Sunday, July 10, 2016

“Welching on public pensions is still not an option for Illinois” —Eric Madiar






“Through its recent decisions, the Illinois Supreme Court delivered a clear message that pension reform efforts seeking to unilaterally reduce benefits simply cannot be squared with the Illinois Constitution's pension clause. That outcome was hardly surprising given the plain language, drafting history, and prior court decisions interpreting the pension clause.

“Now that the Illinois Supreme Court has clearly reaffirmed that welching is simply not an option the General Assembly may pursue, the question becomes what can legislators do?

As [Eric Madiar] recently wrote in the Chicago-Kent College of Law Bulletin, the court's recent decisions reveal that adherence to usual contract principles — offer, consideration, and acceptance — provides a legal avenue for structuring pension reform legislation that can achieve meaningful savings and square with the pension clause.

“In particular, the proposal offered by Senate President John J. Cullerton provides one such viable approach consistent with those principles despite recent criticism. Another perhaps more collaborative approach is engaging public sector labor unions and forging an agreement that reduces the pension benefits of current union employees through the collective bargaining process.

“While some stakeholders portray amending the pension clause to permit unilateral benefits cuts or authorizing Illinois municipalities to file for federal bankruptcy to discharge their pension obligations as viable options, the Article shows that is simply not the case. Indeed, even if the clause were amended — a big if — a court would most likely find that the amendment violates the U.S. Constitution's contracts [Article 1] or takings clause [5th Amendment].

“Moreover, the General Assembly simply lacks the legal power to enact the valid state law necessary under federal law to authorize its municipalities to file for bankruptcy. As the Illinois Supreme Court recently explained, there is ‘no possible basis for interpreting the pension clause to mean its protections can be overridden if the General Assembly deems it appropriate.’

“Accordingly, the clause withdraws from the legislature, as a matter of state law, the legal power to pass any statute authorizing municipal bankruptcy as a means to unilaterally discharge public pension obligations.

“In the end, while contract principles and other permissible options can help mitigate the burden of State and municipal pension obligations, the state must still restructure its revenue system so it can meet, not simply defer its fiscal obligations.

“As Paul Simon observed in 1971, ‘We mortgage the future not only when we create bonded indebtedness; we also mortgage the future when we don't pay into the pension systems as we should.’ Revising our State's revenue system, of course, will require political courage and entail tax increases. Welching on public pensions, however, is still not an option for Illinois.”


— Eric Madiar is an attorney and government relations consultant based in Springfield, who previously served as chief legal counsel to Senate President John J. Cullerton from 2009-2014. To read his recent article in the Chicago Daily Law pension article, click here.

This article, "Eric Madiar: State's pension obligations must be met," is from The State Journal-Register.



13 comments:

  1. The Illinois Supreme Court had ruled that Public Act 98-599 violated the Pension Clause, the Contracts Clause, and the Takings Clause... of the Illinois Constitution, including article XIII, section 5 on May 8, 2015.

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  2. “…Plaintiffs’ challenges to the new law were predicated on the Illinois Constitution of 1970. In all five actions, plaintiffs’ principal contention was that the reduction in retirement annuity benefits for Tier I employees was void and unenforceable as a violation of the constitution’s pension protection clause (Ill. Const. 1970, art. XIII, § 5). Four of the complaints (RSEA, ISEA, Harrison, and SUAA) also alleged that the annuity reduction provisions violated article I, section 16, of the Illinois Constitution (Ill. Const. 1970, art. I, § 16), which provides, inter alia, that no law impairing the obligation of contracts shall be passed. Two of those four complaints (RSEA and ISEA) included separate impairment of contract claims on behalf of a specific subset of employees who elected to participate in early retirement programs offered by the State in 1991, 2002 and 2005. Violations of article I, section 15, of the Illinois Constitution (Ill. Const. 1970, art. I, § 15), which prohibits the taking or damaging of private property for public use without just compensation, were alleged in Harrison and SUAA. In addition, RSEA and ISEA asserted that the annuity reductions violated equal protection under article I, section 2, of the Illinois Constitution (Ill. Const. 1970, art. I, § 2) because they did not also include members of the JRS system, i.e., judges…” (In re Pension Reform Litigation (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants, May 8, 2015).

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  3. Can the Unions Bargain Away Constitutionally-Guaranteed Benefits through Consideration for Retirees?

    The answer is NO. Retirees are not part of the collective bargaining process, only active employees are. The Illinois Supreme Court seems to suggest that a consideration supported by collective bargaining for current employees is a possibility, nonetheless. However, a legitimate consideration means not taking away an already existing constitutionally-guaranteed benefit!

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  4. From Eric Madiar:

    "...The path [to take] is adherence to usual contract principles... Another more collaborative approach is engaging public sector labor unions and forging an agreement that reduces pension benefits of current union employees through the collective bargaining process.

    "Lawmakers may also restructure the current statutory funding schedule and pursue some form of a buyout proposal.

    "In addition, lawmakers may shift the employer's portion of the 'normal costs' of pension benefits paid by the State for downstate and suburban teachers and university and community college employees, respectively, to local schools districts, universities and community colleges...

    "In the end... the State must still restructure its revenue system so its fiscal obligations are met, not simply deferred. That, of course, will require political courage and entail tax increases. Welching on public pensions, however, is still not an option."

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    1. The above quotations are from this article: Eric M. Madiar, Illinois Public Pensions: Where To From Here?, 33 Ill. Pub. Employee Labor Report, p. 20 (Winter/Spring 2016).

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  5. If Illinois policymakers pass a bill to shift its responsibility of paying the “normal costs” to local school districts, many school districts would not be able to afford to pay these costs, even if they are “phased in for a few years.”

    “A shift would create a new and large financial requirement for school districts, which would be difficult for many to meet. Moreover, Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes. Shifting the state’s normal cost obligation onto school districts would only mean that an even higher proportion of school districts’ revenue would come from property taxes.

    “[Furthermore,] property tax bases would not be sufficient to absorb any shift in the employer normal cost for teacher pensions… School districts are demographically and financially varied, and it would be difficult to impose a uniform normal cost shift on them… Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes… While shifting the state’s normal cost obligations onto school districts may provide some relief to the state’s budget, it will not mitigate these financial obligations and will instead push them onto school districts that, on average, already derive the majority of their revenue from local sources” (The Center for Tax and Budget Accountability, March 2012).

    What would be other probable effects? In cash-strapped school districts, of which there are many, teachers would not receive increases in their salaries; many teachers would lose their jobs; student programs would be reduced or eliminated; class sizes would increase; it would be more difficult to recruit, as well as retain and attract, the best teaching candidates… (Education Sector Policy Briefs).

    The public school system in Illinois would be jeopardized; the public school teacher’s dignity and guaranteed retirement security would be imperiled, and their students’ right to be taught by the very best teachers available in Illinois would be at risk.

    Approximately one-third of the total pension payment is the normal costs; the other two-thirds of the payment is the interest owed on the debt that the state created for not fully funding the pension system for almost six decades. To transfer the normal costs of the teachers’ retirement system to the school districts is to diminish the state’s role in providing income retirement security to its public employees.


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  6. Surely, Illinois politicians should stop ignoring their moral responsibility and legal obligation to fund the Teachers’ Retirement System and other public pension systems. It is their moral duty and legal concern to find ways to increase the state’s revenue so that the public pension systems of Illinois are properly funded, instead of these incessant, irresponsible challenges of the State and U.S. Constitutions.

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  7. Glen, I read Eric Madair's full post. I was somewhat dismayed that he advocates a way forward by advocating President Cullerton's plan based on consideration and he cited some New York court cases to back his claim that this is the path forward. What are your thoughts on his belief that a choice of including raises as part of your future pension earnings or giving up your guaranteed Cola, which should be referred to as an AAI contribution. He beleives this type of choice passes constitutional muster. Your thoughts would be greatly appreciated. Thank you, I enjoy reading your blog.

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    1. According to Madiar: "Whether Illinois courts will reach the same broad conclusion as New York courts with respect to Illinois public sector labor unions under our Pension Clause remains to be seen. Mayor Rahm Emanuel of Chicago, however, has expressed interest in not waiting long to find out."

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    2. 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.

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    3. 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…

      “[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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  8. “On pension reform, Governor Rauner has publicly come out in support of Democratic Senate President John Cullerton's proposal. The problem with pension reform is that the Illinois Supreme Court has rejected prior proposals as unconstitutional. That raises the bar to ensure any pension reform agreement can get by the court. ‘We have bipartisan agreement on how to do it,’ said Illinois Gov. Bruce Rauner. ‘All of us believe our proposal is constitutional. It's fair. It doesn't take away anybody's accrued benefit.’”

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  9. If someone seeks to change the pension code in order to impair the rights of individuals or forces a choice between two negative alternatives, I still believe it is morally wrong and illegal.

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