Friday, January 11, 2013

Don't pass unconstitutional pension fix by Ralph Martire (and Commentary)

Even casual observers know state government owes a huge debt to its public pension systems. This unfunded liability totals some $95 billion, which is a lot, even in Monopoly money. While the problem has been decades in the making, there is suddenly pressure for a solution right now, but not for good government reasons.

The real pressure was the perceived political opportunity created by a lame-duck session to move controversial legislation that isn’t constitutional and otherwise wouldn’t have political legs. The bill garnering the most support currently would reduce the unfunded liability by cutting existing retirement benefits two key ways: Eliminating for six years cost-of-living adjustments retirees currently get annually and limiting how much salary a pension can be based on.

The legislation also would increase worker contributions to the systems. If permissible, these changes could save the state around $29 billion (actual savings will be less, since the proposal also includes some unknown, new costs for the state). That’s a big “if,” given the proposed benefit cuts do not appear permissible under the Illinois Constitution.

Back in the early 1980s the Illinois General Assembly was worried about the unfunded liability owed to the Judicial Retirement System. To save some money and reduce that unfunded liability, it passed a law changing how a judge’s salary would be measured for purposes of calculating pension benefits. This miffed a few justices, who sued claiming the change was a violation of Article XIII, Section 5 of the Illinois Constitution. That article provides: “Membership in any pension or retirement system of the state … shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

One of the named plaintiffs in this case, James Felt, showed that upon his retirement, the new computation would cause him to lose $3,187.44 in annual benefits. The state countered that its police power allowed it to impair contracts where the impairment was insubstantial and the state’s interest was compelling — in this case ensuring the fiscal viability of its underfunded judicial pension system.

While recognizing the state’s legitimate interest in ensuring the fiscal viability of its pension systems, the Illinois Supreme Court nonetheless struck down the legislation as an unconstitutional diminishment of a pension benefit. In the process, the Felt Court rejected every single argument the state made. Indeed, the court maintained that doing otherwise would ignore the plain language of the Illinois Constitution, overrule prior Illinois Supreme Court decisions and run counter to the clear intent of the drafters of the Illinois Constitution. As to this last point, the Supreme Court cited an explanation of Article XIII, Section 5 given by its author in the Record of Proceedings from the 1970 Constitutional Convention. That explanation plainly stated the intention of the provision was to prohibit the state from “changing the terms of” or “lessening” the pension benefits payable to workers “after they have embarked upon employment.”

Just last year the Arizona court that heard Barnes v. Arizona State Retirement System, considered a constitutional challenge to legislation passed by that state’s General Assembly that didn’t even take benefits away from retirees. It merely increased the contributions required of current public workers toward their own retirement. The Barnes Court ruled that increasing contributions from workers was an unconstitutional diminishment of pension benefits under Article II, Section 25 of the Arizona Constitution — which is almost identical to Illinois’ non-diminishment clause. As a result, Arizona was ordered to repay the full amount of the increased contributions employees paid over the two years the legislation was effective, plus interest. There’s an outcome to avoid.

Finagling votes to pass unconstitutional legislation and leaving matters to the courts is no way to resolve problems.

Ralph Martire is executive director of the
Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank. Write to him at

Commentary (reprise)
Like all other citizens, public employees’ legal rights are derived from past political constitutions, legislative enactments, and case law. All citizens of Illinois have a fundamental right to oppose a General Assembly that imposes a violation of their constitutional rights and earned benefits for the following reasons:

“The Pension Clause [Article XIII, Section 5 of the Illinois Constitution] not only makes a public employee’s participation in a pension system an enforceable contractual relationship, but also constitutionally protects the pension benefit rights contained in the Illinois Pension Code when an employee joins a pension system, including employee contribution rates. The Clause also safeguards pension benefit enhancements that are later added during employment. Further, the Clause ensures that pensions will be paid even if a pension system defaults or is on the verge of default. Finally, while the Clause bars the General Assembly from adversely changing the benefit rights of current employees via unilateral action, these rights are “contractual” in nature and may be modified through contractual principles. In sum, while welching on public pension promises is not an option for Illinois as some legal and civic commentators have suggested, legitimate contract principles provide a solution to mitigate this crisis” (Abstract for Is Welching on Public Pension Promises an Option for Illinois? by Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate (2011)).

“The Pension Clause safeguards the pension benefit rights contained in the Pension Code when a public employee begins contributing to the pension system whether or not the employee is eligible to retire” (Eric M. Madiar (2011) Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution).

Here are three of many important “vested rights” cases:
Kraus v. Board of Trustees of the Police Pension Fund of the Village of Niles (1979) 
Felt v. Board of Trustees of the Judges Retirement System (1985)
Buddell v. Board of Trustees of the State University Retirement System (1987)
(Eric M. Madiar (2011) Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution).

“In Illinois, New York and Arizona… by joining a pension system, public employees obtain absolute ‘vested’ rights in the pension plan, including later benefit increases added during their service. These rights cannot be unilaterally changed by the legislature under any circumstances, but the rights may be modified via legitimate contract principles (an offer, new consideration, and voluntary employee acceptance)” (Eric M. Madiar (2012). Public Pension BenefitsUnder Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants? ABA Journal of Labor & Employment Law, V. 27, no. 2, 179-194).

“In jurisdictions that find that a public employee’s pension contract rights arise… either when the employee first was hired or joined the pension plan, or at some point during the employee’s public service, courts have generally held that, once these rights come into effect, the employee is protected with respect to both past service and future service. 

“In these jurisdictions, thus, public employees are considered to have a contractual right to continuance, throughout their employment, of substantially the same pension terms as in effect when their protected pension rights came into effect, and this protection covers both the pension credited to them when the rights first arose and the additional pension that may be credited to them for future service throughout their public service career.

“[It is true any] attempt to denigrate the validity of decades of judicial precedents about the binding nature of legislation establishing pension commitments to government employees and to motivate state courts to overturn long-settled premises about these commitments would impose its own, unjustifiable costs. The states and their instrumentalities have promised pension benefits to their employees; those employees have relied on those long-standing promises; and as a result the citizens of the states have benefited from the services provided by those employees.

“There is no sound public policy reason to conclude that these promises – based on the reasonable expectations of the contracting parties – should not be fully protected by the laws prohibiting or limiting the impairment of contracts”  (Greenfield, Douglas L., Lahne, Susan G. (2012). How Much Can States Change Existing Retirement Policy? In Defense of State Judicial Decisions Protecting Public Employees’ Pensions. National Council of State Legislatures Legislative Summit, 1-16).

We might assume the government of Illinois would not want to prove that its contracts are worthless, especially when the “most basic purposes of the impairment [of the pension] clause [Article XIII, Section 5] as well as notions of fairness that transcend the clause itself, point to a simple constitutional principle: government must keep its word” (Laurence H. Tribe, American Constitutional Law). Most importantly, had Illinois legislators funded the public employees' pension throughout the years instead of "diverting" (stealing) the money, there would not be a pension debt problem in the State of Illinois.

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  1. You said it! Let us not forget how the state of IL. WANTED to provide their own pension plans (vs going with Social Security) for their employees. It was a monetary advantage for the state to provide their own pension plans. I wonder what happened to the money saved going this route?

  2. So, when IEA offered to the General Assembly that it would be ok to force active members to pay more for their benefits, did they knowingly violate the verdict of the Barnes v. Arizona State Retirement System case, a verdict which SUPPORTS members benefits being protected? Why would IEA give up something that previous courtroom precedents indicate should not be in jeopardy?

  3. Dear Disgruntled,
    I have always suggested the following:

    1) Even if legislators invited union leaders to the table, why bargain away any of the public employees’ “constitutionally-guaranteed” rights and earned benefits? “A public employee obtains ‘vested rights’ in the Pension Code provisions relevant to pension benefits when the employee becomes a member of a pension system by making his or her initial employee contribution to the system. In addition, the Pension Clause protects pension benefit rights as an enforceable contractual relationship” (Eric M. Madiar, “Is Welching on Public Pension Promises an Option for Illinois” p. 36).

    2) Why modify the “constitutionally-guaranteed” Pension Clause “through contract principles” when Speaker of the House Michael Madigan (and his minions) has made this quite clear: “Let the courts decide”?