As we predicted, the Illinois Supreme Court has unanimously struck down the state Public Pension Reform Act. The Court’s opinion was written by Justice Lloyd Karmeier.
We’ve written extensively about the background of the pension debate and the legal issues involved over the past year. For a guide to our previous posts, both here and at the Illinois Supreme Court Review, click here.
The State of Illinois’ five public pension systems have been severely underfunded for generations. The problem hasn’t been caused by a shortfall in employee contributions; the General Assembly has failed, again and again, to make the required contributions. As the Court points out, the shortfalls were apparent as long ago as the Report of the Illinois Pension Laws Commission in 1917. Subsequent Commissions warned of the likely consequences of perpetual underfunding again in 1947 and 1969.
It was “[c]oncern over ongoing funding deficiencies and the attendant threat to the security” of Illinois’ public employee retirees which led directly to the adoption of the Pension Protection Clause by the 1970 Constitutional Convention. That 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.” According to the Court, the meaning of the Clause is crystal clear: “That article XIII, section 5, created an enforceable obligation on the State to pay the benefits and prohibited the benefits from subsequently being reduced was and is unquestioned.”
The General Assembly’s ongoing failure to adequately fund the pension system comes in for extended criticism in the Court’s opinion. As the Court points out, a 1982 report of the Securities and Exchange Commission characterized the legislature’s funding approach as having “no relation to actuarial calculation.” The legislature enacted another funding plan in 1989, “but it failed as well.” The legislature tried again in 1995, but that plan contained “inherent shortcomings” which led directly to the explosion in pension obligations around the time of the Great Recession. The SEC determined that the State was well aware of the adverse implications of its strategy, and the State’s chronic underfunding was the “primary driver” of an increase in the State’s unfunded liability between 1996 and 2010 of $57 billion, even though “[s]everal neighboring states” attained “far higher funding rates . . . during a similar time frame.” By July 1, 2013, the five state-funded systems contained only 41.1% of the funding needed to pay their liabilities.
The Pension Reform Act of 2013 was the legislature’s latest response to the long-running crisis. The bill attempted to reduce the unfunded liabilities in five ways: (1) delaying by up to five years the date on which employees under the age of 46 can begin receiving benefits; (2) capping the maximum salary that may be considered in calculating a retirement annuity; (3) discarding the system of automatic cost-of-living increases in favor of variable (and lesser) increases; (4) completely eliminating between one and five annual increases depending on the age of the employee; and (5) altering hiow the base annuity amount is calculated for purposes of what is known as the “money purchase” formula.
Five actions were filed challenging the constitutionality of the Act. The principal grounds cited were that the Act violated the Pension Reform Clause, but various complaints also argued that the bill violated the Contracts Clause and the Takings Clause. The Circuit Court granted the plaintiffs’ joint motion for partial summary judgment and invalidated the Act in its entirety on the grounds that it violated the Pension Protection Clause. Because the court had struck down a state statute, the appeal was taken directly to the Supreme Court pursuant to Supreme Court Rule 302.
The first issue – whether the Act violated the Pension Protection Clause – was “easily resolved,” according to the Court. The Clause “means precisely what it says,” the Court wrote: pension benefits are a contractual relationship, and they cannot be diminished. Thus, once an individual begins working for the State, subsequent changes to the Pension Code which have the effect of diminishing the benefits of membership in the Pension System cannot be applied to that individual. “[T]here is simply no way” to reconcile the Act with the Clause, the Court held. “In enacting the provisions, the General Assembly overstepped the scope of its legislative power.”
The Court then turned to the principal focus of the State’s defense of the Act, the State’s claim that the protection of the Clause was subject to an exception under the State’s police power. The Court emphatically rejected the State’s argument. As long ago as 1932, the Court pointed out, it had held that “any departure from the law is impermissible unless justification for that departure is found within the law itself. Exigent circumstances are not enough.”
The State argued that since the Clause makes membership in the Pension system a contractual relationship, benefits are subject to diminishment through the police power under the same circumstances that ordinary contracts are. The Court disagreed. First, pension benefits were not merely protected by the Contract Clause – the 1970 Constitutional Convention had rejected a proposal that pension benefits should solely be protected by the language of the Contract Clause. The Court pointed out that it had long ago rejected the proposition that there was an unstated police power exception to the Pension Clause in Felt v. Board of Trustees. Second, “legislation impairing contracts has actually been upheld against contract clause challenges only rarely.” This was particularly true, as the United States Supreme Court has recognized, when the obligation at issue was purely financial. “If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose,” the court wrote, “the Contract Clause would provide no protection at all.”
Although the State had argued during the appeal that it was entitled to a remand to demonstrate the gravity of the financial emergency, the Court held that “it is manifest” that the State could not possibly make the showing which would be necessary to validate the Act, even if a police power exception existed. “[O]ur economy is and always has been subject to fluctuations,” the Court wrote. The possible consequences of chronic underfunding of the pension systems have been well known for decades. “[T]he funding problems which developed were entirely foreseeable.” The State could not claim that alternatives were unavailable; as one Senator pointed out during the debate on the Act, the State could have adopted a new schedule for amortizing the unfunded liabilities, or increased taxes. Thus, the Act wasn’t a last-ditch necessity, in the Court’s view, “it was an expedient to break a political stalemate.”
The United States Constitution forbids “Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole,” the Court wrote. The legislature made no effort in approving the Act to “distribute the burdens evenly among Illinoisans. It did not even attempt to distribute the burdens evenly among those with whom it has contractual relationships.”
The State argued that finding that the Clause is not subject to a police powers exception amounts to holding that the State has surrendered its sovereign authority, “something it may not do.” In frequently eloquent terms, the Court rejected the State’s claim. The sovereign authority rested in the people of Illinois, the Court noted (a point which Justice Karmeier alluded to during oral argument). The expression of that sovereign authority is found in the Constitution, and the legislature “cannot enact legislation that conflicts with provisions of the constitution unless the constitution specifically grants it such authority.” The people surrendered none of their sovereign authority through the Pension Protection Clause, the Court held. Rather, they “simply withheld an important part of it from the legislature because they believed, based on historical experience, that when it came to retirement benefits for public employees, the legislature could not be trusted with more.”
“[T]here simply is no police power to disregard the express provisions of the constitution,” the Court held. Otherwise, “[n]o rights or property would be safe from the State. Today it is nullification of the right to retirement benefits. Tomorrow it could be renunciation of the duty to repay State obligations. Eventually, investment capital could be seized. Under the State’s reasoning, the only limit on police power would be the scope of the emergency.”
“Adherence to constitutional requirements often requires significant sacrifice,” the Court concludes, “but our survival as a society depends on it.” The commands of the Constitution apply just as much in times of crisis as at all other times:
Crisis is not an excuse to abandon the rule of law. It is a summons to defend it. How we respond is the measure of our commitment to the principles of justice we are sworn to uphold . . . Obliging 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 . . . violate article XIII, section 5.
Today’s decision, written by one of the Court’s three Republican members, is likely to create a political firestorm in Illinois.