In re Pension Reform Litigation, 2015 IL 118585
In a unanimous and strongly worded opinion, the Illinois Supreme Court struck down P.A. 98-599 (formerly Senate Bill 1) commonly referred to as the “pension reform legislation.”
As you may recall, P.A. 98-599 instituted a series of reductions in benefits to members of the five State pension funds. That legislation was aimed at reducing annuity benefits for Tier 1 participants by delaying the age at which members could retire, capping the maximum pensionable salary, and significantly reducing annual COLA increases.
After the Supreme Court affirmed the absolute protection against diminishment of pension benefits under Article XIII Section 5 of the Illinois Constitution (the Pension Protection Provision) in Kanerva v. Weems 2014 IL 115811 last summer, the State advanced the argument in defense of P.A. 98-599 the State’s “reserved sovereign powers” (police powers) allow the Legislature to circumvent the mandate of the Constitution in the interest of the greater public good.
After a lengthy recitation of the history of past pension reform efforts and the legislative intent in adopting the Pension Protection Clause in the Illinois Constitution of 1970, the Supreme Court first found the legislation resulted in a clear diminishment of pension benefits in violation of the Pension Protection Clause. It repeated its holding in Kanerva, “that the clause means precisely what is says: ‘if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired’”. It further noted the amount of the members pension benefit depends on when the member first began making contributions to the retirement system and while that benefit could be increased, it cannot be diminished. In re Pension Reform Litigation, ¶¶5, 45.
The Court then addressed the State’s argument it’s police powers allowed it to suspend the Pension Protection Clause. In finding the State’s argument unpersuasive, the Court gave a lengthy recitation of the historical inability of the General Assembly to adequately fund the State pension systems. It noted, “There is no dispute that employees have paid their full share as required by law at all times relevant to this litigation. That has not been the case with respect to the contributions owed by the General Assembly.” Id., ¶10. Specifically, the Court cited the recent SEC admonishment of State funding of the pension systems “as bearing no relation to actuarial calculation.” Id., ¶17. It then proceeded to debunk the State’s argument the systems’ underfunding was due to the Great Recession by noting several states bordering Illinois have significantly higher funding ratios than Illinois. Id., footnote 6.
Having found fault with the State’s given reasons for the cause of the pension crisis, the Court then proceeded to dismantle the legal justification offered by the State for the use of its police powers. The Court noted the contract clause cases cited by the State did not involve the Pension Protection Clause. Rather, those cases arose under the contract clauses of the Illinois and United States Constitutions. While that line of authority does recognize limited exceptions, those are allowable only if the impairment is reasonable and necessary to serve an important public purpose. Based on decades of warnings of underfunding, the Court found the current “crisis” entirely foreseeable. “The General Assembly may find itself in crisis, but it is a crisis which other public pension funds managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible.” Id., ¶66.
The Court also observed several less drastic alternatives the State considered and could have adopted instead of P.A. 98-599. For example, it found adopting a new amortization schedule for unfunded liability and seeking additional tax revenue less drastic means of addressing the pension funding issue. Id., ¶67. These alternatives were acknowledged by the legislature in debate over passage of the bill. In short, the Court ultimately held the State could not justify the impairment of pensions by the contract clause or police powers.
In rejecting this argument, the Court noted that adoption of the State’s argument that a crisis of its own making justifies suspension of the Pension Protection Clause would allow the legislature to circumvent this protection whenever it sees fit by creating an economic hardship in meeting its pension obligations.
In holding P.A. 98-599 unconstitutional in its entirety, the Court closed by stating, “Obligating the government to control itself is what we are called upon to do today. The Constitution of Illinois and the precedent of our court admit of only one conclusion: the annuity reduction provisions of Public Act 98-599 enacted by the legislature and signed into law by the Governor violate article XIII, section 5’s express prohibition against diminishment of the benefits of membership in public retirement systems.” Id., ¶89.
Together with the Supreme Court’s decision last year in Kanerva, this decision makes very clear any legislation seeking to address the pension deficit using a reduction in benefits faces a very high hurdle. Recognizing this concern, Governor Rauner was forced to admit his plan for reform moving existing members to a 401k style plan faced significant legal hurdles.
As the Supreme Court has sent the legislature back to the drawing board, we will continue to monitor legislative action in the arena of pension reform.