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Thursday, March 5, 2015 12:01 am

Pension tension

State pension lawsuit heads to Illinois Supreme Court

 The Illinois Supreme Court will hear arguments on a lawsuit over public pension benefits next week, bringing to a head fundamental disagreements over the rights conferred by Illinois’ constitution and whether an emergency justifies overriding the constitution.

If state employees and retirees are successful, they’ll see a law which undisputedly reduces the value of their retirement benefits struck down, while a victory for the state could significantly alleviate the underfunding of Illinois’ pension liabilities.

In December 2013, the Illinois General Assembly approved Senate Bill 1, which contained five methods of reducing the state’s pension liability, including, among other provisions, a reduction in the automatic annual increases for pension annuities, an increase to retirement ages and a cap on the salary figure used to calculate benefits.

Several state retirees and affiliated groups immediately sued the state to stop implementation of the law, asking the Sangamon County Circuit Court to rule it unconstitutional. The Illinois Constitution contains a provision calling pension benefits an “enforceable contractual relationship” which can’t be “diminished or impaired.” To defend the law, the state argued that such reductions in benefits are allowed because Illinois is in an emergency. That, the state claimed, justifies using “police powers” that allow the state to amend the contractual relationship created by the state constitution.

In November 2014, Sangamon County Circuit Judge John Belz ruled in favor of the retirees and struck down the law, saying it “impairs and diminishes the benefits of membership in state retirement systems in multiple ways.”

Appeals in cases involving constitutional questions go straight to the Illinois Supreme Court, where lawyers in Attorney General Lisa Madigan’s office filed briefs doubling down on the “police powers” argument that failed in the circuit court. Citing at length the state’s ongoing fiscal problems – 20 percent of the state budget in 2014 went toward the unfunded pension liability, for example – Madigan’s office said using the emergency police powers to change pension benefits is a matter of “general public welfare.”

The state points out that prior to the 1970 Constitutional Convention that enacted the pension clause in question, pension benefits were considered “gratuities” that could be changed at any time. Madigan’s office says the convention delegates created a layer of protection around benefits by ensuring they would be considered a contractual relationship. The state claims all contracts are understood to be changeable.

“If the pension clause really bars the state’s exercises of its police powers under every possible circumstance, no matter how dire the consequences, then the ‘contractual relationship’ the clause creates is unlike any other contractual relationship ever recognized in American law,” lawyers for the state wrote.

Madigan’s office is careful to say that accepting the contract theory won’t lead to lawmakers using it to justify slipping out of other contracts at will. The state lawyers claim that police powers only apply in certain circumstances, although they don’t address the threshold for triggering those powers.

Meanwhile, the plaintiffs – state employees, retirees and their associated groups – argue that the state constitution plainly says their benefits cannot be diminished or reduced. They, too, cite the 1970 Constitutional Convention, saying it’s clear from the discussion surrounding the pension clause that the delegates meant to protect benefits from exactly the kind of erosion being threatened by the 2013 law.

“What we are trying to merely say,” convention delegate Henry Green said in 1970, “is that if you mandate the public employees in the state of Illinois to put in their five percent or eight percent or whatever it may be monthly, and you say when you employ these people, ‘Now, if you do this, when you reach sixty-five, you will receive $287 a month,’ that is, in fact, what you will get.”

The plaintiffs further bolster their argument by citing a letter from then state Sen. E.B. Groen to delegate Green. In the letter, Groen claims Green’s proposal for what would later become the constitution’s pension clause was “inflexible” and “would only serve to curtail the powers of the Legislature and limit its authority.” Groen urged Green to revise the clause by making the protection “subject to the authority of the General Assembly to enact reasonable modifications .…” Green rejected the idea, and Groen’s proposal was never presented to the rest of the delegates.

Illinois’ pension systems have been underfunded since at least 1917, the plaintiffs say, noting that the state commission tasked with overseeing the systems at the time said they were “moving toward crisis” due to insolvency caused by “financial provisions entirely inadequate for paying the stipulated pensions when due.” In 1969, the year prior to the Illinois Constitution and its pension clause being adopted, the state pension systems were only funded at about 41.8 percent, the plaintiffs say. By 2013, when the law in question was passed, the systems were funded at 41.1 percent.

The state’s pension systems have always had enough money available to pay their existing retirees. Instead, pension underfunding refers to the systems’ inability to pay now for all current and future benefits – a distinctly unlikely scenario that would only arise if all existing employees retired at once and began drawing a pension. Illinois’ underfunding is still considered a problem, however, because most other states can cover a significantly higher percentage of their current and future pension obligations, making Illinois look bad by comparison.

For example, according to the U.S. Census Bureau’s Annual Survey of Public Pensions, Wisconsin’s state pension systems in fiscal year 2013 held $84.1 billion in cash and investments to cover their total obligations of $78.7 billion – a funding ratio of 106 percent. Illinois’ state pension systems held $94 billion in cash and investments that same year, but the state’s total pension obligations amounted to $197.8 billion – a ratio of 47.5 percent.

Despite the current lawsuit over pension benefits being unresolved, Gov. Bruce Rauner, who pitched his first budget plan to lawmakers in February, proposed an alternative pension overhaul package that would also cut retiree benefits. Rauner claims to believe his pension changes are constitutional, and he estimates they would immediately save the state $2.2 billion.

One of Rauner’s proposed changes hinges on defining benefits as only those already accrued, excluding future benefits yet to be earned. However, Rauner’s plan may be undercut by the plaintiffs’ arguments in the existing pension lawsuit. The plaintiffs cite Constitutional Convention delegate Helen Kinney, who said in 1970 at the convention: “All we are seeking to do is to guarantee that people will have the rights that were in force at the time they entered into the agreement to become an employee ….”

The case is set for oral arguments before the Supreme Court on March 11.

Contact Patrick Yeagle at pyeagle@illinoistimes.com.

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