Tuesday, January 10, 2017

Lawyer and Lobbyist Eric M. Madiar Believes Cullerton's Senate Bill Is Permissible/ Lawyers Gino L. DiVito and John M. Fitzgerald Disagree

According to Eric M. 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).

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

“…[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:


  1. From John Dillon’s Blog:

    “…In legally, overly-simplistic words, Madiar’s argument for Cullerton to Rauner is that as the employer, the state has the right to decide compensation. And compensation is never guaranteed. Just as a faculty or union may argue for an increase, so may a state (the employer of a public educator) define a raise or decide to withhold one. In other words, this is not consideration, it’s an employer’s negotiable prerogative…

    “Likewise, Madiar himself never really supported his own scheme either: ‘Our current pension disaster cannot be blamed on salary or pension cost increases. Between 1985 and 2014, pension funding liabilities grew by $97 billion. Benefit increase only counted for 8%, or $8 billion of that growth. Pay increases were actually less than actuaries had assumed they would be, and they actually helped bring down the unfunded liability by $1.3 billion. The state's failure to fund the system accounts for 49% or 47% of that growth. So simply put, the main reason we are in this mess is for insufficient pension contributions” (City Club of Chicago)…

    “‘We have a state fiscal system that is so poorly designed that it failed to generate sufficient revenue growth both to maintain service levels from one year to the next and to cover the state's actuarially required contributions…’” (Eric Madiar, Senate President Cullerton’s Advisor, Consultant and Designer of SB 17 to the City Club of Chicago, Sept. 2015).


  2. Kraus v. Board of Trustees, 72 Ill. App. 3d 833, 390 N.E.2d 1281 (1st Dist. 1979) (IL Appellate Court): A police officer went on disability due to an on-duty injury after 11 years of active service. When he entered the force, in 1956, an officer could retire after 20 combined years of active service and disability and could base retirement on the salary for his rank when he elected to retire. In 1973, before the officer met the 20-year requirement to retire, the legislature changed the Pension Code to give an officer a pension based on his salary at the time he went on disability. The police pension board thus based the officer’s retirement on his salary in 1967 rather than the salary for his rank in 1976 when he retired. The trial court reversed the police pension board. The Appellate Court agreed with the trial court and held that the amendment to the Pension Code (in 1973) could not apply to the officer because the Pension Clause “entitled [him] to receive the benefits under the relevant sections of the Pension Code as in effect at the time the constitutional provision became effective in 1971.”

    The court said pension rights became fixed when an employee entered the pension system or when the constitution became operative, whichever was later, but not at retirement. [Law existing at the time of “vesting” is incorporated into employee’s agreement… Pension benefits commence at the time employee contributions begin… 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.”]

    “[B]y joining a pension system, public employees obtain absolute ‘vested’ rights in the pension plan, including later benefit increases added during their service. These rights cannot be unilaterally changed by the legislature under any circumstances, but the rights may be modified via legitimate contract principles…” (Eric M. Madiar (2012). Public Pension Benefits under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants? ABA Journal of Labor & Employment Law, V. 27, no. 2, 179-194).

  3. Some people believe that a legitimate consideration means not diminishing an already existing constitutionally-guaranteed benefit. I am one of those people; however, my strongest beliefs have always been based upon moral perspectives reinforced by the most current legal analyses. Consider the most recent Illinois Supreme Court Cases:

    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 v. Weems, 2014 IL 115811).

    2015 MARY J. JONES et al., Appellees, v. MUNICIPAL EMPLOYEES’ ANNUITY & 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”)…” (Jones v. Municipal Employees' Annuity and Benefit Fund, Circuit Court). The Illinois Supreme Court affirmed the decision on March 24, 2016: (Jones v. Municipal Employees' Annuity & Benefit Fund, 2016 IL 119618).

  4. 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” (Heaton v. Quinn, 2015 IL 118585).

    In Illinois, the 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. “…[A] contract right becomes vested when the employee has fulfilled all of the necessary qualifications and obligations for enjoyment of the right, [as in the case of retirees]. Lawrence, 152 Ill. App. 3d at 197-98 (quoting Kulins, 121 Ill. App. 3d at 525-27); see also Navlet v. Port of Seattle, 194 P.3d 221, 237 (Wash. 2008) (en banc)… Where all of the requisite specifications for the present or future enjoyment of a right have been achieved, the right is considered to be vested…” Black’s Law Dictionary 1699 (9th ed. 2009). (qtd. in Matthews v. CTA, 2016 IL 117638).