Illinois Supreme Court Rules Pension Reform Unconstitutional

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Illinois Supreme Court Rules Pension Reform Unconstitutional

May 8, 2015

Today, the Illinois Supreme Court struck down the Illinois pension reform legislation that was passed in December 2013 by the General Assembly and signed by then-Governor Quinn. See In re Pension Reform Litigation, 2015 IL 118585. This legislation pertained to “Tier 1” members of the General Assembly Retirement System, the State Employees’ Retirement System, the State Universities Retirement System and Teachers’ Retirement System. The reform law was enacted to help save Illinois’ sinking finances by modifying several different aspects of Illinois public pension laws. These modifications included, but were not limited to: (1) a reduction of the automatic 3% annual pension increase that pension recipients currently enjoy; (2) the elimination of the automatic 3% annual increase for certain public employees who have not yet begun receiving a pension; (3) a new cap on the pensionable salary of members of certain State retirement systems; and (4) an increase in the retirement age for members of certain State retirement systems on a sliding scale based upon one’s age.

In November 2014, a Sangamon County state court judge ruled that the reform legislation “without question diminishes and impairs the benefits of membership in State retirement systems” in violation of the State Constitution’s so-called “Pension Protection Clause.” On a direct appeal, the Illinois Supreme Court largely agreed with the trial court’s analysis. Among other things, the Supreme Court relied on the Pension Protection Clause, which declares that “[m]embership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” See Ill. Const. Art. XIII, § 5. Because the pension reform legislation reduced annuity benefits owed to “Tier 1” members of these pension plans, the Supreme Court concluded that the Pension Protection Clause had been violated. The Court explained its analysis as follows:

Retirement annuity benefits are unquestionably a “benefit of contractually-enforceable relationship resulting from membership” in the four State-funded retirement systems. Indeed, they are among the most important benefits provided by those systems. If allowed to take effect, Public Act 98-599, would clearly result in a diminishment of the retirement annuities to which Tier 1 members of GRS, SRS, SURS and TRS became entitled when they joined those systems.

Id. at ¶ 47.

In turn, the Supreme Court rejected the government’s argument that the dire financial circumstances facing the State of Illinois justified the General Assembly to invoke the State’s “reserved sovereign powers” to override the rights and protections provided by the Illinois Constitution. In doing so, the Court noted that the financial troubles facing the State were not “unique”:

Economic conditions are cyclical and expected, and fiscal difficulties have confronted the State before. In the midst of previous downturns, the State or political subdivisions of the State have attempted to reduce or eliminate expenditures protected by the Illinois Constitution, as the General Assembly is attempting to do with Public Act 98-599. Whenever those efforts have been challenged in court, we have clearly and consistently found them to be improper.

With these understandings, the Supreme Court expressed little sympathy for the General Assembly’s desire to “cut costs”:

our economy is and has always been subject to fluctuations, sometimes very extreme fluctuations. Throughout the past century, market forces have periodically placed significant pressures on public pension systems. The repercussions of underfunding those pension systems in such an environment have been well-documented and were well-known when the General Assembly enacted the provisions of the Pension Code which Public Act 98-599 now seeks to change. . . . The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible.

Id. at ¶ 66. The fact that the General Assembly had other alternatives for addressing the pension crisis (including for example simply raising taxes) further persuaded the Court there was no need to resort to drastic remedy of violating the Illinois Constitution’s “Pension Protection Clause.”

It is unclear where this decision leaves the State of Illinois’ ongoing attempts to address the ever-mounting pension deficit. One very real possibility is that the State will focus its cost-savings efforts in other areas, including deep cuts to the Local Government Distributive Fund (“LGDF”). One thing is for sure – all Illinois citizens (including public employers) will soon be affected by this decision of the Illinois Supreme Court. Please contact a Clark Baird Smith LLP attorney to discuss questions related to this pension reform law decision.
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