Monday, July 25, 2016

A Response to Senator Cullerton's Pension Reform Proposal and Eric M. Madiar's Analysis (by Gino L. DiVito and John M. Fitzgerald)







Originally posted on Capitol Fax, Monday, July 25, 2016 

Excerpts:

“…[T]he Cullerton proposal would force upon pension system members a choice between two diminishments of their constitutionally protected pension rights. The fact that a ‘choice’ is offered does not matter. Either ‘choice’ would be a pension diminishment and a violation of the Pension Protection Clause of the Illinois Constitution. 

“As the Illinois Supreme Court has explained, ‘once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to that individual.’ In re Pension Reform Litigation (Heaton v. Quinn), 2015 IL 118585, ¶ 46; see also Kanerva v. Weems, 2014 IL 115811, ¶ 38; Jones v. Municipal Employees’ Annuity & Benefit Fund of Chicago, 2016 IL 119618, ¶¶ 36-47. 

“Applying this constitutional rule, our courts have repeatedly invalidated amendments to the Illinois Pension Code that would change the calculation of a pension system member’s pensionable salary so as to diminish that member’s pension benefits. In Heaton, the Illinois Supreme Court invalidated legislation which, among other things, ‘cap[ped] the maximum salary that may be considered when calculating the amount of a member’s retirement annuity.’ Heaton, 2015 IL 118585, ¶ 27 (describing P.A. 98-0599). 

“Likewise, in Felt v. Board of Trustees of Judges Retirement System, our Supreme Court invalidated legislation that changed a judge’s pensionable salary from the ‘salary of the judge on the last day of judicial service’ to ‘the average salary for the final year of service as a judge.’ See Felt, 107 Ill. 2d 158, 161-63 (1985). 

“Likewise, in Kraus v. Board of Trustees of Police Pension Fund of Village of Niles, the Illinois Appellate Court held that a police officer on disability could not constitutionally be denied his right under the Pension Code to ‘receive a pension of one half the salary attached to his rank for the year preceding his retirement on regular pension.’ While the Pension Code had been amended so as to change that formula, that Pension Code amendment could not be applied to the officer because it was enacted after he joined the pension system. See Kraus, 72 Ill. App. 3d 833, 843-51 (1979). In other words, it is clear that variables in the pension formula that are tied to a pension system member’s salary cannot be changed to that member’s detriment after he or she has joined the pension system.

“But the Cullerton proposal would do exactly that. In Mr. Madiar’s words, pension system members who choose not to ‘agree’ to a diminishment of their COLAs (or, more accurately, statutory ‘automatic annual increases’ in the pension annuity) would be offered future salary increases only ‘on the express condition that the increases, if accepted, will not apply in the calculation of the employee’s pension at retirement.’ 

“Under existing law, pension system members’ salary increases are factored into the formula that is used to calculate their pension annuities. By way of example, under section 16-121 of the Pension Code, a TRS member’s salary is defined as the ‘actual compensation received by a teacher during any school year and recognized by the system in accordance with rules of the board.’ That ‘actual compensation’ will incorporate any salary increases a teacher has earned over the course of his career, and that teacher’s ‘salary’ will be a variable in the formula used to determine his pension annuity. 

“The Cullerton proposal would change the formula to freeze a pension system member’s pensionable salary as of the date he refused to ‘agree’ to another pension diminishment. Thus, section 16-121 would presumably be amended to define a TRS member’s ‘salary’ as something less than his or her ‘actual compensation’ if that TRS member refused a COLA reduction. Under the Cullerton proposal, a TRS member’s ‘salary’ would instead be his ‘actual compensation’ as of the date he turned down the COLA-reduction option, not the ‘actual compensation’ he subsequently ‘received.’

“Such a pensionable salary freeze does not stand on any different footing from the pensionable salary changes that were held unconstitutional in Heaton, Felt and Kraus. The principle is simple: One’s pensionable salary is a key variable in the pension formula. A pension system member currently enjoys the right to have any future salary increases factored into his or her pensionable salary. The Cullerton proposal would change that statutory formula so as to freeze pensionable salaries as of a date certain and thereby reduce pensions. That is a violation of the Pension Protection Clause of the Illinois Constitution.

“Of course, public sector employers generally may simply decide not to give their employees a raise. But that is beside the point. The Cullerton proposal would diminish pensions by changing the way the Pension Code calculates pension annuities; specifically, by freezing one’s pensionable salary as of a date certain. That is not permitted by the Pension Protection Clause.

“Mr. Madiar concedes that Illinois decisions have ‘invalidated legislation that unilaterally narrowed the statutory definition of pensionable salary,’ but he argues that none of those decisions ‘involved an express offering of future salary increases on a non-pensionable basis’ (emphasis in original). To us, that is a distinction without a difference. Changing the law to provide that future salary increases will not count towards one’s pensionable salary constitutes a diminishment of one’s constitutionally protected pension rights. Such a change would suffer the same fate as other changes to the Pension Code’s formulation of one’s pensionable salary. 

“Nor is the outcome different simply because a pension system member is given a ‘choice’ between two alternative pension diminishments. Mr. Madiar argues that a diminishment of pension rights may be constitutionally valid if it is part of a ‘bargained-for exchange.’ This argument may have persuasive force if a pension system member is being offered some new benefit in exchange for surrendering a pension right. In the Cullerton proposal, however, there is no new benefit. Under that proposal, at best, a pension system member is permitted to keep the current statutory treatment of his or her pensionable salary.

“Mr. Madiar relies heavily on Carroll v. Grumet, 281 A.D. 35, 36-38 (N.Y. App. Div. 1952). But in that case, a New York City firefighter was offered a ‘cost of living bonus’ and agreed, apparently from the outset, that this new benefit would never count towards his pensionable salary. We believe Carroll is distinguishable. Unlike the plaintiff in Carroll, who apparently never had a legal right for the ‘cost of living bonus’ to be counted towards his pensionable salary, members of Illinois public sector pension systems have an existing legal right for any salary increases that they may earn between now and their retirement to be factored into their pensionable salary. 

“We should add that Kanerva counsels against over reading the holdings of New York decisions in this area. See Kanerva, 2014 IL 115811, ¶ 52 (agreeing with the Hawaiian Supreme Court’s holding that a certain New York decision interpreting the New York Constitution’s pension protection provision was ‘distinguishable and unpersuasive’). We see no reason to believe that the Illinois Supreme Court would adopt the expansive reading of Carroll suggested by Mr. Madiar.

“Mr. Madiar also argues that the ‘choice’ imposed on pension system members by the Cullerton proposal is not tantamount to duress. Even if true, that point would be irrelevant. If both options presented by the Cullerton proposal are unconstitutional pension diminishments, then the proposal would be invalid regardless of whether it constitutes duress in the legal sense.

“In conclusion, we applaud Mr. Madiar for his continued scholarship on this crucial legal subject. We also agree that creative ideas will be necessary to address the chronic problem of pension system underfunding in this State. We strongly believe, however, that this particular proposal is unconstitutional.”

About the authors: Gino L. DiVito and John M. Fitzgerald are partners at the Chicago law firm Tabet DiVito & Rothstein LLC. Mr. DiVito is a retired justice of the Illinois Appellate Court. 

For the complete article from Capitol Fax:

 

2 comments:

  1. 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…”

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  2. 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)).

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