COLA: a Guarantee for Illinois Judges (What about Public Employees?)

I. Cost‐of‐Living Adjustments (COLA) Defined:

“The purpose of a COLA is to offset, or reduce, the effects of inflation on retirement income… Most state and local governments provide a COLA for the purpose of offsetting or reducing the effects of inflation, which erodes the value of retirement income... This depreciation can affect the sufficiency of retirement benefits, particularly for those who have no means to supplement their income due to disability or advanced age. 

“Social Security beneficiaries are provided an annual COLA to maintain recipients’ purchasing power. Similarly, most state and local governments provide an inflation adjustment to their retiree pension benefits. This is particularly important for those public employees – including nearly half of public school teachers and most public safety workers – who do not participate in Social Security.

“Unlike Social Security, however, state and local retirement systems typically pre-fund the cost of a COLA over the working life of an employee to be distributed annually over the course of [a retiree’s] lifetime…

“[The] distinction between [compound and simple] COLA types is whether the increase is applied in a simple or compound manner. Under a simple COLA arrangement, each year’s benefit increase is calculated based upon the employee’s original benefit at the time of his or her retirement. Under a compound COLA arrangement the annual benefit increase is calculated based upon the original benefit as well as any prior benefit increases. Some COLAs are both, in that they may be 'simple' until the retiree reaches a certain age or year retired, at which point COLA benefits are calculated using a compound method…" (from the National Association of State Retirement Administrators).

 

II. COLA Is Guaranteed for Illinois Judges:

Docket Nos. 97624, 97656 cons.-Agenda 10-March 2004.

ANN B. JORGENSEN et al., Appellees, v. ROD R. BLAGOJEVICH, Governor, et al., Appellants. Opinion Filed May 20, 2004.

JUSTICE RARICK delivered the opinion of the court:

The issue before us is whether the General Assembly and the Governor violated the Illinois Constitution when they attempted to eliminate the cost-of-living adjustments to judicial salaries provided by law for the 2003 and 2004 fiscal years. The circuit court declared that they did. In addition, it ordered the Comptroller to include the cost-of-living adjustments for the 2004 fiscal year in the judges' paychecks. The Governor and Comptroller have appealed. For the reasons that follow, we affirm.

Article VI, section 14, of the Illinois Constitution (Ill. Const. 1970, art. VI, §14) provides, in pertinent part: "Judges shall receive salaries provided by law which shall not be diminished to take effect during their terms of office. All salaries and such expenses as may be provided by law shall be paid by the State ***."

The Salaries Act (5 ILCS 290/0.1 (West 2002)) established the specific salaries the state was required to pay its judges for the fiscal year beginning July 1, 1982, and ending June 30, 1983. The Act further provided that judicial salaries were to be increased the following fiscal year. Beginning July 1, 1983, the state was obligated to pay judges either the increased rate set forth in the statute or the amount "set by the Compensation Review Board, whichever is greater, to be paid out of the State Treasury." 5 ILCS 290/3 (West 2002) (judges of the Supreme Court); 5 ILCS 290/3.1 (West 2002) (judges of the appellate court); 5 ILCS 290/3.2 (West 2002) (judges of the circuit court); 5 ILCS 290/3.3(a) (West 2002) (associate judges of the circuit court)…

Whether the federal COLAs at issue in Will had "vested" for purposes of the compensation clause was determined by federal law. Whether the state judicial COLAs at issue here had vested for purposes of article VI, section 14, of the Illinois Constitution (Ill. Const. 1970, art. VI, §14) is determined exclusively by the law of the State of Illinois. We detailed the legal genesis of judicial COLAs at the outset of this opinion. The standards for conferring and calculating COLAs were developed by the Compensation Review Board pursuant to its statutory authority under the Compensation Review Act. Those standards, which were formulated following the United States Supreme Court's decision in Will, expressly provided that COLAs were to be given on July 1, 1991, and on July 1 of each year thereafter and that such COLAs were to be considered a component of salary fully vested at the time the Compensation Review Board's report became law.⁽¹⁾

The report was submitted to the General Assembly as required by the Compensation Review Act. In SJR 192, both houses of the General Assembly adopted the COLA provisions of the Compensation Review Board's report. SJR 192 was passed in June 1990. Pursuant to those provisions, COLAs have thus been a fully vested component of judicial salaries in Illinois since 1990.

This construction of the law is supported by the legislature. Every General Assembly convened since 1990 has recognized that the COLAs implemented by SJR 192 are a vested component of the salaries authorized by law. That is why funds were consistently appropriated for the COLAs and it is why both houses of the General Assembly passed SB 100 to lift the suspension on judicial FY2003 COLAs imposed by Public Act 92-607. The remarks of SB100's sponsors and the floor debates from both houses are clear, consistent and unambiguous on the point. Because SJR 192 made COLAs a vested component of judicial salaries in 1990, the legislature realized that Public Act 92-607 could not be applied to judges in FY2003 without violating the prohibition against diminishment of judicial salaries contained in article VI, section 14, of the Illinois Constitution.

Under the foregoing circumstances, the Governor cannot avoid applicability of article VI, section 14 on the theory that the COLAs at issue in this case were not vested and had not yet taken effect. That is so with respect to the FY2004 COLA as well as the COLA for FY2003. Because the FY2003 and FY2004 COLAs were vested, the efforts by the legislature and Governor to prevent the Judges from receiving them violated article VI, section 14. The circuit court was therefore correct to invalidate Public Act 92-607. It was also correct to declare invalid the Governor's attempt to limit funds for the payment of judicial COLAs through his reduction veto of HB 2700…

Pursuant to that authority, we have concluded that the Comptroller shall, upon receipt of vouchers prepared by the Administrative Office of the Illinois Courts, issue warrants drawn on the treasury of the State of Illinois, to pay the judicial COLA for FY2003 as well as the COLA for FY2004.

In reaching this result, we acknowledge that substantial budgetary challenges currently confront the Governor and the General Assembly. The adverse economic conditions facing so many of our fellow citizens have taken an inevitable toll on the state's treasury. Revenues are not keeping pace. Despite ongoing efforts by the Governor and legislature, shortfalls persist. We do not mean to diminish the seriousness of the situation or appear insensitive to the difficulties faced by our coordinate branches of government. Those difficulties are undeniable, and we are highly cognizant of the need for austerity and restraint in our spending. As administrators of the judiciary, we make every effort to economize whenever and however we can. One thing we cannot do, however, is ignore the Constitution of Illinois. 

This court did not set the salaries judges receive, nor did we make COLAs a component of those salaries. The salaries, including their COLA component, were provided by law in the manner described earlier in this opinion, Now that those salaries have been implemented, the constitution commands that they be paid. No principle of law permits us to suspend constitutional requirements for economic reasons, no matter how compelling those reasons may seem. 

For the foregoing reasons, the judgment of the circuit court is affirmed. Upon receipt of vouchers prepared by the Administrative Office of the Illinois Courts, the Comptroller is hereby ordered to issue warrants drawn on the treasury of the State of Illinois to pay the Judges, and the class of judges they represent, the judicial COLAs due and owing for FY2003 and FY2004. Any matters that arise in connection with execution of this judgment shall be presented directly to our court. Because both parties have requested an expedited hearing and ruling in this matter, the mandate shall issue immediately.

Affirmed.

1. The text of the report actually states that the COLAs it established would be fully vested "at the time the other provisions of the Report became law." This language is set forth at the conclusion of the report, following all of the Board’s other statements and determinations. The Governor argues that no other provisions of the report actually became law and that the vesting provision therefore never became operative. This argument is untenable. Although the General Assembly ultimately rejected most of the findings in the report, it quite clearly adopted paragraphs 15 and 16, and those are paragraphs in which the Board determined that salaries were to include COLAs. 

Ann B. Jorgensen et al., Appellees, v. Rod R. Blagojevich, Governor, et al., Appellants.

 

III. Now what shall we infer about some Illinois legislators’ attempt to rob public employees of a COLA but to exempt Illinois judges? 

To reduce the teachers’ COLA will undeniably diminish the teachers’ constitutionally-guaranteed, earned benefits. Creating and passing any bill that diminishes any constitutionally-guaranteed earned benefits, such as the compounded COLA that is already in place for retired and current teachers (they have acquired a “vested” right when they enter the pension system and are guaranteed this benefit by Illinois statute) is illegal and immoral, especially considering this egregious negligence: the state’s unfunded liability increased $90 billion since 1983. Forty-six percent of that figure ($41.4 billion) was machinated by legislators of the State of Illinois. To respect contractual promises as legitimate rights and moral concerns is at stake for EVERY citizen in Illinois because Cheating ANY citizen’s guaranteed rights and benefits violates moral,ethical and legal principles explicitly avowed in the State and U.S.Constitutions.

According to the National Council of State Legislatures (January 2011), “In 2011, 10 states revised their provisions for automatic cost-of-living adjustments, as eight other states had done in 2010. These states did not have a constitutionally-guaranteed protection for their current and retired public employees. An automatic COLA is one that is made annually, usually pinned to a measure of inflation like the Consumer Price Index. Its purpose is to reduce inflationary erosion of the purchasing power of retirement benefits.

“In all cases in 2011, as in 2010, state action reduced future commitments. State actions in 2011 affect current benefit recipients in three states, but [they] were designed to affect people who will retire in the future or, in six states, only people who will be hired in the future.”

As stated by Illinois Issues Statehouse Bureau (January 2012), “according to the National Council of State Legislatures, 17 states have taken actions in the last two years that would reduce COLA benefits. Most states making such changes, including Illinois, have reduced COLAs for future employees [until recently with Senate Bill 1]. However, in 2010, Colorado, Minnesota and South Dakota all reduced the cost-of-living increases given to current retirees, and other states are taking notice… Since then, New Jersey and Rhode Island have both put a freeze on COLA benefits until their pension systems get on sound financial footing.

“Last summer [2011], judges in Colorado and Minnesota tossed out court challenges from retired state workers, allowing the COLA reductions to stand. The states said that the COLAs were not part of contractually-guaranteed benefits, while workers argued that reducing them would violate both state and federal protections for contracts. ‘The big legal question that has resulted in these court cases is to what extent are future COLAs … promised and protected benefits,’ said David Draine, senior researcher for Pew Center on the States…

“The rulings in Colorado and Minnesota do not apply to other states and judges elsewhere, including California and West Virginia [where they] have ruled that COLAs cannot be reduced. However, Keith Brainard [Research Director for the National Association of State Retirement Administrators] said the rulings do indicate that some judges are willing to take into consideration the dire situation that some pension systems are in and may allow lawmakers to use more discretion if they are ‘making a reasonable effort to share the burden equally – that is [they are] not taking it out on only one group.’ In the case of Denver, [for example], the money saved from COLA reductions is slated to go back into the pension system to help shore it up, instead of being spent in areas that lawmakers might consider more popular with voters.”

In Illinois, can legislators legally change the COLA for both current and retired teachers? Is there a contractual right to a teacher’s COLA based upon statutory language? Would the compounded TRS COLA be constitutionally protected because eliminating or reducing this COLA would diminish "vested" pension benefits for an active teacher and retiree?

According to Rich Frankenfeld, TRS Director of Outreach, “the attorneys of the IEA, IFT and school management have said for years that pension benefits for current and retired teachers cannot be changed. For them, this includes the 3% post-retirement increase (what most members call the COLA). Last year, the chief legal counsel [Eric Madiar, Is Welching on Public Pension Promises an Option for Illinois?] to the Illinois Senate Democrats issued a comprehensive analysis of these issues, basically supporting their position.” 

IV. Is the COLA Guaranteed for Other Public Employees? (Updated January 2014):

From the 12-page legal document recently filed by the law firm of Tabet, DiVito & Rothstein on behalf of the plaintiffs named from the IRTA and IASA: 

"...Over the years, the Illinois Supreme Court has had several occasions to interpret the Pension Protection Clause. The Illinois Supreme Court’s decisions have been consistent: '[T]his court has consistently invalidated amendments to the Pension Code where the result is to diminish benefits.' McNamee v. State, 173 Ill. 2d 433, 445 (1996). That is because, under the Pension Protection Clause, the 'contractual relationship' between a retirement system member and the State of Illinois is 'governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system.' McNamee, 173 Ill. 2d at 439.

"In a strikingly similar context, the Illinois Supreme Court also has warned: 'No principle of law permits us to suspend constitutional requirements for economic reasons, no matter how compelling those reasons may seem.' Jorgensen v. Blagojevich, 211 Ill. 2d 286, 316 (2004).

"The guarantee on which so many relied has been violated. On December 3, 2013, the General Assembly passed, and on December 5, 2013, Governor Pat Quinn signed into law, a 'reform' of the Illinois pension system. That legislation was known as Senate Bill 1 and now is Public Act 98-0599. It is not true reform. It is an unapologetic violation of the Pension Protection Clause of the Illinois Constitution. Public Act 98-0599 directly diminishes and impairs the benefits of membership in a retirement system of the State.

"Public Act 98-0599 amends the Illinois Pension Code so as to diminish pre­existing pension rights… Public Act 98-0599 changes the formula used to calculate the cost of living adjustment (COLA) for pension annuities, so as to lessen the pension annuities that retirees currently receive and those that current employees had been promised.

"More specifically, Public Act 98-0599 adds new language to the Pension Code which provides that, on or after the Act’s effective date, COLAs 'shall be calculated as 3% of the lesser of (1) the total annuity payable at the time of the increase, including previous increases granted, or (2) $1,000 multiplied by the number of years of creditable service upon which the annuity is based . . . .' (See, e.g., the Act’s amendment to 40 ILCS 5/16-133.1.) Prior to Public Act 98-0599, the Pension Code provided for COLAs of 3% compounded annually. (See id.)

"Public Act 98-0599 also provides that State retirement system members who have not begun to receive a retirement annuity before July 1, 2014, will receive no COLA at all on alternating years for varying lengths of time, depending on their age. (See, e.g., the Act’s amendment to 40 ILCS 5/16-133.1.)...

"Many thousands of livelihoods depend on consistent enforcement of the Pension Protection Clause. Countless careers, retirements, personal investments and medical treatments have been planned in justifiable reliance not only on the promises that were made in collective bargaining agreements, employment agreements and the Illinois Pension Code, but also on the guarantee of the Pension Protection Clause.

"In this action, Illinois educators and school administrators who have devoted their careers to public service, on behalf of themselves and a class of similarly situated persons, respectfully ask this Honorable Court to enforce the Pension Protection Clause of the Illinois Constitution. Among other things, the plaintiffs seek a declaration that Public Act 98-0599 is void in its entirety because it violates the Pension Protection Clause of the Illinois Constitution...

"This case presents an actual controversy concerning the unconstitutionality of Public Act 98-0599. The plaintiffs and all members of the class they represent have a direct interest in that actual controversy..."

V. (Updated May 29, 2015): What about Public Employees? The answer is yes. On May 8, 2015, the Illinois Supreme Court delivered the judgment of the court, with opinion. All seven justices concurred in the judgment and opinion (Doris Heaton et al., Appellees v. Pat Quinn, Governor, State of Illinois, et al., Appellants)]. There are two interesting footnotes in the judgment on pension reform litigation regarding COLA: "By way of comparison, data published by the Social Security Administration show that Social Security increases, which are tied to the cost of living, averaged 3.98%, nearly a percentage point more than under the Illinois formula, between 1975 and 2014 (page 4)." (http://www.ssa.gov/OACT/COLA/colaseries.html.). "While the automatic annual increases have sometimes exceeded changes in the cost of living, these judgments are not cost of living adjustments, and as indicated earlier in this disposition, the increases have actually lagged the average increases granted by the Social Security Administration, which are tied to the cost of living" (page 27).

 

VI. Regarding the Cost-of Living Adjustment (COLA) of the Illinois Teachers’ Retirement System
 

Illinois Pension Code: 40 ILCS 5/16-133.1) (from Ch. 108 1/2, par. 16-133.1) Sec. 16-133. (Automatic annual increase in annuity):

(a) Each member with creditable service and retiring on or after August 26, 1969 is entitled to the automatic annual increases in annuity provided under this Section while receiving a retirement annuity or disability retirement annuity from the system. An annuitant shall first be entitled to an initial increase under this Section on the January 1 next following the first anniversary of retirement, or January 1 of the year next following attainment of age 61, whichever is later. At such time, the system shall pay an initial increase determined as follows:

(1) 1.5% of the originally granted retirement annuity or disability retirement annuity multiplied by the number of years elapsed, if any, from the date of retirement until January 1, 1972, plus

(2) 2% of the originally granted annuity multiplied by the number of years elapsed, if any, from the date of retirement or January 1, 1972, whichever is later, until January 1, 1978, plus

(3) 3% of the originally granted annuity multiplied by the number of years elapsed from the date of retirement or January 1, 1978, whichever is later, until the effective date of the initial increase. However, the initial annual increase calculated under this Section for the recipient of a disability retirement annuity granted under Section 16-149.2 shall be reduced by an amount equal to the total of all increases in that annuity received under Section 16-149.5 (but not exceeding 100% of the amount of the initial increase otherwise provided under this Section).

Following the initial increase, automatic annual increases in annuity shall be payable on each January 1 thereafter during the lifetime of the annuitant, determined as a percentage of the originally-granted retirement annuity or disability retirement annuity for increases granted prior to January 1, 1990, and calculated as a percentage of the total amount of annuity, including previous increases under this Section, for increases granted on or after January 1, 1990, as follows: 1.5% for periods prior to January 1, 1972, 2% for periods after December31, 1971 and prior to January 1, 1978, and 3% for periods after December 31, 1977.

(b) The automatic annual increases in annuity provided under this Section shall not be applicable unless a member has made contributions toward such increases for a period equivalent to one full year of creditable service. If a member contributes for service performed after August 26, 1969 but the member becomes an annuitant before such contributions amount to one full year's contributions based on the salary at the date of retirement, he or she may pay the necessary balance of the contributions to the system and be eligible for the automatic annual increases in annuity provided under this Section. 

c) Each member shall make contributions toward the cost of the automatic annual increases in annuity as provided under Section 16-152.

(d) An annuitant receiving a retirement annuity or disability retirement annuity on July 1, 1969, who subsequently reenters service as a teacher is eligible for the automatic annual increases in annuity provided under this Section if he or she renders at least one year of creditable service following the latest re-entry.

(e) In addition to the automatic annual increases in annuity provided under this Section, an annuitant who meets the service requirements of this Section and whose retirement annuity or disability retirement annuity began on or before January 1, 1971 shall receive, on January 1, 1981, an increase in the annuity then being paid of one dollar per month for each year of creditable service. On January 1, 1982, an annuitant whose retirement annuity or disability retirement annuity began on or before January 1, 1977 shall receive an increase in the annuity then being paid of one dollar per month for each year of creditable service. On January 1, 1987, any annuitant whose retirement annuity began on or before January 1, 1977, shall receive an increase in the monthly retirement annuity equal to 8¢ per year of creditable service times the number of years that have elapsed since the annuity began.

Source: Illinois Pension Code