A state employee union enters into a contract with the State calling for certain wage increases. Ultimately, the legislature refuses to fully fund the increases, and they aren’t paid. Is the State in breach of contract, or are its contractual obligations implicitly conditional on the legislature appropriating the money?

In a ruling with significant potential implications for Illinois’ long-running financial crisis, the Illinois Supreme Court recently held in State of Illinois v. American Federation of State, County and Municipal Employees that the State’s financial obligations were by definition conditioned on legislative appropriations. Our detailed summary of the underlying facts and lower court rulings in AFSCME is here. Our report on the oral argument is here.

In 2008, the State agreed to a four-year collective bargaining agreement with AFSCME, which represents most state employees. AFSCME agreed to defer the wage increases mandated by the contract in 2009 and 2010 as a concession to the recession’s impact on the State.

In early 2011, then-Governor Quinn proposed a budget which included sufficient funds to pay the raises required for the year. When the budget was ultimately approved, it was estimated that there was insufficient money to finance the increases at 14 agencies. AFSCME sought arbitration of the dispute, and the arbitrator ordered the increases paid.

The State filed a complaint in Circuit Court seeking to vacate the award, together with an emergency motion for stay. The trial court granted the stay. In the weeks that followed, the legislature made supplemental appropriations, and several agencies experienced enough attrition to pay the increases to remaining employees, but employees in six agencies remained without the mandated increases. The trial court held that the State’s contractual obligations were conditional on appropriations. The Appellate Court reversed.

In an opinion by Justice Theis for a six-Justice majority, the Supreme Court reversed. The State argued that the arbitrator’s award didn’t draw its essence from the CBA because the arbitrator refused to give any effect to the parties’ agreement that the provisions of the CBA “cannot supersede law.” The Court rejected the State’s view, concluding that the arbitrator’s award was guided by contract principles and not his own views of fairness and justice.

The State’s second argument was that the arbitration award violated public policy. Specifically, the Court pointed to Article 8, Section 2(b) of the state Constitution: “The General Assembly by law shall make appropriations for all expenditures of public funds by the State.” The Court acknowledged that the State has provided that public employees have “full freedom of association, self-organization, and designation of representatives of their choosing” for purposes of collective bargaining (5 ILCS 315/2), but pointed out that that broad statement was tempered by Section 21 of the Act, which provided that employers and employees could negotiate multi-year collective bargaining agreements “subject to the appropriation power of the employer.” (5 ILCS 315/21.)

AFSCME argued that if all collective bargaining agreements are conditional on appropriations, the right to collective bargaining is meaningless. The Court pointed out, however, that a number of collective bargaining agreements over the years have made wage increases expressly contingent upon legislative appropriations. The Appellate Court had held that a contingency for legislative appropriations must be made express in order for the making the State’s obligation contingent not to violate the contracts clause of the state constitution. The Supreme Court majority disagreed, pointing out that statutes and laws in existence at the time of the contract are read into the contract as a matter of law.

Justice Kilbride dissented in part, arguing that the majority’s opinion arguably suggested that the State could avoid contracts with vendors simply by the legislature refusing to make a necessary appropriation. Justice Kilbride wrote that he would hold that “the state employees’ contractual rights to raises continue under the contract clause of the Illinois Constitution . . . even if that obligation cannot immediately be enforced because of lack of appropriations.” In its concluding paragraph, the majority responded to the dissent’s concern, writing that “we disagree with the dissent that our decision creates uncertainty as to the State’s obligations, generally, under its contracts. We reiterate that this case involves a particular contract: a multiyear collective bargaining agreement. Whether other state contracts with different provisions and different controlling law could also be subject to legitlative appropriation without offending the contracts clause is not before us.”

Despite the majority’s comment, some observers have speculated since the opinion was filed that the Court’s emphasis on the exclusivity of the appropriations power casts doubt upon the State’s ability to pay its employees, given that the relevant appropriations for 2016 have not been enacted by the legislature.

Image courtesy of Flickr by Uwe Neon (no changes).