Illinois Supreme Court Rules Some Retiree Insurance Benefits are Protected by Illinois Constitution
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Illinois Supreme Court Rules Some Retiree Insurance Benefits are Protected by Illinois Constitution
July 7, 2014
In a 6-1 decision, the Illinois Supreme Court held that some retiree health insurance benefits are a form of a “pension or retirement system,” and those insurance benefits are protected by the Pension Clause of the Illinois Constitution. See Kanerva v. Weems, 2014 IL 115811 (July 3, 2014). Because retiree insurance benefits are entitled to constitutional protection, the Court held that Public Act 97-695, which changed insurance premium contributions for employees covered by the State Employees Group Insurance Act of 1971 (“Insurance Act”), was unconstitutional.
Although this specific decision only affected public employees who participate in pension funds referenced by the Insurance Act – such as the State Employees’ Retirement System (“SERS”), the State Universities Retirement System (“SURS”), and the Teachers’ Retirement System of the State of Illinois (“TRS”) – the decision could affect retiree insurance benefits offered by any public employer. The decision may also be a harbinger for the Court’s future decision on the constitutionality of the broader pension reforms that were passed last year.
Background
The Insurance Act provides retiree insurance benefits for members of SERS, SURS, and TRS. Although not named as plaintiffs in the Weems litigation, the Insurance Act also provides insurance benefits for members of the General Assembly Retirement System and the Judges Retirement System.
Until 2012, the Insurance Act included a specific formula that dictated how insurance premiums would be allocated between the State and the retiree: the State was required to pay 5% of the cost of the basic insurance program for each year of service, up to a maximum State-subsidy of 100% of the cost of basic insurance for a retiree with 20 years of service.
The legislature amended the cost-allocation provisions of the Insurance Act when it passed Public Act 97-695, which became effective on July 1, 2012. Under Public Act 97-695, retirees were no longer guaranteed a specific percentage contribution to the cost of their retiree health insurance based on years of service. Instead, on an annual basis the Director of the Department of Central Management Services would issue an administrative decision (without action by the legislature), specifying the amount that would be paid by the State for retiree insurance benefits. Critically, Public Act 97-695 applied to all participants covered by the Insurance Act, including people who had already retired and employees who were covered by collective bargaining agreements.
The Supreme Court’s Decision
Public Act 97-695 quickly came under judicial scrutiny. Four separate lawsuits were filed. Although various legal theories were cited, the Supreme Court analyzed a single argument: that the amendments to the Insurance Act were unconstitutional under Article XIII, Section 5 of the Illinois Constitution, the so-called “Pension Clause.”
The Pension Clause in the Constitution says that “[m]embership in any pension or retirement system of the State … shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
At issue was whether retiree insurance premiums, which were only provided by statute under the Insurance Code, not the Pension Code, qualified as a “pension or retirement system of the State.” The Supreme Court held the “plain and ordinary meaning” of the Pension Clause meant that the subsidized insurance benefits were, in fact, part of a “pension or retirement system.” Central to the Court’s decision was the fact that “an employee’s eligibility for subsidized health care following retirement … is condition on membership in one of the State’s various public pension systems.” The Court concluded that “all of the benefits that flow from that relationship are constitutionally protected” under the Pension Clause.
The Supreme Court ultimately held that Public Act 97-695 was unconstitutional as it applied to any retiree, survivor, or employee who was covered by the Insurance Acct prior to the passage of Public Act 97-695. Because the Court specifically included “employees” in its holding, the Court essentially ruled that Public Act 97-695 was unconstitutional even as to people who had started their employment even a single day before the Act became effective.
In dissent, Justice Burke wrote that pension and retirement benefits should be limited to a plan that provides “income” for participants. Justice Burke further argued that because insurance benefits are not paid by the state’s pension plans, they should not receive protection under the Pension Clause. Justice Burke further observed that the majority opinion could have far-reaching, unintended consequences. By way of example, Justice Burke pointed out that if a municipality passed an ordinance promising a ceremonial plaque upon retiring and receiving statutory pension benefits, the receipt of the ceremonial plaque would be constitutionally guaranteed.
Potential Impact On Local Government
As Justice Burke observed, the true reach of this decision way well be far broader than those employees covered by the Insurance Act. If a unit of government offers retiree insurance benefits to its employees, the way in which those benefits are offered should be closely scrutinized to determine whether those health insurance benefits can be changed. Under the Weems decision, if receipt of those insurance benefits “flows from” or is “conditioned on” membership in any retirement system established by state statute – such as IMRF or a police or fire pension fund – opponents to the changes would probably argue that those changes would be unconstitutional.
At the same time, if retiree health insurance benefits are provided regardless of participation in a state retirement system (e.g., benefits are provided strictly based on years of service to the community, regardless of whether the employees qualified to receive pension benefits), the door is open to argue that Weems does not apply. The Court has not yet ruled on whether an employer can change those types of insurance benefits, or whether those benefits would also be considered part of a “pension or retirement system.”
Because of the potentially far-reaching consequences of the Weems decision, public employers should consult with their legal counsel before changing or implementing any retiree health insurance benefits.
A Window Into The Future For Pension Reform?
The 6-1 decision in Weems probably has more than a few pension reform advocates worried about the longevity of last year’s pension reforms.
Despite the broad margin in the Weems case, there are passages from the decision that might be cited by both sides of the pension reform debate. For example, last year’s pension reforms were designed to limit the pension benefits for so-called “Tier 1” participants, i.e., people who were already employed at the time of the pension reforms, but had not yet retired. The fact that the Weems decision reversed the Insurance Act amendments for all “employees” will certainly be cited by opponents of last year’s pension reforms.
At the same time, the Weems Court repeatedly criticized the changes to the Insurance Act because the amendments drew no distinction between individuals who had already retired and those who were still employed by the State.
Advocates in favor of pension reform laws can point out that unlike the changes to the Insurance Act, last year’s pension reforms had no effect on people who had already retired.
Ultimately, it is difficult to predict how the Supreme Court will rule on any future case. As they say on television: stay tuned to Clark Baird Smith for further developments.
Please contact your Clark Baird Smith LLP attorneys with any questions you might have about how this case might affect your unit of government.
The CBS LLP Legal Advisory is prepared for general information purposes only. The summaries of recent court opinions and other legal developments are not necessarily inclusive of all the recent legal authority of which you should be aware when making your legal decisions. Thus, while every effort has been made to ensure accuracy, you should not act on the information contained herein without seeking more specific legal advice on the application and interpretation of these developments to any particular situation.
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