Wednesday, February 6, 2013

What happens if the Illinois public pension funds are “on the verge of bankruptcy?”

Your Pension Is More than a Promise. It Is a Constitutional Contract.




“Contrary to Sidley [Austin’s] Claim, the State Must Make Pension Benefit Payments from Its General Fund If a State Pension System Defaults or Is on the Verge of Default… [W]elching by the State is not an option, contrary to Sidley’s suggestion. The Clause stands as a constitutional guarantee that pension recipients will receive their pension payments when due even if a pension fund defaults or is on the verge of default. Any state pension participant placed in such a position would have a cause of action in circuit court to enforce this guarantee and obtain payment directly from the State’s General Fund. A participant need not pursue payment before the Illinois Court of Claims and depend upon the largesse of the General Assembly.

“Sidley claims that the obligation to pay annuities rests solely with the ‘State’s employee pension funds’ and that the ‘State itself is not a guarantor of that obligation.’(530) Sidley asserts that this result stems from Section 22-403 of the Illinois Pension Code, which provides that ‘[a]ny pension payable under any law hereinafter referred to shall not be construed to be a legal obligation of the State . . . but shall be held to be solely an obligation of such pension fund, unless otherwise specifically provided in the law creating the fund.’ (531)

“Sidley advances this claim even though the Pension Code Article of each of the State’s five retirement systems contains a provision that states in nearly identical terms. (532) The provision states in pertinent part: ‘Obligations of State. The payment of the required department contributions, all allowances, annuities, benefits granted under this Article, and all expenses of administration of the system are obligations of the State of Illinois to the extent specified in this Article.’ (533)…

“The Clause makes the State a Guarantor based on its plain meaning, Convention history, Illinois court decisions, and common law understanding of pension payments as creating a debtor relationship. Sidley’s ‘guarantor’ argument ignores the Clause’s plain language and common meaning.

“Sidley’s position is untenable for several reasons. First…, the Clause contains prohibitory language that pension benefit rights cannot be ‘diminished’ or ‘impaired.’ (541) Illinois courts have interpreted the word ‘diminish’ under both the 1870 and 1970 Illinois Constitutions as a mandate to pay an obligation when due. (542) As a consequence, Illinois courts will presume that the word ‘diminishment’ as used in the Pension Clause imposes an identical mandate that pension payments be paid when due, especially since the term has a settled legal meaning. (543)

“This conclusion is bolstered by Delegate [Helen] Kinney’s statements at the Convention. Delegate Kinney explained that the term ‘impair’ ‘meant to imply and intend that if a pension fund would be on the verge of default or imminent bankruptcy, a group action could be taken to show that these rights should be preserved.’ (544) She further explained that while the Clause ‘was not intended to require 100 percent funding or 50 percent or 30 percent funding,’ it would trigger funding if a court ‘determine[d] that imminent bankruptcy would really be [an] impairment’ in that pension payments could not be made. (545)

“She also stated that ‘if the word ‘impairment’ bothers people, I suggest, if it is the wish of the Convention, that word could be deleted, and the rest of the [Clause] could stand’ via the word ‘diminish.’ (546) In addition, the Illinois Supreme Court concluded in Lindberg [People ex rel. Illinois Federation of Teachers v. Lindberg, 1975], McNamee [v. State, 1996], and Sklodowski [People ex rel. Sklodowski v. State, 1998] that the Clause guarantees that pension recipients will receive pension payments when they become due. (547) Relying on the statements of Delegates [Henry] Green and Kinney, the court explained in McNamee that the Clause was ‘intended to force the funding of pensions indirectly, by putting the state and municipal governments on notice that they are responsible for those benefits.’ (548) As a result, Sidley’s search for the ‘magic’ (549) word ‘guarantor’ in the Clause is unnecessary given the meaning of the terms ‘diminish’ and ‘impair.’

“The Pension Code sufficiently manifests intent to make pension payments the obligations of the State when due… [T]he Illinois Pension Code Article of each of the five state-funded pension systems contains a provision with sufficient language binding the State to pay pensions even if a system defaults. Each provision states in pertinent part that ‘[t]he payment of the required department contributions, all allowances, annuities, benefits granted under this Article, and all expenses of administration of the system are obligations of the State of Illinois to the extent specified in this Article.’ (550)…

“[E]ven if Sidley’s interpretation of the Pension Code were correct that the State is not a guarantor or that pension recipients only have a right to moneys in their respective funds, this conclusion cannot overcome what the Pension Clause requires. Section 9 of the Transition Schedule of the 1970 Illinois Constitution provides in pertinent part: The rights and duties of all public bodies shall remain as if this Constitution had not been adopted with the exception of such changes as are contained in this Constitution. All laws, ordinances, regulations and rules of court not contrary to, or inconsistent with, the provisions of this Constitution shall remain in force, until they shall expire by their own limitation or shall be altered or repealed pursuant to this Constitution. (559)… [E]ven if Sidley’s narrow interpretation of the Pension Code was correct, that interpretation would conflict with the demands of the Pension Clause and be invalid pursuant to Section 9 of the Transition Schedule of the 1970 Constitution. After all, the General Assembly cannot impair a constitutional guarantee by legislation. (564)

“In addition, the Supreme Court would most certainly reject Sidley’s public policy argument that the State somehow retains a reserved police power to abscond on its obligations to pension recipients should a pension system default. (565) As discussed above, Illinois courts have concluded that the Clause affords the legislature no such reserved power. (566) Relying on Kraus [v. Board of Trustees of the Police Pension Fund of the Village of Niles (1979], the Supreme Court explained in Felt [v. Board of Trustees of the Judges Retirement System (1985)] that to accept the Attorney General’s argument ‘we would have to ignore the plain language of the Constitution of Illinois, reject the New York decisions on the constitutional provision which was the model for section 5 of article XIII, and overrule this court’s decision in Bardens [v Board of Trustees of the Judges Retirement System (1961)].’ (567) As a New York court noted, ‘[a]lthough fiscal relief is a current imperative, an unconstitutional method may not be blinked.’ (568)

“A pension recipient would most likely obtain relief in circuit court through a mandamus action against the State Comptroller… [This writ is used when all other judicial remedies have failed or are inadequate].  Sidley is incorrect that a pension participant would need to seek relief before the Illinois Court of Claims should a State pension system default or be on the verge of default. Again, while the Illinois Supreme Court has held that the Pension Clause does not provide pension participants with a constitutional right to a specific funding percentage, (569) it undoubtedly guarantees them the right to receive the money due them at the time of retirement. (570)

“In addition, the Supreme Court has recognized, per the statements of Delegate [Helen] Kinney, that if a pension fund were ‘on the verge of bankruptcy or imminent bankruptcy’ and ‘benefits [were] in immediate danger of being diminished,’ then pension participants would have a cause of action in circuit court to enforce their right to receive payments. (571) Since the Clause acts as a restriction on legislative power, it is enforceable by the courts. (572)

“This conclusion comports with the drafters’ original intent, (573) and the voters’ understanding that pension recipients would receive their full benefits. (574) In addition, the Attorney General conceded and counsel for TRS in Sklodowski argued in its briefs that the Clause guarantees that pension participants could enforce their pension benefits in court and continue to receive pension payments from the State. (575) Sidley’s contention that no such arguments were made is simply untrue. (576)

“In sum, if the Illinois Supreme Court were confronted with a circumstance where a pension fund was on the verge of default and pension payments were diminished, then the court would most likely permit a mandamus action to proceed and resolve that action in the same manner as Jorgenson v. Blagojevich [2004]. (577) In that case, the court held that where a constitutional or statutory provision ‘categorically commands the performance of an act, so much money as is necessary to obey the command may be disbursed without any explicit appropriation.’ (578) The court applied this principal to compel the State Comptroller to pay judges from the State Treasury, without an appropriation, the cost of living increase that was part of their constitutionally-protected salaries under Article VI, Section 14 of the Illinois Constitution. (579)

“As noted, that provision bars the diminishment of judicial salaries just as the Clause prohibits the diminishment of pension benefit rights. Accordingly, the Supreme Court would most likely grant pension participants the same relief provided in Jorgenson by compelling the Comptroller to pay the needed funds from the State General Revenue Fund, especially since the State Pension Funds Continuing Appropriation Act requires automatic appropriations be made from the Fund to the five State pension systems. (580)…”

from IS WELCHING ON PUBLIC PENSION PROMISES AN OPTION FOR ILLINOIS?
AN ANALYSIS OF ARTICLE XIII, SECTION 5 OF THE ILLINOIS CONSTITUTION by Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate, (pages 65-70).


530 Sidley Guarantor Memo, supra note 529, at 1.
531 Id. at 1 (quoting 40 ILCS 5/22-403).
532 Id. at 2 (citing 40 ILCS 5/2-125, 40 ILCS 5/14-132, 40 ILCS 5/15-156, 40 ILCS 5/18-132, but leaving out 40 ILCS 5/16-158).
533 40 ILCS 5/14-132 (emphasis added).
541 See supra notes 20-24, 364-72 and accompanying text in Parts I and III, respectively.
542 See People ex rel. Lyle v. City of Chicago, 360 Ill. 25, 28-29, 195 N.E. 451 (1935) (construing Article IX, § 11 of the 1870 Illinois Constitution during the depths of the Great Depression as a command require that judicial salaries be paid where the provision provided that the “fees, salary or compensation of no municipal officer who is elected or appointed for a definite term of office, shall be increased or diminished during such term.”); People ex rel. Northrup v. City Council of the City of Chicago, 308 Ill. App. 3d 284, 31 N.E.2d 337 (1st Dist. 1941) (same conclusion with respect to the salaries of aldermen); Jorgensen v. Blagojevich, 211 Ill. 2d 286, 298-309, 811 N.E.2d 652, 659-66 (2004) (relying on its Lyle decision and holding pursuant to Article VI, § 14 of the 1970 Illinois Constitution as a mandate that judges receive previously-awarded cost of living increases where the provision provided that “Judges shall receive salaries provided by law which shall not be diminished to take effect during their terms of office.”).
543 See Robbins v. Bd. of Trustees of the Carbondale Police Pension Fund, 177 Ill. 2d 533, 541, 687 N.E.2d 39, 43- (1997) (“It is fundamental that where a word or phrase is used in different sections of the same legislative act, a court presumes that the word or phrase is used with the same meaning throughout the act, unless a contrary legislative intent is clearly expressed.”); People v. Smith, 236 Ill. 2d 162, 167, 923 N.E.2d 259 (2010) (“if a term has a settled legal meaning, the courts will normally infer the legislature intended to incorporate the established meaning.”).
544 IV Proceedings 2926.
545 Id. at 2929.
546 Id. at 2929.
547 See discussion Part II B of this Article.
548 McNamee v. State, 173 Ill. 2d 433, 444 672 N.E.2d 1159, 1164 (1996)
549 Sidley Supplemental Guarantor Memo, supra note 529, at 4.
550 40 ILCS 5/2-125; 40 ILCS 5/14-170; 40 ILCS 5/15-156; 40 ILCS 5/16-158; 40 ILCS 18-132.
559 ILL. CONST. 1970 Trans. Sch. § 9.
564 Washington Home, 157 Ill. at 426-28, 41 N.E. at 896-97 (1895) (“In cases where [a constitution’s] provisions are negative or prohibitory in their character, they execute themselves. Where that instrument limits the power of either of the departments of the government, or where it prohibits the performance of any act by an officer or person, none would contend that the power might be exercised or the act performed until prohibited by the general assembly. * * * When the constitution says, ‘You must not pay,’ it must be obeyed in preference to a statute which says, ‘You must pay.’ And this is true, not only where the statute on its face is in conflict with the constitutional provision, but also in a case where an attempt to apply the statute to a given state of facts gives rise to a violation of such provision.”).
565 Sidley Supplemental Guarantor Memo, supra note 529, at 33-35.
566 See supra notes 245-46, 265-67, 455-67 and accompanying text.
567 Felt v. Bd. Trustees of the Judges Retirement Sys., 107 Ill. 2d 158, 167-68, , 481 N.E.2d 698, 702 (1985).
568 Kleinfeldt v. New York Employees’ Retirement Sys., 365 N.Y.S.2d 500, 324 N.E.2d 865 (1975) (cited and quoted favorably by Felt, 118 Ill. 2d at 163, 481 N.E.2d at 700).
569 See supra notes 295, 311, 328 and accompanying text. People ex rel. Illinois Federation of Teachers v. Lindberg, 60 Ill. 2d 266, 272, 326 N.E.2d 749, 752 (1975)
570 Lindberg, 60 Ill. 2d. at 271, 326 N.E.2d at 751-52 (stating that the Clause provides the contractual right to “receive money due them at the time of their retirement”); McNamee v. State, 173 Ill. 2d 433, 446, 672 N.E.2d 1159, 1166 (1996) (“[the Clause] creates an enforceable contractual relationship that protects only the right to receive benefits.”); People ex rel. Sklodowski v. State, 182 Ill. 2d 220, 230-31, 695 N.E.2d 374, 378-79 (1998) (same).
571 McNamee, 173 Ill. 2d at 446-47, 62 N.E.2d at 1166; Sklodowski, 182 Ill. 2d at 233, 695 N.E.2d at 379.
572 Client Follow-Up Co. v. Hynes, 75 Ill. 2d 208, 390 N.E.2d 847 (1979) (“limitations written into the Constitution are restrictions on legislative power and are enforceable by courts.”). See also People ex rel. Hilger v. Myers, 114 Ill. App. 2d 478, 252 N.E.2d 924 (1st Dist. 1969) (holding that sovereign immunity did not bar a mandamus action against a state official to pay a State employee back pay where a state statute required that the employee be paid).
573 See IV Proceedings 2926 (statements of principal sponsor, Delegate Kinney) (defining the word “enforceable” as “meant to provide that the rights established shall be subject to judicial proceedings and can be enforced through court action”; and defining the word “impaired” as “meant to imply and to intend that if a pension fund would be on the verge of default or imminent bankruptcy, a group action could be taken to show that these rights should be preserved”); id. (statements of cosponsor, Delegate Kemp) (stating he understood the Clause as making “certain that irrespective of the financial condition of a municipality or even the state government that those persons who have worked for often substandard wages over a long period of time could at least expect to live in some kind of dignity during their golden years”) (emphasis added). 
574 See supra notes 196-202 and accompanying text (discussing the Convention’s official explanation and newspaper articles).
575 See Br. Teachers’ Retirement Sys. of the State of Illinois, People ex rel. Sklodowski v. State, 1997 WL 33559055 at *25-26 (“Indeed, by the logic of the State Defendants’ interpretation of the separation of powers doctrine, the court could do nothing to enforce the TRS’s members’ right to receive retirement payments even if the TRS’s assets were totally depleted, and the Pension Protection Clause’s express guarantee that the right to receive such benefits is ‘enforceable’ would therefore be meaningless. Since a position rendering an explicit constitutional guarantee meaningless is untenable, the State Defendant attempts to avoid the logical consequence of their argument by contending that the courts can enforce the Pension Protection Clause only when the State Retirement Systems go totally bankrupt. That position concedes the issue. If the courts have the power to act when the Systems go bankrupt, then they do have the power to act. There is no logical explanation for the distinction that the State Defendants advance in this regard. Either the courts have the ability to enforce constitutionally binding contractual commitments by this State, or they do not. Undoubtedly, the courts have such power.”); Br. Ill. Attorney Gen., People ex rel. Sklodowski v. State, 1997 WL 33669053 at *41-*44 (conceding that plaintiffs would have stated a cause of action under McNamee and Lindberg if they had alleged that their benefits had been unpaid, reduced or were even in danger of being unpaid or reduced in the near future; further, “even if the pension funds were on the verge of bankruptcy such that the participants benefits were diminished, there clearly was no danger that benefits might not be paid at the time the Appellate Court decided this case in late 1996. * * * [Public Act 88-593] not only repealed the language of Public Act 86-273 upon which plaintiffs, counter plaintiffs, and interveners rely, but it provides for continuing automatic appropriations of the state contributions to each pension Systems if adequate contributions are not otherwise appropriated.”); Reply Br. Ill. Attorney Gen., People ex rel. Sklodowski v. State, 1997 WL 33669057, at *23-*24 (“The plaintiffs did not allege that anyone had their benefits reduced or were in imminent danger of having their benefits reduced. Thus, the only contractual right which article XIII, section 5 gives to the plaintiffs—the right to receive a given amount of benefits under a given set of circumstances—is not at issue in this case.” * * *“If, as this Court has held, that provision [i.e., the Pension Clause] guarantees only the right to receive pension benefits and no participant has failed to receive benefits, the impairment of contract provisions of the United States and Illinois Constitutions are not implicated.”).
576 See Sidley Guarantor Memo, supra note 529, at 4; Sidley Supplemental Guarantor Memo, supra note 529, at 25.
577 211 Ill. 2d 286, 811 N.E.2d 652 (2004). See People ex rel. Sklodowski v. Illinois Retired Teachers Association, 284 Ill. App. 3d 809, 817-18, 674 N.E.2d 81, 86-87 (1st Dist. 1996) (“Once rights are created by the constitution or statute, ‘[i]t is within the realm of judicial authority to assure that the action of the members of the executive branch does not deprive [individuals] of an institution of rights conferred by statute or by the Constitution.’”) (citation omitted) abrogated on other grounds, Sklodowski, 182 Ill. 2d at 233,  695 N.E.2d at 379. Accord Noyola v. Bd. of Educ. of the City of Chicago, 179 Ill. 2d 121, 132, 688 N.E.2d 81, 86 (1997) (courts “most certainly have the authority to assure that the action of public officials does not deprive citizens of rights conferred by statute or the Constitution. Where, as alleged here, public officials have failed or refused to comply with requirements imposed by statute, the courts may compel them to do so by means of a writ of mandamus, provided that the requirements of that writ have been satisfied.”) (citing Illinois Retired Teachers Association, 284 Ill. App. 3d at 817-18, 674 N.E.2d at 87).
578 211 Ill. 2d at 314, 811 N.E.2d at 668-69 (quoting Antle v. Tuchbreiter, 414 Ill. 571, 581, 111 N.E.2d 836 (1953)).
579 Id.
580 40 ILCS 15/1 (2008); 40 ILCS 15/1.1 (2008); 40 ILCS 15/1.2 (2008).

1 comment:

  1. The Center on Budget and Policy Priorities affirms that “it would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations... Confusion between short-term cyclical deficits and debt, pensions and retiree insurance – and the overstatement of the magnitude of the latter set of problems – draw attention away from the need to modernize state and local budget and revenue systems and address structural problems that have built up over time in these systems.

    “States suffer from ‘structural deficits’ or the failure of revenues to grow as quickly as the cost of services… Structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy in areas such as health care. Fixing these structural problems would help states and localities balance their operating budgets without resorting to [desperate measures]… It is far more constructive to focus on fixing these basics of state and local finance than to proclaim a crisis based on exaggerations of imminent threats.”

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