CalSTRS trustees turned up the political pressure on budget-stressed lawmakers Thursday, vowing to sue the state if it skips a $500 million payment aimed at supplementing benefits for thousands of retired teachers.

The board's decision challenges a major state budget deal that slashed $3.7 billion from the state's projected $38.2 billion budget deficit.

Those cuts included deferring a half-billion dollars in payments next fiscal year to a California State Teachers' Retirement System benefit fund. The fund provides cost-of-living protection for older retirees whose buying power is eroded by inflation.

The state is penalizing "the most financially vulnerable retired teachers in the state of California," said George Avak, president-elect of the California Retired Teachers Association. The group has pledged to join any lawsuit filed by CalSTRS, the nation's third-largest pension fund with 715,000 members and $100 billion in assets.

While the missed state payment won't affect supplemental benefits paid to the current 60,000 retired teachers, CalSTRS officials say it could threaten the fund's ability to pay full benefits in the future. CalSTRS consultants say the lost state money would have a long-term impact on the investment income the fund generates in later years. The could mean less money for future retirees to compensate for rising consumer prices.

From the outset, CalSTRS and the teacher's group opposed the cut outlined in Gov. Gray Davis's January budget.

But they found themselves on the losing end this spring after lawmakers hammered out their first significant budget-cutting pact, which Davis signed off on last month.

CalSTRS trustees quickly hired attorneys to investigate litigation against the state.

The budget accord does not specify when the state would restore the payments, a major sticking point for the pension fund. CalSTRS also wants the state to make up for lost interest income.

Jack Ehnes, chief executive officer, said CalSTRS will continue pursuing new legislation to guarantee when the cut would be rescinded.

The fund is focusing on a measure carried by Assemblyman Gene Mullin, D-San Mateo. His bill, AB 265, calls for skipping the state payments for the next two fiscal years and then increasing contributions from 2010-11 to 2019. The measure cleared the Assembly on Wednesday and has moved to the Senate.

Ehnes said the board will press forward with a lawsuit "if other solutions can't be found."