Tuesday, July 12, 2016

According to Eric Madiar, Senate President John J. Cullerton’s contractual proposal is permissible

“…The Senate President’s proposal is based on the premise that pension benefits protected by the Pension Clause are ‘contractual’ in nature and subject to modification ‘in accordance with usual contract principles.’[172]

“As confirmed by the Illinois Supreme Court’s Chicago Pension Reform decision, while pension benefits cannot be reduced unilaterally, they can be reduced or otherwise modified so long as the employee ‘knowingly and voluntarily’ agrees to the modification ‘in exchange for valid consideration from the employer.’[173]

“Illinois courts define the term ‘consideration’ as ‘some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’[174] Under Illinois law, ‘any act or promise which is of benefit to one party or disadvantage to the other is a sufficient consideration to support a contract.’[175] A promise, however, to do what a person is already bound to do by contract or statute does not constitute legal consideration.[176]

“On the issue of what may serve as ‘consideration,’ the Illinois Appellate Court has indicated that work hours, salary levels, and other terms of employment are generally not protected by the Clause even though changes to these terms would indirectly affect the pension amount a person would ultimately receive in retirement.[177] Indeed, as to salaries, Illinois courts have long held that public employees do not have a vested right in the expectation of the continuance of a specific rate or method of compensation, even where they are employed prior to the amendment of an enacted salary schedule.[178]

“In addition, the Illinois Appellate Court has noted that New York court decisions have found it permissible for a public employer to offer future salary increases on the condition that the increases not qualify as pensionable income if accepted by the employee. [179] The New York decisions instruct that since a public employer has no obligation to offer public employees salary increases—unless otherwise required by statute or contract—the employer has the power to offer future salary increases either without condition—and thereby count toward the employee’s pension—or on a non­pensionable basis.[180]

“In turn, when employees accept future salary increases on an express non­pensionable basis, they cannot later claim that these increases are includable for pension purposes because a waiver has occurred and the increases are thereby excluded from the pension calculation formula.[181]

“Recast in the light of these decisions, the Senate President’s proposal harnesses the discretionary power of the State, as an employer, to condition or not condition its offering of future salary increases to each Tier 1 employee in order to obtain a pension benefit reduction.

“The legal consideration the proposal offers to each Tier 1 employee who agrees to lower COLA increases in retirement is the State’s irrevocable promise, as an employer, to never offer him or her future salary increases on a non­pensionable basis.

“A Tier 1 employee, of course, is free to reject this offer. If he or she does, then the employee would do so with the full knowledge that all future salary increases will only be offered to him or her expressly on a non­pensionable basis—a right the State, as an employer, may exercise.

“According to news reports, the Senate President’s proposal is estimated to save the State about $1 billion a year. [182] In sum, the Senate President’s proposal offers a basic framework that can be enhanced with other forms of consideration to achieve the same objective of savings to the State…”

[172] Jones v. Mun. Employees’ Annuity and Ben. Fund of Chicago, 2016 IL 119618 at ¶53; Buddell v. Bd. of Trustees of the State Univ. Retirement Sys., 118 Ill.2d 99, 105, 514 N.E.2d 184, 187 (1987).

[173] Jones, 2016 IL 119618 at ¶¶53 and 47.

[174] Carter v. SSC Odin Operating Co., LLC, 2012 IL 113204 at ¶23, 976 N.E.2d 344, 352 (quoting Lipkin v. Koren, 392 Ill. 400, 406, 64 N>E>2d 890, 893 (1946)). 

[175] Doyle v. Holy Cross Hosp., 186 Ill.2d 104, 112, 708 N.E.2d 1140, 1145 (1999).

[176] Watkins v. GMAC Fin. Servs., 337 Ill. App. 3d 58, 64, 785 N.E.2d 40, 44 (1st Dist. 2003); Boyle v. Whipple, 62 Ill. App. 2d 448, 453, 211 N.E.2d 113, 115 (3d Dist. 1965).

[177] Kraus v. Bd. of Trustees, 72 Ill.App.3d 833, 849, 390 N.E.2d 1281,1292­93 (1979); Madiar Pension Article, supra note 5, at 235, 276. As one Illinois court put it, “statutes governing the wages, working conditions, or employment benefits of public employees do not create any vested rights in the continued existence of those laws.” Gust v. Village of Skokie, 125 Ill.App.3d 102, 107 (1st Dist. 1984).

[178] Chicago Patrolmen’s Ass’n v. City of Chicago, 56 Ill.2d 503, 508 (1974).

[179] Kraus, 72 Ill. App. 3d at 849­50, 390 N.E.2d at 1293; Madiar Pension Article, supra note 5, at 273, 279, & n. 565.

[180] Carroll v. Grumet, 117 N.Y.S.2d 553, 555 (App. Div. 1953), favorably cited in Kraus, 72 Ill.App.3d at 850, 390 N.E.2d at 1293.

[181] Id. at 555­56. Accord Ballentine v. Koch, 674 N.E.2d 292, 296 (N.Y. 1996); Schacht v. City of New York, 346 N.E. 2d 518, 31­32 (N.Y. 1976); McGarrigle v. City ofNew York, 803 N.Y.S.2d 529, 531 (App. Div. 2005); Rosen v. New York City Teachers’ Retirement Bd., 122 N.Y.S.2d 485, 486­88 (App. Div.), aff’d, 116 N.E.2d 239 (N.Y. 1953); White v. Hussey, 87 N.Y.S.2d 252 (App. Div. 1949), aff’d 95 N.Y.S.2d 539 (1950); Schwartz v. Simpson, 114 N.Y.S.2d 730, 736­38 (Mun. Ct. 1952).

[182] Monique Garcia & Kim Geiger, Senate President Cullerton Offers New Pension Plan, CHI. TRIB. (May 13, 2015) available at: http://www.chicagotribune.com/ct­illinois­pension­reform­cullerton­met­0513­20150512­story.html.

from Eric M. Madiar, Illinois Public Pensions: Where To From Here?, 33 Ill. Pub. Employee Labor Report (Winter/Spring 2016).


  1. The flaws in these arguments are twofold. One is that he quotes lower court rulings based on cases brought in other states out of context, not the definitive Illinois Supreme Court decision.
    Secondly, this is a specious argument because it interprets a hypothetical right of the employer, making future increases part of the benefit calculation, to a consideration that can be altered in return for an additional benefit now. In fact, both these considerations are part of the current contract, so the idea here is you are asked to give up one or the other current benefit in exchange for nothing.

    1. Rosemary,

      This is only a brief excerpt from Madiar's complete 38-page analysis. I recommend that you read his entire article: Eric M. Madiar, Illinois Public Pensions: Where To From Here?, 33 Ill. Pub. Employee Labor Report (Winter/Spring 2016).

  2. From a Memorandum by Gino L. DiVito and John Fitzgerald to the then Governor of Illinois, Pat Quinn, May 5, 2010:

    “…When does a State employee earn the right to have his pension calculated in a certain way? Those decisions have been unanimous: ‘Vesting of an employee’s rights in the system occurs either at the time the employee entered the system or in 1971, when the Illinois Constitution became effective, whichever is later.’ Carr v. Bd. of Trustees of Police Pension Fund of Peoria, 158 Ill. App. 3d 7, 8 (3d Dist. 1987); see also Schroeder v. Morton Grove Police Pension Bd., 219 Ill. App. 3d 697, 700 (1st Dist. 1991); Hannigan v. Hoffmeister, 240 Ill. App. 3d 1065, 1073 (1st Dist. 1992); Barber v. Bd. of Trustees of Vill. of S. Barrington Police Pension Fund, 256 Ill. App. 3d 814, 820 (1st Dist. 1993 (same, quoting Carr, 158 Ill. App. 3d at 8)…

    “Thus, a State employee’s pension rights are ‘governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system.’ Di Falco v. Bd. of Trustees of Firemen’s Pension Fund of Wood Dale Fire Protection Dist. No. 1, 122 Ill.2d 22, 26 (1988); see also McNamee v. State, 173 Ill.2d 433, 439 (1996); People ex rel. Sklodowski v. State, 182 Ill.2d 220, 229 (1998)…

    “[T]he Pension Protection Clause was intended to protect State employees ‘against abolishing their rights completely or changing the terms of their rights after they have embarked upon the employment ─to lessen them.’ See Felt, 107 Ill.2d at 162 (quoting 4 Record of Proceedings, Sixth Illinois Constitutional Convention 2929)…

    “Subsequent Illinois Supreme Court decisions are even clearer on this point. See McNamee, 173 Ill.2d at 439 (pursuant to the Pension Protection Clause, a State employee’s participation in a pension plan is ‘an enforceable 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’); see also Sklodowski, 182 Ill.2d at 229. Sidley Austin’s position is squarely contradicted by this controlling authority…

    “[T]he Pension Protection Clause does not limit itself…; neither the phrase ‘previously earned,’ nor any equivalent of it, appears anywhere in the Pension Protection Clause. Furthermore…, a State employee earns the right to have his pension calculated in a certain way when he enters the retirement system. Accordingly, a superficial distinction between ‘previously earned’ benefits and prospectively earned benefits does not answer the question at hand. Nothing in the Pension Protection Clause suggests otherwise…

    “Kraus held that the Pension Protection Clause ‘prohibits legislative action which directly diminishes the benefits to be received by those who became members of the pension system prior to the enactment of the legislation, though they are not yet eligible to retire.’ See Kraus, 72 Ill. App. 3d at 849… Kraus also noted… that a State employee may agree, ‘for consideration, to accept a reduction in benefits.’ Id. at 849... [Furthermore], an end run around the Pension Protection Clause is directly prohibited by Kraus. As that decision explains, the legislature cannot ‘directly’ diminish the pension rights of current State employees, and legislative action that incidentally affects pension rights is permissible only if it is ‘directed toward another aim.’ See Kraus, 72 Ill. App. 3d at 849… [T]o directly diminish the pension rights of current State employees… would therefore violate the Pension Protection Clause…”

  3. I wrote this nearly four years ago:

    I believe the legislators of the State of Illinois would be breaching a contract by forcing public employees to make a choice to diminish their originally-vested guarantee. They would be breaking an enforceable promise, one that is bilateral and emphasizes an agreement between the State of Illinois and its public employees as to their future rights and benefits. To impair the obligation of a contract is to lessen its value. "Any law which changes the intention and legal effect of the original parties, giving to one a greater and to the other a less interest or benefit in the contract, impairs its obligation" (115 A. 484, 486). State statutes which do so are prohibited by Article 1, Section 10 of the United States Constitution.

  4. It is evident that Illinois legislators will continue to 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 resultant pension debt, and the state’s insufficient flow of revenue.

    What these legislators should be doing is reexamining the concept of justice and what lawfulness demands: that people must keep their covenants with one another. No justice is accomplished when diminishing public employees' constitutionally-guaranteed benefits and rights. What needs to be diminished, however, is the continuation of legislators' irresponsibility, corruption, and incompetence.

    Any modifications of the Pension Protection Clause by the Illinois General Assembly should be seen for what it is: an accommodation for “only” the General Assembly who have stolen money from the public pension systems for decades and are, thus, avoiding a pre-existing duty rule.

    I have said this many times: contracts supported by consideration are often one-sided, advantageous arrangements, especially a consideration that would be in exchange for reductions of originally-vested benefits assured by the Illinois Constitution.

    What the Illinois General Assembly needs to be reminded of again and again is that the Illinois Supreme Court “has consistently invalidated amendments to the Pension Code where the result is to diminish benefits” (McNamee v. State, 173 Ill. 2d 433, 445 (1996)). “Any alteration of the pension system amounts to a modification of an existing contract between the State (or one of its agencies) and all members of the pension system, whether employees or retirees. A member is contractually protected against a reduction in benefits” (Kuhlmann v. Board of Trustees of the Police Pension Fund of Maywood, 106 Ill. App. 3d 603, 608 (1st Dist. 1982)).

  5. 2014 Kanerva v. Weems (July 3)
    The Pension Protection Clause makes it “clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired… [The State of Illinois or anyone else] may not rewrite the Pension Protection Clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve... [P]ension benefits are insulated from diminishment or impairment by the General Assembly…” (Kanerva, 2014 IL 115811, 38, 41, 48).

    2015 MARY J. JONES et al., Appellees, v. MUNICIPAL EMPLOYEES’ ANNUITY AND BENEFIT FUND OF CHICAGO et al., Appellants (March 24)

    “…In this case, it is undisputed that the unions were not acting as authorized agents within a collective bargaining process. Thus, we need not resolve whether the vote taken by union representatives as expressed in the Brandon affidavit bound members of the Funds in a collective bargaining process. Rather, we agree with the trial court that ‘these negotiations were no different than legislative advocacy on behalf of any interest group supporting collective interests to a lawmaking body.’ The individual members of the Funds have done nothing that could be said to have unequivocally assented to the new terms or to have ‘bargained away’ their constitutional rights. Accordingly, nothing in the legislative process that led to the enactment of the Act constituted a waiver of the Funds members’ constitutional rights under the pension protection clause… The judgment of the circuit court declaring Public Act 98-641 to be unconstitutional and permanently enjoining its enforcement is affirmed.”

    “[Furthermore, consider that] in the context of the collective bargaining process for public employees, employees designate a particular union as their exclusive agent for collective bargaining negotiations. See 5 ILCS 315/6 (West 2014). The cases that defendants rely upon to support a bargained-for exchange argument involved agreements reached through the collective bargaining process. See Ballentine v. Koch, 674 N.E.2d 292, 296 (N.Y. Ct. App. 1996) (“[B]ecause plaintiffs designated the PBA as their agent for the collective bargaining negotiations at issue here and were thus bound by its actions taken on their behalf during the negotiation process [citation], the PBA’s waiver of the constitutional protections of [New York’s pension protection clause] is valid as to plaintiffs ***.”); Schacht v. City of New York, 346 N.E.2d 518, 519 (N.Y. Ct. App. 1976) (“Plaintiff, having designated the union to be her agent for collective bargaining purposes, is bound by agreements made by that union on her behalf”)…” (2015 MARY J. JONES et al., Appellees, v. MUNICIPAL EMPLOYEES’ ANNUITY AND BENEFIT FUND OF CHICAGO et al., Appellants): Thus, unions need ratification by its membership, retirees, and non-members for any consideration.

    2015 Doris Heaton, et al. v. Pat Quinn, in his capacity as Governor of the State of Illinois, et al. (May 8)
    “…The concerns of the delegates who drafted article XIII, section 5, and the citizens who ratified it have proven to be well founded. Even with the protections of that provision, the General Assembly has repeatedly attempted to find ways to circumvent its clear and unambiguous prohibition against the diminishment or impairment of the benefits of membership in public retirement systems. Public Act 98-599 is merely the latest assault in this ongoing political battle against public pension rights. As we noted earlier, through that legislation the General Assembly is attempting to do once again exactly what the people of Illinois, through article XIII, section 5, said it has no authority to do and must not do… The judgment of the circuit court declaring Public Act 98-599 to be unconstitutional and permanently enjoining its enforcement is affirmed.”