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Tuesday, October 14, 2014
"Illinois Supreme Court Rules on the Scope of the State Constitution’s Pension-Benefit Protection" (Freeborn & Peters LLP)
“Rising healthcare costs and the expense of existing public pension obligations are two of the greatest challenges facing the American economy. In Kanerva v. Weems, 2014 IL 115811, 13 N.E.3d 1228, 383 Ill.Dec. 107, the Illinois Supreme Court brought these two issues together in a way that may have significant implications for the fiscal health of Illinois for years to come.
“The State of Illinois has subsidized the health insurance premiums of its retired employees for decades. The state has repeatedly modified the statutes governing these payments, creating a variety of subsidy entitlements ranging from 5 percent to 100 percent. Crucially, each of these modifications applied only prospectively — i.e., they affected only newly qualifying retirees, annuitants, and survivors and left existing subsidy rights untouched.
“In 2012, however, the state enacted a sweeping revision of its health insurance subsidy practices. P.A. 97-695, effective July 1, 2012, eliminated all existing state health insurance premium subsidy structures for annuitants, retirees, and survivors and replaced them with a program under which the state would contribute toward a basic program of healthcare benefits in an amount that would be determined anew each year by the Director of the Department of Central Management Services.
“Soon after the Act took effect, various retired state employees filed lawsuits contesting its legality. These lawsuits, consolidated in Kanerva, asserted a variety of different challenges to the Act but were united in contending that it violated the Illinois Constitution of 1970. The circuit court rejected the plaintiffs’ constitutional argument and granted the Kanerva defendants’ motion to dismiss it for legal insufficiency under §2-615 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-615. The Illinois Supreme Court’s de novo reconsideration of this finding forms the heart of its Kanerva decision.
“The Kanerva plaintiffs’ constitutional argument rests on Article XIII, Section 5, of the Illinois Constitution, which 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.’ The Kanerva plaintiffs contend that health insurance premium subsidy rights are a ‘benefit’ under this provision and, accordingly, may not be reduced except prospectively.
“The Kanerva defendants, on the other hand, argue that health insurance premium subsidy rights clearly fall outside the scope of Article XIII, Section 5’s protected ‘benefits’ in view of the fact that they are neither codified in the Illinois Pension Code nor paid from the assets of the retirement funds established in that Code.
“The Kanerva court was unable to reach a unanimous decision on these competing arguments. A majority found that the plaintiffs had the better analysis, stating:
“[E]ligibility for all of the [disputed] benefits is limited to, conditioned on, and flows directly from membership in one of the State’s various public pension systems. Giving the language of article XIII, section 5, its plain and ordinary meaning, all of these benefits, including subsidized health care, must be considered to be benefits of membership in a pension or retirement system of the State and, therefore, within that provision’s protections. 2014 IL 115811 at ¶40.
“The majority noted that this reading of the constitutional text was further supported, inter alia, by the fact that the state had had a health insurance premium subsidy program in place when the 1970 Constitution was proposed and adopted, yet the drafters chose the broad wording of Article XIII, Section 5, even though they could have expressly limited the covered benefits to annuities or benefits directly conferred by the Pension Code. 2014 IL 115811 at ¶41.
“Significantly, the majority’s decision did not reach the question of whether the specific modifications to existing health insurance premium subsidy rights imposed by the Act were a diminishment or impairment of those rights. Its ruling was limited to its findings that those rights were pension benefits under Article XIII, Section 5, and the plaintiffs’ related claims were accordingly legally sufficient to survive a motion to dismiss.
“The dissent, by Justice Burke, noted that the Illinois Supreme Court had previously ruled that the Illinois Constitution’s pension protection clause created a contractual relationship that ‘is governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system’ (2014 IL 115811 at ¶68) — a holding that, in Justice Burke’s view, directly supported the defendants’ argument that health insurance premium subsidies are not pension benefits.
“Justice Burke further observed that health insurance premium subsidies have dramatic practical differences from a standard pension benefit since they ‘are not within the control of the legislature and are subject to change depending on advancements in medical technology, increases in the costs of treatments, and the availability of insurance plans’ (2014 IL 115811 at ¶70) and argued that the majority’s adoption of ‘flow[ing] directly from’ and ‘attendant to’ as the measure of what qualifies something as an Article XIII, Section 5, benefit conferred a potentially absurd scope on that provision’s guarantee of non-impairment. 2014 IL 115811 at ¶71.
“Justice Burke also contended that the absence of an express exclusion of health insurance premium subsidy rights from Article XIII, Section 5, was entirely reasonable given that when that provision was drafted, ‘no such benefits were provided for in any [existing] pension or retirement system.’ 2014 IL 115811 at ¶75.
“Although Kanerva’s holding is limited to the §2-615 issue, the defendants will face an uphill battle on remand in attempting to convince the circuit court that the Act’s changes do not diminish or impair the constitutionally protected benefit of retiree health insurance premium subsidies.
“By contrast, Kanerva’s holding will provide the plaintiffs with a strong argument that if the State wishes to effect any change in its program of health insurance premium subsidies for existing retirees, it will have to amend the Constitution first. Justice Burke’s dissent fleshes out some of the potential results of these implications of Kanerva: not only will the State be on the hook for its proportional share of any future increases in the cost of health insurance premiums for existing retirees, but the constitutional guarantee of non-impairment may later be found to extend to any other beneficial consequence of membership in the state’s public pension systems whose enacting legislation does not expressly exclude it from Article XIII, Section 5’s scope.
“Given these potentially significant consequences, Illinois legislators would do well to read Kanerva carefully before undertaking any further amendment of the state’s systems for providing for retired public employees.”
From Civil Litigation October 2014 Julian C. Wierenga, , Chicago