Senate Bill 1 and Constitutionality

from the IEA

Senate Bill 1 (Cullerton/Madigan)
Pension-Reducing Choice Legislation Impacting Only TRS Tier 1 Actives

Over the past legislative session, Senate President Cullerton (D-Chicago) has advocated for the following position: If Tier 1 employees were given a choice to reduce their pension benefits, pension legislation would be able to withstand a constitutional challenge in the Illinois Supreme Court.  The IEA, along with the We are One Illinois labor coalition, believe that this specific coercive choice is not constitutional since it diminishes pension benefits that Tier 1 participants would have been entitled to receive no matter which option is chosen.  Article XIII, Section 5 of the Illinois Constitution clearly states pension benefits cannot be "diminished or impaired" for current participants in the retirement systems.

The highlights of the proposal as it passed the Senate are as follows:

The proposal is only applicable for current actives in TRS.  At this time, current retirees are not impacted.  Additionally, current collective bargaining agreements that include salary increases are exempted from the legislation. Active Tier 1 members would be required to make their decision between January 1, 2014, and May 31, 2014. (The irrevocable choice would be in effect on July 1, 2014). The choices are:

1) Choose to keep the current 3% compounded post-retirement increase of their annuity (a.k.a., the cost-of-living adjustment or COLA), but choosing this would require that the member's pension would only be based on the members’ salary prior to the effective date of the decision (July 1, 2014) and the member would not be able to participate in a state health insurance plan in retirement.  Simply put, members in Tier 1 would lose the ability to have any future salary increases factored into their pension, and they would also lose their access to the Teacher's Retirement Insurance Program (TRIP) or a replacement state administered health plan in retirement.

2) Or choose to have future salary increases included in the calculation of their annuity and have access to an undefined state health insurance plan, but choosing this would reduce and delay their post-retirement increase of their annuity (a.k.a., the cost-of-living adjustment or COLA).  The new rules around the post-retirement increase would change it to a simple (non-compounded) increase that would be 3% or half of the rate of inflation (CPI), whichever is less.  This change alone would cut the value of a pension by one third after twenty years in retirement. In addition to the change in the calculation of the COLA, the COLA also would be delayed until age 67 or five years after retirement, whichever occurs first, further reducing the value of a member’s pension.  To be clear, members would be giving up their COLA for undefined access to a health care plan.  The legislation expresses that this could mean a health care plan that calls for members pay the total cost of their coverage. This type of plan is vastly different from TRIP.

Those who reduce their COLA also would be able to choose to pay an additional 2% of their salary into a cash balance account.  This account would be maintained by TRS, and members would receive a fluctuating rate of interest applied to their account balance annually.

Additional Components of the Legislation

Grants a guarantee of the state funding for TRS if 30% of active Tier 1 participants choose to reduce their COLA.  This would only be a guarantee of the current funding plan, a plan by which the state is struggling to abide.

Lastly, there would be additional state contributions to the five state pension funds beginning in Fiscal Year 2020.  These additional contributions are $1 billion annually.  However, as with the current funding plan, there is no certainty that this additional contribution to TRS would be made since it is still conditional on the election of 30% of the active Tier 1 members choosing to reduce their COLA.

Commentary on SB 1

“The significance of any modification of the ‘Pension Clause’[or choice is] the extent to which [public employees] will be deprived of the benefit [they] reasonably expected; the extent to which [public employees] can be adequately compensated for the part of that benefit [COLA, for instance] of which [they] will be deprived; […and] the extent to which the behavior of the party [Illinois General Assembly] failing to perform or to offer to perform [or] comports with standards of good faith and fair dealing” (Professor of Law, Emeritus, Claude D. Rohwer and Professor of Law, Emeritus, Anthony M. Skrocki, Contracts in a Nutshell).

It is an impairment of the public employees’ contract to receive less than what the original vested right and benefit guaranteed. A choice between the COLA and uncertain state-sponsored health care offers public employees and retirees no ethical and lawful alternatives except to consent to the General Assembly’s demands to make an illicit choice.

According to National University of Singapore Professor Mindy Chen-Wishart, “The consideration doctrine is a moving target… Different [understandings] yield different [interpretations]… Each conception can be contradicted by another… Courts have considerable latitude in determining whether to find consideration (or not), and hence whether to enforce a promise (or not)… A contract supported by consideration can still be set aside for… misrepresentation, duress, or undue influence or its contents may be supplemented by implied terms or [be] partially invalidated because of unfairness. In these cases, the presence of serious inadequacy of consideration will usually be the major, although not the sole, factor… It would be highly undesirable to allow public officials to extract benefits in return for the performance of their existing legal duties” (Contract Law).

Contracts supported by consideration are often one-sided, advantageous arrangements. In Illinois, we can imagine that any agreement with the General Assembly regarding a “guaranteed” funding to the pension systems, for example, would not be a “valid” consideration for public employees, especially since it would be in exchange for reductions of originally-vested benefits guaranteed by the Illinois and U.S. Constitutions for uncertain state health care.

Though many legislators would rather dispute one of the Bill of Rights contained in both the Illinois and U.S. Constitutions instead of addressing the “real causes” of the state's budget deficits (the pension ramp, the pension debt, and the state’s insufficient revenue), legislators should reexamine the concept of justice and what lawfulness demands: that people must keep their covenants with one another. In particular, no justice is accomplished when diminishing public employees' earned benefits and rights because of decades of legislators' irresponsibility, corruption and incompetence.

glen brown

For more constitutional analyses, please also read:

“Defending and Protecting Public Employees’ Pensions against the Legislative Siege…” (excerpts from Eric M. Madiar) and “How Much Can States Change Existing Retirement Policy? In Defense of State Judicial Decisions Protecting Public Employees’ Pensions” by Douglas L. Greenfield and Susan G Lahne) (posted December 10, 2012)

Illinois Pension Clause’s Convention Debates, Text and Historical Background (excerpts from Eric M. Madiar) (posted February 4, 2013)

Illinois Pension Reform Is without Legal and Moral Justification (posted May 29, 2012)