“The Pension Protection Clause Imposes Only a Financial Obligation and Does Not Surrender the State's Police Powers”

“...Even beyond the irrelevance of the reserved powers doctrine, the defendants are simply wrong in characterizing the State's attempt to reduce its financial obligations by diminishing pension benefits as an exercise of ‘police powers.’ Likewise, the Pension Protection Clause's prohibition on diminishing pension benefits does not constitute a withholding of ‘police powers.’

“In applying the reserved powers doctrine, the U.S. Supreme Court has distinguished essential sovereign powers, like the police power, from restrictions imposed by financial obligations. U.S. Trust Co. of New York, 431 U.S. at 23-24.

“For instance, courts have acknowledged that police powers and the power of eminent domain are essential sovereign powers subject to the reserved powers doctrine, but that a state's power to tax and spend can be bound through contract and therefore is not subject to the reserved powers doctrine. See, e.g., Matsuda v. City & Cnty. of Honolulu, 512 F.3d 1148, 1153 (9th Cir. 2008) (‘a state will be bound by contracts that limit the use of its taxing and spending powers, even though such contracts limit the state's future exercise of discretion in material ways’); see also United States v. Winstar Corp., 518 U.S. 839, 880 (1996) (plurality) (‘no sovereign power is limited by the Government's promise to purchase’); U.S. Trust Co. of New York, 431 U.S. at 25 n.23 (‘A promise to pay, with a reserved right to deny or change the effect of the promise, is an absurdity’) (quoting Murray v. Charleston, 96 U.S. 432, 445 (1877)).

“A survey of the cases the defendants cite in support of their argument illustrates the difference between police powers and the mere avoidance of financial obligations. Compare U.S. Trust Co. of New York, 431 U.S. at 21-25, 29 (law intended to alter state's bond obligations to further important public purposes not an exercise of police power) with Stone v. Mississippi, 101 U.S. 814, 817-18 (1879) (law outlawing lottery is exercise of police power); Boston Beer Co. v. Massachusetts, 97 U.S. 25, 33 (1877) (law outlawing alcohol is exercise of police power); N14). Fertilizing Co. v. Village of Hyde Park, 70 Ill. 634, 636-37, 642-45 (1873) (law regulating hauling of dead animals is exercise of police power); Atlantic Coast Line R.R. Co. v. City of Goldsboro, N.C., 232 U.S. 548, 552-53, 558-62 (1914) (safety regulations pertaining to railroad are exercise of police power); Pierce Oil Corp. v. City of Hope, 248 U.S. 498, 499-500 (1919) (law regulating storage of combustible fluids is exercise of police power); Butchers' Union Slaughter-House & Live-Stock Landing Co. v. Crescent City Live-Stock Landing & Slaughter-House Co., 111 U.S. 746, 750-51 (1884) (law prohibiting livestock monopolies is exercise of police power).

“Illinois courts also have recognized that financial obligations are distinct from police powers. Indep. Voters of Illinois Indep. Precinct Org. v. Ahmad, 2014 IL App (1st) 123629, !If 67-83 (contract privatizing parking meters does not surrender police powers where city retains wide latitude to regulate street parking even though city must pay financial penalty if regulations reduce parking revenues), leave to appeal denied, 20 N.E.3d 1255 (table) (2014); Sklodowski, 162 III. 2d at 150 (Freeman, J., concurring in part and dissenting in part) (‘States are regularly held to their debt contracts, the [United States Supreme] Court recognizing that mere financial obligations do not compromise reserved powers’) (citation omitted).

“This critical distinction cannot be overcome by claims, like those made by the defendants, that a particular financial obligation is straining resources needed for other purposes: Any financial obligation could be regarded in theory as a relinquishment of the State's spending power, since money spent to repay debts is not available for other purposes. Similarly, the taxing power may have to be exercised if debts are to be repaid. Notwithstanding these effects, the Court has regularly held that the States are bound by their debt contracts. U.S. Trust Co. of New York, 431 U.S. at 24.

“Accordingly, the reserved powers doctrine is not implicated by the State's obligation to pay pension benefits. The Pension Protection Clause imposes only a financial obligation. It does not prevent the State from criminalizing some act or regulating some industry. See Faulkenbury v. Teachers' & State Employees' Ret. Sys. of N.C., 345 N.C. 683, 692 (N.C. 1997) (‘promise to pay pensions does not bargain away a power of the state or local government necessary to protect the vital interests of the people’). The defendants' reserved powers argument therefore fails for the additional reason that financial obligations alone do not surrender the police power or any other essential sovereign power.

“Moreover, as noted above, the drafters intended that the Pension Protection Clause would serve as a bulwark for public pensions especially in times of fiscal distress. Particularly given that constitutional purpose, the Act [SB 1] simply cannot be justified as an exercise of ‘police powers’ or any other implicitly reserved sovereign power. See Flushing National Bank, 40 N.Y.2d at 736 (holding that violation of New York's full faith and credit clause ‘may not be justified by fugitive recourse to the police power of the State or to any other constitutional power to displace inconvenient but intentionally protective constitutional limitations’ where the clause was ‘designed ... to protect rights vulnerable in the event of difficult economic circumstances’).

“Indeed, ‘it is destructive of the constitutional purpose for the Legislature to enact a measure aimed at denying that very protection on the ground that government confronts the difficulties which, in the first instance, were envisioned.’” Id…

from Brief of ISEA RSEA Heaton and Harrison Plaintiffs-Appellees