The California State Teachers' Retirement System asked the California Supreme Court Monday to overturn a law that slashed $3.7 billion from the state's massive budget deficit, arguing that the legislative deal improperly deprived the pension fund of a $500 million payment.

Complicating the state's chaotic financial situation, the lawsuit contends the law, SB 20, violated the U.S. and California constitutions by preventing the state from fulfilling its contractual obligation to make a half-billion-dollar contribution to the pension fund.

The payment funds a CalSTRS program that provides supplemental benefits for thousands of retired teachers. Enacted in May, SB 20 indefinitely deferred the pension fund payment as part of a deal to cut $3.7 billion from California's estimated $38.2 billion budget deficit.

This isn't the first time a large pension fund has sued the state for withholding funds during a budget crisis. In 1994 the California Public Employees' Retirement System sued after the state withheld $910 million in contributions to help balance two state budgets.

CalPERS won its case in Sacramento Superior Court in 1995, then on appeal in 1997 when a state appellate court and then the Supreme Court ordered California to pay $1.36 billion in principal and interest.

Monday's CalSTRS suit named as defendants state Finance Director Steve Peace and Controller Steve Westly, who also serves as a CalSTRS trustee. A Westly spokeswoman said he was studying the suit and would have no comment. Peace's office did not return phone calls.

CalSTRS spokeswoman Sherry Reser said, "The board is sensitive to the state (budget) crisis. They were willing to work with the state as long as we had full assurance of a return of that money."

But SB 20 gave "no assurance that they were ever going to return the money," Reser said.

Under SB 20, CalSTRS' 715,000 members would lose any money not repaid by 2036. If the $500 million is not received by that year, the nation's third-largest pension fund estimated it would lose $6.3 billion in principal and interest, according to the lawsuit.

The payment, which was due last week, is an annual contribution the state is required to make to a fund to supplement retirement benefits for older retirees whose buying power is eroded by inflation. More than 60,000 of the state's 170,000 retired teachers receive supplemental pay.

While the missed state contribution won't affect benefits paid to current retirees, CalSTRS officials say it could threaten the fund's ability to pay full benefits in the future because the missed payment would have a long-term impact on the investment income the fund generates in later years. That would translate into less money for future retirees to combat rising prices.

The state owed CalSTRS $559 million payment July 1 but transferred just $58.87 million to the fund, according to the lawsuit.

Opponents of the budget plan say older retirees depend on the supplemental pay to help them keep up with inflation.

"It was hard fought to get the purchasing power (funding). These benefits cannot be arbitrarily removed," said Jonathan Lightman, executive director of the Faculty Association of California Community Colleges.

Despite opposition from CalSTRS and efforts to work out a compromise, lawmakers agreed to skip the $500 million payment as they hammered out a budget accord that erased $3.7 billion from the estimated $38.2 billion budget shortfall. That deal did not specify when, if ever, the money would be repaid, a major sticking point for CalSTRS and teachers' groups.

"We were willing to work with the state on its budget crisis," said Ed Ely, a spokesman for the California Retired Teachers Association, which plans to join the CalSTRS lawsuit. "But they weren't willing to commit to guaranteed repayment."

In recent weeks, CalSTRS has lobbied to restore the payment in the future. A bill carried by Assemblyman Gene Mullin, D-San Mateo, proposes repaying the money over a six-year period starting next fiscal year. Mullin's measure, however, stalled in the Senate last week.

"We would much prefer legislation," said Reser, the CalSTRS spokeswoman. "CalSTRS is disappointed that it had to resort to litigation."

It's not certain the Supreme Court will even agree to hear the case. It rarely is the first court to take up a case and generally hears appeals that already have passed through lower courts.

But in its lawsuit, CalSTRS argues that the suit qualifies for immediate attention because it's of great public importance and that CalSTRS members would be hurt if the suit first had to navigate the lower courts.

But Gerald Ulmen, an authority on California constitutional law at Santa Clara University, said he would be surprised if the Supreme Court took the case right away. "I think it would be very unusual for the court to hear it originally," Ulmen said. "It's much more likely they will remand it to a court of appeals or a superior court."