve Fund to provide such benefits in

the future. Section 10 and Section 42 to the contrary notwith-

standing, any benefit increase provided under this section shall

not become an obligation of the City of Baltimore. In the event

of any conflict between Section 10 and/or Section 42 and this

section, the terms of this section shall prevail.

(iii) If the performance of the retirement system’s

investment funds cause a decline in the value of the Paid Up

Benefit Fund and the Contingency Reserve Fund, with the

result that full benefit increases previously accrued under this

section cannot be continued, then the trustees shall reduce or

eliminate previously accrued increases on an equal percentage

basis, effective as of January 1 following the June 30 on which

a deficit exists. An equal percentage reduction shall be made

to all benefits granted under this Section regardless of when

such increases were granted. If the Paid Up Benefit Fund and

the Contingency Reserve Fund should become exhausted or

decline in value to the point of having no value, previously

B-16

accrued increases shall be eliminated in full. Any excess

investment earnings available under (c) above in a subsequent

year shall be used to provide an increase in benefits without

regard to any prior reduction or elimination of benefit

increases previously accrued.

[1983 Repl. Vol.]

* * * *

23. Management of funds.

(a) Trustee of funds. The Board of Trustees shall be the

trustees of the several funds of the Elected Officials’ Retire-

ment System of Baltimore created under the provisions of this

subtitle. The Board shall have the power to invest and reinvest

such funds as provided for in Section 7 of this Article 22.

(b) The provisions of Section 7(aX13) of this Article 22,

concerning the divestment of funds in firms doing business in

or with South Africa or Namibia, shall appy to the several

funds of the Elected Officials’ Retirement System of Balti-

more. (Ord. 1105, 1983; Ord. 792, 1986.)

[1989 Supp.]

* * * *

35. Management of funds.

- (a) Trustee of funds. The Board of Trustees shall be the

trustees of the several funds of the Fire and Police Employees’

Retirement System of Baltimore created by Article 22 under

this subtitle as provided in Section 36. The Board of Trustees

shall have the power to invest and reinvest such funds in the

following types or classes of assets subject to the limitation, if

any, as set forth with regard to each type or class of invest-

ment.

B-17

(1) Deposits in savings accounts, or other evidences of

deposits in national or state banks and trust companies.

To the extent that such an investment or account is

insured by the Federal Savings and Loan Insurance Corpora-

tion, or by the Maryland Savings Share Insurance Corpora-

tion, said Trustees may invest in shares of savings and loan

associations or building and loan associations in the State of

Maryland.

(2) Interest-bearing bonds, notes, certificates of

indebtedness, bills or other direct interest-bearing obligations

fully guaranteed both as to principal and interest by the

United States of America, or by Canada, and obligations of the

International Bank for Reconstruction and Development and

obligations of the Inter-American Development Bank.

(8) Interest-bearing bonds of any state, District of

Columbia, territory or possession of the United States of

America, or of any province of Canada, or of any county, or

incorporated city of any state, District of Columbia, territory

or possession of the United States of America or any Canadian

municipality.

(4) Interest-bearing bonds of any commission, instru-

mentality, authority or political subdivision having legal

authority to issue the same, of the United States of America,

Canada, any state, District of Columbia, territory or posses-

sion of the United States of America or of any province of

Canada, or of any county or incorporated city of any state,

District of Columbia, territory or possession of the United

States of America or of any province of Canada.

(5) Interest-bearing bonds, notes or other interest-

bearing obligations of any corporation organized under the

laws of the United States of America or of Canada or province

thereof, or under the laws of any state, District of Columbia,

territory or possession of the United States of America.

Equipment trust obligations or certificates or other secured

instruments evidencing an interest in transportation or other

equipment wholly or in part within the United States of Amer-

ica or Canada with a right to receive determined portions of ~

B-18

rental, purchase price or other fixed obligatory payments for

the use or purchase of such transportation or other equipment.

(6) Publicly-traded preferred or common stock or

shares of any corporation created or existing under the laws of

the United States of America, Canada or province thereof, or

of any state, District of Columbia, territory or possession of

the United States of America; provided, however, that such

investments in stocks shall not exceed fifty per cent (50%) of

the total market value of all the assets of the funds of the Fire

and Police Employees Retirement System referred to herein.

An evaluation of the total assets of the Retirement System

shall be made at least once in every three (3) months, for the

purpose of maintaining this fifty per cent (50%) limitation.

(7) Covered call options may be sold by the Fire and

Police Employees Retirement System when the underlying

common stock is held in the equity portfolio and when such

options are actively traded on a public exchange, provided,

however, that options are not sold on more than twenty-five

per cent (25%) of the total market value of common stocks

held in the portfolio. Purchase of options will be permitted

only when closing out a previously written covered call option.

* * *

(8Xi) Loans secured by first mortgages, or deeds of

trust, on unencumbered fee-simple or improved leasehold real

estate in the District of Columbia or in any state of the United

States of America or province of Canada. Whenever such

loans are made upon fee-simple, or leasehold real estate which

is improved by a building or buildings, the said improvements

shall be insured against loss by fire and such other casualties

as are included in extended coverage policies, and the said

insurance policies shall contain the New York or Massachu-

setts standard mortgage clause or equivalent thereto and shall

be delivered to the mortgagee as additional security for the

said loans. Bonds, notes or other evidence of indebtedness

secured by mortgages or deeds of trust which are guaranteed

or insured by an instrumentality of the United States pursuant

B-19

to Acts of Congress, as heretofore and hereafter amended,

known as the National Housing Act, Servicemen’s Readjust-

ment Act of 1944, and the Bankhead-Jones Farm Tenant Act;

and neither the limitations of this section or any other law of

this state requiring security upon which loans shall be made,

or prescribing the nature, amount or forms of such security, or

limiting the interest rates upon loans, shall be deemed to apply

to such insured or guaranteed mortgage loans. Provided, how-

ever, that such investments in mortgages shall not exceed

twenty-five percent (25%) of the total market value of all the

assets of the funds of the Fire and Police Employees’ Retire-

ment System referred to herein and an evaluation of the total

assets of the retirement system shall be made at least once in

every three (3) months, for the purpose of maintaining this

twenty-five percent (25%) limitation. Upon a foreclosure of its

own mortgages or an acceptance of a deed in lieu of foreclo-

sure by the Trustees, the said Trustees shall have the right to

purchase, hold, operate, lease, manage, and/or sell the subject

real estate.

(ii) Open and closed end real-estate investment

pools, direct real estate investments, and unrestricted mort-

gage investments with equity participation. Such investments

shall be included in the twenty-five percent (25%) restriction of

market value of assets provided for in Section 35(aX8 i), with

the further limitation that these investments shall not exceed

ten percent (10%) of the market value of all the assets of the

retirement system’s funds.

Provided, however, if any such investment is in the

nature of a “real estate investment pool,” as defined hereinaf-

ter, then such investment shall be subject to the following

restrictions:

1. With the exception of an insurance com-

pany, the investment manager shall either be registered as an

investment advisor or function through an investment advisor

registered with the Securities Exchange Commission under

the Investment Advisors Act of 1940.

_ B-20

2. With the exception of an insurance com-

pany, all funds of the real estate investment pool shall be held

in a trust wherein the investment manager, trustees, and all

persons or entities responsible for the management, control,

custody, maintenance, or investment of the funds, or having

any similar responsibility in the pools shall function in a fiduci-

ary capacity in their relationship to the unit holders or inves-

tors in the pool.

3. If the investment is in an insurance company’s

real estate investment pool, the insurance company shall have

the highest rating of A.M. Best Co., and all persons or entities

responsible for the management, control, custody, mainte-

nance or investment of the funds, or having any similar

responsibility, § Shall function in a fiduciary capacity in their

relationship to the unit holders or investors in the pool.

4. The trust agreement shall be tax exempt

under the applicable provisions of the Internal Revenue Code,

Sections 401 and 501(a) or subsequent arnendments or revi-

sions thereto. In the case of insurance company pools, the

pools shall satisfy the applicable requirements of the Internal

Revenue Code, as amended, so that the insurance company

does not pay federal income tax on the earnings of the sepa-

rate accounts of such pools.

5. The trust funds of the real estate invest-

ment pool shall be immune from suit, and exempt from attach-

ment by any creditor of any person, corporation or other

entity that is responsible for the management, custody, con-

trol, maintenance, or investment of the funds, or having any

similar responsibility in said pool, under any local, state, or

federal law. Title to all assets of a separate account of an

insurance company’s real estate investment pool shall be held

solely in the corporate name of the insurance company itself,

and under applicable law such assets shall not be chargeable

with liabilities arising out of any other business which the

insurance company may conduct.

B-21

6. The real estate investment pool trust or any

other agreement for such investment shall not violate the pro-

visions of the Internal Revenue Code, Sections 401 and 501(a)

or any subsequent revisions or amendments thereto, under

which the Fire and Police Employees’ Retirement System is

qualified.

7. Av unit holders or qualified investors in

such a pool shall be pension or employee benefit plans or trusts

qualified under Internal Revenue Code, Sections 401 and/or

501(a), or a governmental plan under Sections 414(d) and/or

818(a\6).

8. For the purposes of this section, a real

estate investment pool shall mean any investment wherein the

retirement system places certain funds into a commingled

trust, or a commingled separate account of a life insurance

company, and wherein the trust or insurance company utilizes

said funds to make certain real estate investments in the Dis-

trict of Columbia, or in any state of the United States of

America or province of Canada, and wherein each such inves-

tor owns through units a certain equity in the investmert.

* * *

(9) Ground rents in the State of Maryland.

(10) Interest, rents or other fixed income due and

accrued on any of the investments authorized in the preceding

subsections.

(11) Short Term Investment Funds established, oper-

ated and maintained by the contract custodian of the assets of

the Fire and Police Employees’ Retirement System, for the

collective investment and re-investment of funds received and

held by it as Trustee, Co-Trustee, or in any other fiduciary

capacity described in Subtitle 5 of Title 3 of the Financial

Institutions Article of the Annotated Code of Maryland (1980

Volume), or any amendment, supplement, or successor thereto

or recodification thereof, which Short Term Investment Fund

B-22

has been qualified under the provisions of Section 401(a) and

exempt from Federal income taxation under Section 501(a) of

the Internal Revenue Code of 1945, as amended, and which is

used as a temporary investment/cash management vehicle;

provided that investment in such Short Term Investment

Fund may be made from uninvested cash reserves held by the

contract custodian, or from funds designated by the Invest-

ment Managers of the Fire and Police Employees’ Retirement

System funds. In connection with the participation of the Fire

and Police Employees’ Retirement System in such Short Term

Investment Fund, where required by law or the terms of the

Short Term Investment Fund, the Declaration of Trust estab-

lishing such Short Term Investment Fund is hereby adopted

and made a part of the Fire and Police Employees’ Retirement

System to the extent such instrument does not violate the

Internal Revenue Code or other applicable law and does not

affect the tax qualification of the Fire and Police Employees’

Retirement System, and any funds of such System invested in

the Short Term Investment Fund shall be subject to all the

provisions thereof, as the same may be amended from time to

time.

(12) Asset Lending of securities which are under the

custody of the contract custodian of the assets of the Fire and

Police Employees’ Retirement System, provided that: (1) such

securities are loaned in accordance with the procedures set

forth in the Department of Labor Prohibited Transaction

Exemption 81-6 Ruling (PTE 81-6), or applicable successor

regulations; (ii) the Board of Trustees shall approve or autho-

rize the designated Investment Managers to approve the secu-

rities to be loaned, the brokers to whom such securities are

loaned, and the collateral to secure assets loaned; and provided

further, that before any such assets are loaned, the Board of

Trustees and the Director of Finance shall, pursuant to PTE

81-6 procedures enter into a master loan agreement with the

contract custodian setting forth the procedures to be followed;

the broker to whom such securities will be loaned; collateral

arrangements; fees; and other applicable provisions; and such

master loan agreement shall be approved prior to execution by

the Board of Trustees, by the Director of Finance as the desig-

B-23

nated custodian of the assets of the Fire and Police Employ-

ees’ Retirement System, by the City Solicitor and the Board of

Estimates; provided, however, that the market value of securi-

ties loaned shall not exceed twenty-five percent (25%) of the

total market value of all assets of the Fire and Police Employ-

ees’ Retirement System on any day.

The Board of Trustees shall have the duty and respon-

sibility of periodically determining investment policies consis-

tent with the above limitations, the capital market

environment, and the actuarial characteristics of the Fire and

Police Employees Retirement System and to public such

investment policy guidelines by filing a copy thereof with the

Department of Legislative Reference of Baltimore City, and

after January 1, 1979, also by publication in the Municipal _

Journal).

All contributions from time to time paid into the sev-

eral funds, and the income thereof, without distinction

between principal and income, shall be held and administered

by the Board of Trustees or its agents in the funds, and the

Board shall not be required to segregate or invest separately

any portion of the funds.

Provided, however, that nothing in this amendatory

ordinance shall be deemed to render illegal or to invalidate the

making and holding of any investment heretofore made and

now remaining in said funds where such investment when

made was authorized by law prior to the enactment of this

amendatory ordinance; and provided further, that nothing

herein shall be deemed to prevent the Board of Trustees from

accepting, in lieu or substitution of securities representing

investments heretofore validly made, other securities not of

the kind enumerated but authorized by ordinance as invest-

ments for the said Board prior to the enactment of this amend-

atory ordinance, where the Board shall deem such substitution

of securities desirable to preserve the investment of the said

funds. Subject to the terms, provisions and conditions con-

tained herein, said Trustees shall have full power to hold,

purchase, sell, assign, transfer, and dispose of any of the secu-

B-24

rities and investments in which any of the funds created herein

shall have been invested, as well as the proceeds of said invest-

ments and any moneys belonging to said funds.

* * *

(13)*(i) On the first day of the third quarter of fiscal

year 1987, no monies or funds held under any provision of the

retirement system shall remain invested or hereinafter by

3Sections 2 and 3 of Ord. 765, 1986 provide as follows:

‘Sec. 2. And be it further ordained,

(a) That, subject to the provisions of this section, the divestiture

required by Section 1 of this ordinance shall be completed with the time limit

established in this ordinance.

(b) That the time limit shall begin on the first day of the third quarter of

fiscal year 1987.

systems shall make quarterly reports to the Mayor and City Council con-

cerning the progress of divestiture.

(d) That, during the time limit, the Board of Trustees of the retirement

systems may from time to time suspend the divestiture program provided

the suspending Board adopts a resolution pursuant to this section.

(e) That when a Board of Trustees of either retirement system adopts a

resolution suspending the divestiture program under this section, the sus-

pending Board shall find as follows:

(1) That the rate of return on the funds are 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.

(f) That when a Board of Trustees of the retirement systems adopts a

resolution suspending the divestiture program under this section, the resolu-

tion shall:

(1) State the standards and conclusions for the suspension;

(2) Set forth the duration of the suspension and the time of resump-

tion of the divestiture program; however, the period of suspension shall not

exceed 90 days and the time limit shall be tolled for the period of suspension;

and

(3) Be in writing and shall be sent to the Mayor, President of the

City Council, and the Department of Legislative Reference.

Sec. 3. And be it further ordained, That the time limit for divestiture

under this ordinance is 2 years.”’

B-25

invested in the stocks, securities or other obligations of any

bank or financial institution which makes loans to the Republic

of South Africa or Namibia, or to a national corporation of the

Republic of South Africa or Namibia, or in the stocks, securi-

ties, or other obligations of any company doing business in or

with the Republic of South Africa or Namibia, or whose subsid-

iary or affiliate does business in or with the Republic of South

Africa or Namibia.

(ii) Business entities doing business in or with the

Republic of South Africa shall be identified by reference to the

most recent annual report of the African Fund entitled ‘‘Uni-

fied List of United States Companies with Investments or

Loans in South Africa and Namibia.”

(iii) Business entities doing business in or with the

Republic of Namibia shall be identified through correspon-

dence with the United Nations’ Office of the Commissioner for

Namibia and the United Nations’ Center for Transnational

Corporations.

(b) Interest. As of July 1, 1978, the Trustee will determine

the ‘‘carrying value’’ of the fund in accordance with the asset

valuation method theretofore employed, and the ‘adjusted

market value’’ of the fund representing an average fair mar-

ket value as of that date.

During the 1979 fiscal year, the Trustees will establish a

“reserve for book value’ as of July 1, 1978, equal to the

difference as of that date between the carrying value and the

adjusted market value of the fund. On that date and on each

annual valuation date thereafter, the value of the fund assets

for actuarial valuation purposes will be carried at (1) the then

current adjusted market value, plus (2) the reserve for book

value.

The Board of Trustees annually shall credit regular inter-

est less the investment management, custodian and invest-

ment advisor costs on the mean amount for the preceding year

in each of the funds. After payment of pension fund manage-

B-26

ment, custodian, and investment advisor services as provided

in Sections 35(g) and 43(a), any excess of the earnings of the

funds of this retirement system as determined in accordance

with an appropriate asset valuation method giving effect to

actual earnings of the funds, over the earnings based on the

regular interest rate used for valuation purposes shall first be

applied by the Board of Trustees to meet the conditions of any

asset averaging method then in use under the system.

An additional amount equal to one and one-half percent of

the mean amount for the preceding year in each of the funds

will be deducted from the remaining excess earnings, if any,

and applied by the Board of Trustees to reduce the remaining

balance, if any, in the ‘“‘reserve for book value’’; to the extent

the excess earnings are less than one and one-half percent per

annum, the City of Baltimore shall contribute the difference to

the ‘“‘reserve for book value’’, average over a five year period

in accordance with the asset valuation method theretofore

employed. The remaining excess earnings, if any, shall next be

applied by the Board in such amount or amounts as they

determine (1) to decrease the amount contributed by the City

of Baltimore, and/or (2) to decrease the period over which the

unfunded accrued liability will be amortized as provided in

Section 36(d\4), and/or (3) to reduce the remaining balance, if

any, in the “reserve for book value’’. Any deficiency of the

earnings of the funds of this retirement system, as determined

in accordance with an appropriate asset valuation method giv-

ing recognition to actual earnings of the funds, below the

required earnings based on the regular interest rate used for

valuation purposes shall first be applied to meet the conditions

of any asset averaging method then in use under the system;

the remaining deficiency in earnings, if any, shall be applied by

the Board of Trustees in such amount or amounts as they

determine either (1) to increase the amount contributed by the

City of Baltimore, and/or (2) to increase the period over which

the unfunded accrued liability will be amortized as provided in

Section 36(d)\4).

The increase or decrease of contribution and/or the

increase or decrease in length of amortization period shall be

B-27

determined by the Board after receiving the advice o° the

actuary engaged by the City, on the basis of regular interest

rate used for valuation purposes, and of such mortality and

other tables as shall be adopted by the Board of Trustees.

The Board of Trustees shall use such portion of the net

unallocated interest surplus (if any) as is deemed necessary by

the actuary to cover the cost to the City of Baltimore which

may result from the implementation of Ordinance 762, 1986,

effective July 1, 1986.

Any unallocated interest surplus in the retirement system

as of July 1, 1987, shall be applied to reduce the unfunded

accrued past service liability of the system.

bursements for pensions, annuities, and other payments, there

may be kept available cash on deposit in one or more banks or

trust companies located in the City of Baltimore, organized

under the laws of the State of Maryland or of the United

States, in such amount as the Trustees may by resolution from

time to time adopt, not exceeding a sum equal to the estimated

disbursements projected for a period of fifteen days. The sums

on deposit in bank shall be secured by collateral posted by the

depositories of such type and amoun:t as the Commissioners of

Finance may prescribe, but in no event shall the market value

of such collateral be less than one hundred per cent of the

amount on deposit according to the depositories’ records. In

exercising this authority for bank deposits, the Trustee shall

endeavor to minimize the amount of such deposits, and shall

consider appropriate money management techniques, includ-

ing wire transfers of funds and the zero-balance-fee-for-service

method of maintaining bank balances. In no event shall the

bank accounts be used as the basis for, or be used to provide

supplementary compensation for such investment administra-

tors.

(d) Securities Handling. The Custodian designated in

the Charter of Baltimore City (1964 Revision, as amended)

may cause any investment in securities held by the Trustees to

~— 7

B-28

be registered in or transferred into the name of the Trustees

or into the name of such nominee as the Custodian may direct,

including a nominee partnership created by the Board of

Trustees, or the Custodian may retain them unregistered and

in form permitting transferability, and further may authorize

its contractual agents to deposit securities with ‘‘clearing cor-

porations” as defined in Section 8-102 of Article 95B of the

Annotated Code of Maryland for the express purpose of hav-

ing such clearing corporations act as centralized depositories

of such securities, but the books and records of the Custodian

and its contractual agents shall at all times show that all such

investments are part of the several funds of the Fire and

Police Employees Retirement System. The authority to make

use of a clearing corporation shall include the authority to

utilize the “book entry’’ system of the United States Govern-

ment, and agencies thereof, for which the Federal Reserve

Bank is the authorized fiscal agent.

(e) Conflicts of interest. Except as otherwise herein

provided, no trustee and no employee of the Board of Trustees

shall have any direct interest in the gains or profits of any

investment made by the Board of Trustees or their designees,

nor as such receive any pay or emolument for his services,

except as authorized from time to time by the Board of Esti-

mates. No trustee or employee of the Board shall, directly or

indirectly, for himself or as an agent in any manner use said

gains or profits, except to make such current and necessary

payments as are authorized by the Board of Trustees; nor shall

any trustee or employee of the Board of Trustees become an

endorser or surety or in any manner an obligor for moneys

loaned by or borrowed from the Board of Trustees.

(f) Trustee Fiduciary Liability. Neither the Board of

Trustees nor any agent, person or other entity acting on behalf

of the Board of Trustees shall be liable for the making, reten-

tion or sale of any investment or reinvestment made as herein

provided, nor for any loss or diminution of the funds, except

that due to his or its own gross negligence, wilful misconduct

or lack of good faith.

B-29

(g) Custodian and Supervision of Funds. The City offi-

cial designated in the Charter of Baltimore City (1964 Revi-

sion, as amended) shall be the custodian of the several funds of

the Fire and Police Employees Retirement System. Supervi-

sion of the several funds of the Fire and Police Employees

Retirement System shall be vested in the Board of Trustees.

Subject to the approval of the Board of Estimates, the Board

of Trustees may hire and appoint such persons, agents or

entities (including corporate fiduciaries) as in its discretion

may be required or advisable to enable it to perform such

pension fund investment management duties hereunder; pro-

vided further, that subject to the approval of the Board of

Estimates the Board of Trustees may enter into agency and

pension fund investment management agreements with one or

more qualified pension fund managers for the purpose of

obtaining pension fund investment management for the Fire

and Police Employees Retirement System and the several

funds thereof. Payment for such investment management ser-

vices shall be made from the resources of the pension fund or

funds.

(h) Prudent investment of funds. The Board of Trust-

ees shall discharge its duties, with respect to the investment of

the funds of the Fire and Police Employees’ Retirement Sys-

tem, solely in the interest of the members and beneficiaries

and:

(1) For the exclusive purpose of:

(i) providing benefits to members and benefi-

ciaries; and

(ii) defraying reasonable expenses of adminis-

tering the retirement system;

(2) With the care, skill, prudence, and diligence

under the circumstances then prevailing that a prudent person

acting in a like capacity and familiar with such matters would

use in the conduct of an enterprise of a like character and with

like aims;

ae B-30

(3) By diversifying the investments of the retire-

ment system’s funds so as to minimize the risk of large losses,

unless under the circumstances it is clearly prudent not to do

so; and

(4) In accordance with the provisions of Section 35

of this subtitle; (Ord: 492, 1985; Ord. 762, 1986; Ord. 765,

1986; Ord. 779, 1986; Ord. 794, 1986; Ord. 58, 1988; Ord. 123,

1988.) -

[1983 Repl. Vol.; 1989 Supp.]

C-1

APPENDIX C

FIRE AND POLICE EMPLOYEES’

RETIREMENT SYSTEM

OF THE

CITY OF BALTIMORE, MARYLAND

ANNUAL FINANCIAL REPORT

FOR THE

FISCAL YEAR ENDED JUNE 30, 1986

Prepared by:

Ernest J. Glinka, Administrator

Thomas P. Taneyhill, CPA, Deputy Administrator

Charles W. Parker, Accountant Supervisor

C-2

Fire and Police Employees’ Retirement System

City of Baltimore, Maryland

NOTES TO FINANCIAL STATEMENTS

1. The Reporting Entity:

The Fire and Police Employees’ Retirement System of the

City of Baltimore (F&P) is a defined benefit local retire-

ment plan covering officers and most employees of the Fire

and Police Departments. Established July 1, 1962, the plan

is managed by a Board of Trustees in accordance with

Article 22 of the Baltimore City Code. Prior to the above

date, all fire and police personnel were members of the

Employees’ Retirement System. Upon the creation of the

F&P, eligible personnel automatically transferred thereto

except for those who elected to remain in the Employees’

Retirement System, the plan which covers City employees

with the exception of those required to join the F&P, the

Maryland State retirement systems, or the Elected Offi-

cials’ Retirement System.

Based on the reporting entity oversight responsibility crite-

ria, as defined by the National Council on Governmental

Accounting Statement #3, the F&P is a component unit of

the City of Baltimore, the oversight unit, and is reported as

such. Oversight responsibility is derived from the govern-

mental unit’s power and includes, but is not limited to

financial interdependency, designation of management,

ability to significantly influence operations, and account-

ability for fiscal matters. The F&P does not exercise over-

sight responsibility for any other unit.

* * *k* *

C-3

EMPLOYEES’ RETIREMENT SYSTEM

OF THE

CITY OF BALTIMORE, MARYLAND

ANNUAL FINANCIAL REPORT

FOR THE

FISCAL YEAR ENDED JUNE 30, 1986

Prepared by:

Ernest J. Glinka, Administrator

_ Thomas P. Taneyhill, CPA, Deputy Administrator

Charles W. Parker, Accountant Supervisor

C-4

Employees’ Retirement System

City of Baltimore, Maryland

NOTES TO FINANCIAL STATEMENTS

The Reporting Entity:

The Employees’ Retirement System of the City of Balti-

more (ERS), a defined benefit local retirement plan, estab-

lished January 1, 1926, is administered in accordance with

Article 22 of the Baltimore City Code. The plan covers

most employees of the City with the exception of those

required to join the Maryland State retirement systems,

the Fire and Police Employees’ Retirement System, or the

Elected Officials’ Retirement System.

Based on the reporting oversight responsibility criteria, as

defined by the National Council on Governmental Account-

ing System #3, the ERS is a component unit of the City of

Baltimore, the oversight unit, and is reported as such.

Oversight responsibility is derived from the governmental

unit’s power and includes, but is not limited to financial

interdependency, designation of management, ability to

significantly influence operations, and accountability for

fiscal matters. The ERS does not exercise oversight

responsibility for any other unit.

* * * *

a wre" nadia Aintree

ELECTED OFFICIALS’ RETIREMENT SYSTEM

OF THE

CITY OF BALTIMORE, MARYLAND

ANNUAL FINANCIAL REPORT

FOR THE

FISCAL YEAR ENDED JUNE 30, 1986

Prepared by:

Ernest J. Glinka, Administrator

Thomas P. Taneyhill, CPA, Deputy Administrator

Charles W. Parker, Accountant Supervisor

C-6

Elected Officials’ Retirement System

City of Baltimore, Maryland

NOTES TO FINANCIAL STATEMENTS

June 30, 1986

The Reporting Entity:

The Elected Officials’ Retirement System of the City of

Baltimore (EOS), a defined benefit local retirement plan,

established December 5, 1983, is administered in accor-

dance with Article 22 of the Baltimore City Code. The plan

covers the Mayor, the Comptroller, and the President and

all members of the City Council. All elected Baltimore City

officials are required to join except for those officials who

are members of the Employees’ Retirement System of the

City of Baltimore who may choose to remain members of

that system. At the above date two officials in the Employ-

ees’ Retirement System chose to remain members thereof.

Based on the reporting entity oversight responsibility cri-

teria, as defined by the National Council on Governmental

Accounting Statement #3, the EOS is a component unit of

the City of Baltimore, the oversight unit, and is reported

as such. Oversight responsibility is derived from the gov-

ernmental unit’s power and includes, but is not limited to

financial interdependency, designation of management,

ability to significantly influence operations, and account-

ability for fiscal matters. The EOS does not exercise over-

sight responsibility for any other unit.

x* * * *

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.