Wednesday, November 2, 2016

A Klonsky/Brown Pension Discussion








Glen,

Like you, I recognize that the threat to Illinois' public employee pensions is an existential one. We always must be vigilant when it comes to our pensions and the threat of pension theft. The ruling of the Illinois Supreme Court confirmed the language of the 1970 Constitution, known as the pension protection clause that prohibited any reduction or impairment of our retirement benefits. For the current period, I think that current retirees are therefore protected. I also think the Court extended this protection to all current employees. The pension protection clause covers them from the time they were hired and entered into the pension system. Do you agree?

-Fred


I agree, Fred. Based upon several antedated court cases (that began with Kraus v. Board of Trustees of the Police Pension Fund of the Village of Niles, 1979), law existing at the time of “vesting” is incorporated into an employee’s agreement. Pension benefits commence at the time employee contributions begin. The Illinois General Assembly cannot modify benefits. “The Clause protects pension benefit rights as an enforceable contractual relationship that is subject to modification [only] through contract principles” (Eric M. Madiar, Is Welching on Public Pension Promises an Option for Illinois, 2011).

The Pension Protection Clause has safeguarded current employees’ pensions consistently for 36 years since Kraus. Most recently, The Illinois Supreme Court had ruled that Public Act 98-599 violated the Pension Protection Clause, the Contracts Clause, and the Takings Clause of the Illinois Constitution on May 8, 2015. 

Moreover, consider what Gino DiVito and John Fitzgerald (Tabet, DiVito & Rothstein, LLC) stated in a Memorandum to Gov. Quinn on April 12, 2010: 

“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)…
 
“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…” (Memorandum by Gino L. DiVito and John Fitzgerald to the then Governor of Illinois, Pat Quinn, May 5, 2010). 

Nevertheless, there will be another attempt, not long after the election, for a “modification of contract principles.” Any attempt at modifications of the Pension Protection Clause by the Illinois General Assembly should be seen for what it is: another challenge by the current General Assembly and governor to steal money from the public pension systems so they can avoid 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. 

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

-Glen


Glen,

Once again you have laid out the legal case as well as any legal scholar. I tend to look at things politically. The ability of the state legislature to mount another attack on public employee pensions involves political calculations. You constantly remind us that the promise of a pension to the state’s workers is a moral and legal obligation of the state. However, to most politicians in our legislature pension obligations are neither a moral nor a legal problem for them. They only consider political cost and benefit.

First, I would say that there is the Quinn factor. The election of Bruce Rauner as Governor can be directly tied to the decision of former Governor Pat Quinn to make so-called pension reform his signature issue. It cost him his political career. Even the most venal of legislators can figure that out. 

Secondly, pension theft has become, with the election of Bruce Rauner, a more partisan issue. Some pension-theft Democrats have become born-again Progressives.

I am willing to welcome that. I believe that for the immediate future, current retirees can feel pretty secure that their pensions will be paid. I believe that current employees can also feel secure, if slightly less so. As you point out above, the argument for consideration and "a modification of contract principles” will be pursued by the Governor and perhaps Senate President John Cullerton.

We can only hope - no demand - that the two state teacher unions and other public employee unions stand firm and resist these attempts. If the past actions of the current union leadership is a predictor of future performance I can understand anyone’s skepticism. 

Rank and file union teachers must organize to prevent any deals that the leadership makes that claims an exchange current benefits for something else. As you correctly point out, no exchange of current benefits for consideration can possibly be in the interest of current teachers.

My biggest concern is for Tier 2 and future teachers. Who even pretends to represent their interests?

-Fred


I agree, Fred: “Rank and file union teachers must organize to prevent any deals that the leadership makes that claims an exchange of current benefits for something else.”

Although retirees are not part of the collective bargaining process, active employees are. The Illinois Supreme Court suggested that a consideration supported by collective bargaining for current employees is a possibility. However, one would think that a legitimate consideration means not taking away an already existing constitutionally-guaranteed benefit! 

The Illinois General Assembly will probably be arguing for consideration based upon Eric Madiar’s recent research. Here is a synopsis:

According to Madiar, “…Aside from the Senate President’s contractual proposal, the Illinois Supreme Court’s Chicago Pension Reform decision strongly indicates that pension benefits may also be modified by public sector labor unions acting as authorized agents within the collective bargaining process for their members under Illinois law.

“The court found that the legislation at issue violated the Pension Clause because the labor unions ‘were not acting as authorized agents within the collective bargaining process.’ To support this proposition, the court referenced two New York court decisions cited by the City of Chicago.

“In these decisions, the New York Court of Appeals held that duly designated labor unions could bind their members to the terms of collective bargaining agreements that waived the constitutional protections the members enjoyed under the New York Constitution’s pension clause. As another New York court succinctly explained, the purpose of its pension clause ‘was merely to insure that pension and retirement benefits would not be subject to the whim of the Legislature or the caprice of the employer.’ The court continued that:

“‘Whereas unilateral action by the employer or the Legislature may not impair such benefits, the parties are not prevented from negotiating a reduction. The Union is free to waive any right of its members to certain benefits in exchange for other consideration and the parties are free to negotiate less beneficial terms for new employees hired after the agreement expires. As long as the contractual benefits are not unilaterally diminished, there is no constitutional violation.’

“In short, New York court decisions indicate that duly authorized unions may collectively bargain over and waive the protected pension benefit rights of their members in exchange for consideration.

“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.

“Shortly after the Illinois Supreme Court issued its decision, Mayor Emanuel stated that he intends to restart negotiations with the City’s labor unions to forge a pension reform agreement through collective bargaining given ‘the opening’ provided by the decision.

“If a new accord with labor unions cannot be reached, then Mayor’s office may pursue ‘work ­rule changes, lower break-­in pay for new employees, another round of health care reforms, and other cost­-saving concessions and dedicate those savings to pensions.’

“It is important to note that as this Article went to press the Illinois Supreme Court issued its decision in Matthews v. Chicago Transit Authority. In that decision, the court further confirmed that ordinary contract principles may be used to modify the existing pension benefits of current employees, and that public sector labor unions have the authority to modify the existing pension benefits of its active members through the collective bargaining process.

“The Matthews decision appears to provide a clear path for the use of the collective bargaining process as a contractual means to modify the pension benefits of current public employees who belong to unions…” (Eric M. Madiar, Illinois Public Pensions: Where To From Here?, 33 Ill. Pub. Employee Labor Report (Winter/Spring 2016). This will be another argument for the Illinois Supreme Court to consider.


And to answer your question: “Who even pretends to represent [Tier II and future teachers’] interests?” No one is currently talking about the injustice.

According to Bob Lyons, TRS Trustee, “the financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.

“In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.”

Moreover, as stated by Dick Ingram, TRS Executive Director: “Tier II is the pension benefit structure created by the General Assembly in 2010 for anyone who had not contributed to TRS or another Illinois public pension system before January 1, 2011. Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions mean reduced long term costs for the state.

“If Tier II is left alone, it will accomplish its mission. The $61.6 billon TRS unfunded liability will shrink over several decades and eventually be eliminated because the state will pay less to the ever-growing number of Tier II members. In fact, at some point in the future, we estimate that Tier II members actually will help create a surplus of funds for TRS that effectively could eliminate the need for any state government contribution to the System.

“But the core of Tier II – the reduced benefits structure – is a problem the Teacher Recruiting and Retention Task Force will review. The benefit structure is unfair to all Tier II members. Right now, a Tier I member’s pension costs roughly 20 percent of an active member’s salary. Because of the benefit reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an active member’s salary. However, by law, active Tier II members of TRS, like [Ingram], pay the same 9.4 percent salary contribution to the System that active Tier I members pay.

“What all this means is that Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members” (Topics and Report, Teachers Retirement System of the State of Illinois, winter 2015).

-Glen 



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