Today we continue our discussion of the centerpiece of the Illinois Supreme Court’s civil docket – the public pension reform case – with a look at the State’s Opening Brief, which was filed January 12, 2015. As we’ll see below, the State’s defense of the Pension Reform bill almost certainly sets up an all-out fight on the most fundamental battleground of all in constitutional adjudication – the debates at the 1970 constitutional convention (a subject we’ll explore in detail soon).
The State’s brief begins with the effect of the “Great Recession” of 2008-2009 on the State’s pension liabilities. The State paints a direful picture of the effect of the recession on state finances: “State revenues had plummeted, state services had been slashed, and the state retirement systems’ unfunded pension liabilities had ballooned to approximately $100 billion.” The State concedes that it had made insufficient annual contributions to the system in the years before 1994 – “a practice repeatedly upheld as constitutional” – but the brief insists that the State was mending its ways. According to the brief, as of 2006, the State was on track to get the pension funds 90% funded by 2045. But then the recession hit, cratering state receipts while at the same time causing the systems’ assets to lose more than 30% of their value. The State also claims that “[d]ramatically increased longevity over the past two decades” has contributed to the systems’ unfunded liabilities.
Based on the filings below – and the extensive exchange of publicly available memos leading up to the 2013 pension reform package – we can expect the plaintiffs to directly attack the State’s historical theme. Although the State admits in passing to the legislature’s decades-long underfunding of the system – a habit which led directly to the adoption of the Pension Protection Clause in the first place – at least one study has concluded that 47% of the growth in the State’s pension liabilities between 1983 and 2012 was due to legislative underfunding. Sixteen percent was due to stock market losses, and only 10% due to people living longer than expected. Employee salary increases? They were actually less than expected, and helped reduce unfunded liabilities.
The Pension Protection Clause provides:
Membership 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.
The State begins its argument by emphasizing the first half of the clause, providing that pension relationships are contractual in nature. The Circuit Court entirely failed to come to grips with this fact, the State argues – in particular, that the State can modify any contract in the bona fide exercise of its police power. Disregarding this inherent limitation, the State claims, could have dire consequences, making the State unable to reduce pension benefits in the midst of an epidemic to pay for “costly medication,” or by requiring the State to close its prisons and schools in preference to reducing pensions if the State’s bond rating collapsed, making borrowing impossible.
The State points out that the state Constitution has included a Contracts Clause since 1818, but that the Clause – despite its apparently absolute terms – had never been understood as absolutely protecting contracts from impairment any more than the federal constitution does. This is not even a matter of legislative intent, the State argues; the State cannot make a contract which is immune from modification pursuant to the reserved police power, suggesting that any contract exempt from the right of modification would separately violate the constitution’s ban on laws constituting an “irrevocable grant of special privileges or immunities.” “This rule does not mean” that the State’s agreements “are illusory or may be modified at the State’s whim,” the State argues, pointing to cases in which the courts had purportedly held that reserved police powers were not applicable. But there were nevertheless “important reasons” for the reserved limitation on all contracts involving the State.
The Pension Protection Clause is no exception to this body of law, the State argues. The Clause’s express language “reflects a decision to incorporate the same degree of protection afforded to all contracts,” the State claims.
The State then turns to the plaintiffs’ argument that the State ignores the second half of the Clause. After all, the Clause doesn’t merely provide that pension rights are contractual in nature; it then provides that the benefits of that contract cannot be “diminished or impaired.” This doesn’t refute its argument, the State argues, for three reasons. First, the “benefits” which cannot be “diminished or impaired” are the benefits of the contractual relationship – which can inherently be modified by the State. Second, the State claims, the plaintiffs’ argument that benefits cannot be reduced pursuant to the second part of the Clause makes the first part designating pension relationships as contractual into surplusage. Third, the State argues, the word “impaired,” when used in reference to contract claims, inherently allows for the possibility of unilateral amendments by the State pursuant to the police power.
We can expect the plaintiffs to argue that the State’s construction of the pension protection clause reads the second half of the clause – the “diminished or impaired” language – out of the clause. But note the dilemma the plaintiffs face here. The State’s argument can arguably be caricatured as “the State can’t cut pension benefits – unless it needs to.” The State briefly acknowledges that the police power isn’t limitless, but never suggests what limits there might be, or why it might be able to satisfy them. But merely arguing that the State’s police power showing isn’t good enough won’t get the plaintiffs an affirmance. The Circuit Court flatly held that there is no police power exception to the Pension Protection Clause.
The State then turns to the history of the Clause, arguing that the constitutional debates, “when read in the context of the state of the law at the time” don’t permit the conclusion that the convention intended to place pensions beyond the reach of the State’s police powers. The State argues that the Clause was adopted in order to overrule a then-current body of law which would have construed many state pensions as mere gratuities, subject to withdrawal at any time. But “there was no expression of a desire by anyone,” the State argues, to give pensions even greater protection than ordinary contracts. The State points to the statement of the sponsor of a provision conditioning the state right to keep and bear arms on “the police power.” The sponsor was asked whether all provisions of the constitution were outside the police power unless the power was expressly mentioned, and he responded that “[i]t applies to every section.” According to the State, the only case “in American legal history” which had ever suggested that pension rights were outside the scope of the police power was the 2014 opinion of the Arizona Supreme Court, Fields v. Elected Officials’ Retirement Plan, which we discussed here.
We can expect the plaintiffs to take on the State’s reading of the constitutional history in some detail. The plaintiffs are likely to argue that the State ignores the statements of many delegates prominent in the debates who stated that, in view of the State’s chronic underfunding of the pension funds, the Clause was intended to guarantee that a state employee would receive what he or she was promised at the outset of his or her employment in pension benefits.
The State then turns to the cases interpreting the Pension Protection Clause. The State argues that the only decision directly addressing a possible police powers limitation on the Clause, Felt v. Board of Trustees of Judges Retirement System – the decision cited by the Circuit Court for the proposition that there is no such defense – actually stands for the reverse, that such a limitation exists, but the State simply hadn’t made a sufficient showing in that case. Nor is Kanerva v. Weems to the contrary, the State claims. The only question presented in Kanerva was whether the health care benefit subsidies at issue there fell within the scope of the Clause at all.
Next, the State argues that the federal constitution bars the states from surrendering their police powers. This “reserved powers doctrine” has been frequently reaffirmed by the United States Supreme Court, the State argues, and the Court has never strayed from the principle. Once again, the State denies that this argument makes all agreements between the government and private parties meaningless on the grounds that they’re subject to amendment at any time. “[E]xtraordinary circumstances must exist,” the State concedes. But if the Pension Protection Clause does not contain an implicit exception for such police powers, then the Clause violates the federal constitution, according to the State.
The State concludes with a brief argument that the Circuit Court improperly disregarded Section 97 of the Pension Reform Act, which provides that certain provisions are severable, when it chose to strike down the statute in its entirety.
Plaintiffs’ Brief is due February 16, and we’ll take a close look at it then. But before that, we’ll take a detailed tour through the constitutional debates regarding the Pension Protection Clause.
Image courtesy of Flickr by Chuck Coker (no changes).
