Our previews of the new civil cases granted review at the end of the Illinois Supreme Court’s November term continue with Prazen v. Shoop [pdf], a dispute about the politically charged issue of public employee pensions.

Prazen relates to an Early Retirement Incentive (ERI) plan adopted by a city pursuant to section 7-141.1 of the Pension Code. At the end of 1998, the plaintiff retired from his position as superintendant of the city electric department, purchasing five years “age-enhancement credit” pursuant to the ERI to do so. Less than two weeks before his retirement became effective, the plaintiff incorporated a business which he had run as an unincorporated entity for some time – Electrical Consultants, Ltd.

Three days after it was incorporated, ECL and the city entered into a management and supervision agreement for the operation of the city’s electric department, effective one day after plaintiff’s retirement. Pursuant to the agreement, ECL agreed to provide a full time person to perform its duties with the electric department. The agreement was extended a number of times, until ECL finally terminated it in early 2009. ECL was voluntarily dissolved several months later. Throughout the life of the company, ECL employed no more than three people: plaintiff, his wife and their daughter.

The potential problem here is Section 7-141.1(g) of the Pension Code:

An annuitant who has received any age enhancement or creditable service under this Section and thereafter accepts employment with or enters into a personal services contract with an employer under this Article thereby forfeits that age enhancement and creditable service . . .

In the years immediately following his 1998 retirement, the plaintiff sought assurances on three occasions from the Illinois Municipal Retirement Fund that his contract with the city didn’t imperil his pension. In 1998, an IMRF representative allegedly told the plaintiff’s lawyer that a former employee could contract with an IMRF employer as an independent contractor (which is what the contract between the City and the plaintiff’s ECL corporation was). In early 2002, IMRF representatives confirmed that everything said in 1998 still applied. In late 2002, an IMRF representative confirmed that an “early out” employee could work for a corporation – even one he owned – doing work for his former employer, so long as the corporation wasn’t merely a guise to evade the statute.

Nevertheless, in 2010, IMRF staff informed the plaintiff that his continued relationship with the city had run afoul of Section 7-141.1(g) of the Pension Code after all. The plaintiff appealed the decision to the IMRF benefit review committee. Concluding that the IMRF had the power to “make administrative decisions concerning participation and coverage and to carry out the intent of the Fund,” the committee determined that the plaintiff’s corporation was a “guise” to evade the return-to-work provisions of the statute and ordered the plaintiff to repay the portion of his pension annuity attributable to his early retirement incentive. The IMRF Board of Trustees later affirmed the staff determination and adopted the committee’s conclusions as its own. The Circuit Court affirmed.

The Appellate Court (Fourth District) reversed. The Court held the Board of Trustees had the power to order return of benefits in only two circumstances: when an employee had accepted “employment with” or entered into a “personal services contract with” his former employer. The Board made neither determination here. If the Board were permitted to expand its general power to make “administrative decisions on participation and coverage” into authority to order return of benefits under additional circumstances not specified by the statute, then Section 7.141.1(g) would be rendered superfluous, the Court found. The Board’s finding that the plaintiff’s corporation was a “guise” for evading the statute amounted to an equitable determination to pierce the corporate veil, according to the Appellate Court. If the legislature wanted to grant such power to the Board, it would have said so, in the Court’s view.