# Opposition Brief — Lubman v. Mayor of Baltimore City

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1990
- **Citation:** 493 U.S. 1093

## Text

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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

I.

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

1.

2.

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 .....

F

2.

The Ordinances Do Not Take Petitioners’
Property Without Just Compensation ...

The Ordinances Do Not Deprive
Petitioners of Due Process of Law ......

il

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

iv

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

“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.

(c) That during the time limit the Board of Trustees of the retirement
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.

* * *

(c) Cash on Deposit. For the purpose of meeting disburse-
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.

ee

—— Se =

a

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.

(c) That during the time limit the Board of Trustees of the retirement
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.”’

en

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.

(c) Cash on Deposit. For the purpose of meeting dis-
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

1.

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

C5

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* * * *

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0713%3A2. Public record. Not legal advice.