Antedated Court Cases: Challenging the Pension Protection Clause

Article XIII, Section 5 of the Illinois Constitution states:  “Membership in any pension or retirement system of the state or any local government, or any agency or instrumentality of either, shall be an enforceable, contractual relationship, the benefits of which shall not be diminished or impaired.” (Helen Kinney and Henry Green were the delegates who jointly “sponsored the pension clause proposal as an amendment to the proposed Legislative Article” at the 1970 Illinois Constitution).

To let the courts decide is a reckless disregard of a senator’s and representative’s duty to uphold the State of Illinois and the United States Constitution. Besides the datum that a State cannot pass any law “impairing the obligations of contracts” (Article I, Section 10, the Constitution of the United States of America), Appellate and Supreme Court cases are costly lawsuits at the taxpayers’ expense. 

1974       Peters v. City of Springfield… firemen filed suit

Pension rights are “earned.” There is no distinction between “earned” and “unearned” pension benefits… “The Clause protects pension benefit rights as an enforceable contractual relationship that is subject to modification through contract principles.”

1975       People ex. Rel. Illinois Federation of Teachers v. Lindberg

              ...Can’t force the Illinois General Assembly to fund the pension systems at a specific percentage.

                (See McNamee ’96 and Sklodowski ‘98).

1979       Kraus v. Board of Trustees… Police Pension Fund, Niles

              The law existing at the time of “vesting” is incorporated into an 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 through contract principles.”

1982       Village of Sherman v. Village of Williamsville

                Record of proceeding of Constitutional Convention (21 July 1970)…

                Rights are fixed when an employee embarks upon employment.

1985       Felt v. Board of Trustees (Judges)

…Can’t diminish terms of contract with pension system… Pensions are based upon salary of last day of service or last year. “The Clause protects pension benefit rights as an enforceable contractual relationship that is subject to modification through contract principles.”

1985       Taft v. Board of Trustees, Police, Village of Winthrop Harbor

               Employees have contractual rights regarding increases in their pension benefits.

1987       Carr v. Board of Trustees… Police (Peoria)

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1987       Buddell v. Board of Trustees State University Retirement System (SURS)

                …Can’t diminish terms of contract with pension system…

                Pension Code allows employees to purchase service credit for time in the military.

“The Clause protects pension benefit rights as an enforceable contractual

relationship that is subject to modification through contract principles.”

1988       DiFalco v. Board of Trustees… Fireman’s Pension of Wood Dale

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1991       Schroeder v. Morton Grove… Police

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1992       Hannigan v. Huffmeister

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1993       Barber v. Board of Trustees of Village of Barrington

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1996       McNamee v. State

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

Asks question: whether “the Pension Clause mandates that the pension system be funded at a particular funding percentage or according to a funding schedule.”  The Pension Clause “creates an enforceable contractual relationship that protects only the right to receive benefits… a cause of action would exist if legislation diminished a person’s right to receive benefits or placed the pension system on the verge of default or imminent bankruptcy.”

1998       People ex. Rel. Sklodowski v. State

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.  (See Lindberg ‘75/McNamee ‘96) “Clause does not create a contractual basis for participants to expect a particular level of funding [unfortunately].”

1999       Doyle v. Holy Cross Hospital

Continued employment does not constitute supporting unilateral modification of an existing employment contract.

2001       Miller v. Retirement Board of Policemen (Chicago)

                …Can’t diminish terms of contract with pension system…

“The Clause protects pension benefit rights as an enforceable contractual

relationship that is subject to modification through contract principles.”

2007       Ross v. May Co.

Continued employment does not constitute supporting unilateral modification of an existing employment contract. 


[Added May 8, 2015]: Doris Heaton, et al. v. Pat Quinn, in his capacity as Governor of the State of Illinois, et al.
“…The judgment of the circuit court declaring Public Act 98-599 to be unconstitutional and permanently enjoining its enforcement is affirmed: 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).
 

Notes taken from the 76-page document entitled: IS WELCHING ON PUBLIC PENSION PROMISES AN OPTION FOR ILLINOIS? AN ANALYSIS OF ARTICLE XIII, SECTION 5 OF THE ILLINOIS CONSTITUTION by Eric M. Madiar

http://www.illinoissenatedemocrats.com/index.php/component/content/article/108-public-information-brochures/1517-pension-debate

Unfunded Liabilities & the TRS Pension

No matter what the Civic Committee of the Commercial Club of Chicago (Illinois Is Broke), the Civic Federation, National Taxpayers United of Illinois, and the legislators who are empowered by these groups say, as long as there are continued long-term, short-term, and diversified investments from TRS; a growing teacher workforce; vital membership contributions;  a guaranteed defined-benefit plan for all of its members; and the statutory State contributions to the pension plan, the pension fund’s assets do not have to match its liabilities. These obligations are long-term and will never necessitate a high liquidity of assets at any one time.

The TRS pension does not use a discount rate that is risk-free (such as Treasury bonds).  Its expected returns for its pension fund assets have averaged 9.83% since 1982 by investing in U.S. and international equities, bonds, fixed income, and real estate and by using a strategy that rebalances the investment portfolios according to the pension’s funding ratios and volatility of the market.  To use a discount rate that is far below the expected return on fund assets for actuarial valuations gives a distorted view of TRS’ finances.

Legal, Social, and Economic Justice

HOUSE RESOLUTION 0468                                       
 LRB096 13063 AJO 27628 r

“WHEREAS, During these turbulent and difficult economic times, it is more important than ever that the concept of social justice, the view that every member of our society is deserving of equal economic, political, and social rights and opportunities, be given the highest priority by elected State officials; and

WHEREAS, Assuring social justice is a key element of the

Illinois Constitution as shown by the Preamble which states, in part, that "We, the People of the State of Illinois ... in order to provide for the health, safety and welfare of the people; maintain a representative and orderly government; eliminate poverty and inequality; assure legal, social and economic justice; provide opportunity for the fullest development of the individual; ... - do ordain and establish this Constitution for the State of Illinois…

WHEREAS, Recognizing that when justice is achieved in every aspect of society, rather than merely in the administration of law, individuals and groups will be afforded fair treatment and an impartial share of the benefits of society…

RESOLVED, BY THE HOUSE OF REPRESENTATIVES OF THE NINETY-SIXTH GENERAL ASSEMBLY OF THE STATE OF ILLINOIS, that the House, as a body, will endeavor to give a high priority to social justice and allow that important principle to direct our choices in matters both large and small and guide our decisions in matters temporary or permanent; and be it further

RESOLVED, That suitable copies of this resolution be delivered to each member of the House so that it may serve as a tangible reminder of the commitment each member has to this noble priority.”

“Legal, Social, and Economic Justice”

Article XIII, Section 5 of the Constitution of the State of Illinois: “Membership in any pension or retirement system of the state or any local government, or any agency or instrumentality of either, shall be an enforceable, contractual relationship, the benefits of which shall not be diminished or impaired”

“The Pension Clause serves as a bar against any unilateral legislative or governmental action to reduce or eliminate the pension benefit rights in place when an employee [becomes] a member of the pension system” (Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate, 21, “Is Welching On Public Pension Promises An Option For Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution.” The Great Pension Debate: A detailed analysis of the Illinois Constitution’s pension clause.  04 March 2011).  

The conclusion of the Illinois Appellate court case, Kraus v. Board of Trustees of the Police Pension Fund of the Village of Niles, 1979: pension benefits begin at the time an employee begins his or her contributions to the pension; pension benefit rights are contractual, and the General Assembly cannot modify those rights and benefits (28-32).

The conclusion of the Illinois Supreme Court case, Felt v. Board of Trustees of the Judges Retirement System, 1985: “the Clause safeguards the pension benefit rights contained in the Pension Code when a public employee begins contributing to the pension system whether or not the employee is eligible to retire” (36).

SECTION 16, EX POST FACTO LAWS AND IMPAIRING CONTRACTS

No ex post facto law, or law impairing the obligation of contracts or making an irrevocable grant of special privileges or immunities, shall be passed (Article I, The Constitution of the State of Illinois).

SECTION 10 (Article I, The Constitution of the United States of America)
No State shall… pass any Law impairing the Obligation of Contracts…

The public pensions' funding gap: three questions/ three solutions

I read an interesting article recently by Jack Rasmus, entitled, “The Truth Behind the Public Pensions’ Funding Gap.”  Rasmus is also the author of Epic Recession: Prelude to Global Depression.  He claims that the pension funding gap is the result of several causes that include the recession and resulting unemployment; escalating healthcare costs; pension “contribution holidays” since the mid-1990s [In Illinois, "contribution holidays" have been going on for decades]; “the employment of fraudulent actuarial assumptions about rates of returns” [In Illinois, “the employment of fraudulent actuarial assumptions about rates of returns” have been going on for decades]; an anticipation of hiring more public employees that did not happen; the Pension Protection Act which “allowed pension funds to make loans to hedge funds and private equity firms,” which also allowed speculation in subprime mortgages, foreign exchange, financial derivatives, and  interest rate swapping.  In summary, banks, pension-funds’ managers, pension-payment holidays, and legislators [especially in Illinois] who allowed it to happen have caused the financial catastrophe.

Given this marauding and predatory state of affairs, Rasmus’ asks three questions: “Why not make those who created the pension funding gap pay—the hedge funds, banks, insurance companies, other financial institutions that were responsible for the massive investment losses, the pension fund managers who negligently risked workers’ pensions and the [lying and thieving] politicians who created the problems” pay for a state's unfunded liability?

Moreover, why not make “the Federal Reserve provide direct loans to the pension funds at the same cost of 0.25% that the Federal Reserve has provided loans to other financial institutions these past two years? After all, pension funds are also financial institutions, and Federal Reserve loans won’t add a cent to the federal or state budget deficits as an added plus.”

Finally, Rasmus states this supposition: “[The] Federal Reserve provided $9 trillion to banks during the recent crisis [CEO bonuses were also paid out of OUR money], of which $1 trillion was loaned to foreign non-US banks!  If the Federal Reserve can loan $1 trillion to foreign bankers and their wealthy bondholders and investors, why can’t it do so to protect the retirement of millions of U.S. workers in the public sector—who are the victims, not the criminals responsible for the public pensions crisis?”

TRS: Tier One + Two Tier + Tier Three = Three "Tears"

The Tier-One Pension Plan:

The TRS: Investments – 50%, Membership Contributions – 25%, State – 25% (These are approximations).

·         TRS Diversified Investments:  U.S. & international equities, bonds, fixed income, real estate…  (Since 1982, an average return of 9.8%)

·         Membership contributions:  9.4% of salary (teachers have contributed 100% since 1940; approximately $900 million contributed this year to the pension system);

·         School District contributions:  .58%

·         State Contributions:  Illinois has not fully funded the pension system for decades.

This year the State contributed $2.2 billion; however, approximately 2/3 of that total was for debt service (past interest due).  During the last fiscal year, TRS paid out $3.9 billion in benefits but collected $6.8 billion in revenue.

Total liabilities: approximately $84 billion; unfunded liabilities: approximately $40 billion

The Tier-Two Pension Plan:

SB 1946 passed on March 24, 2010 in approximately 10 hours (There was no public policy for this legislature); it was signed into law on April 14, 2010. It began January 2011. 

Note: Tier II members are subsidizing both Tier I and Tier II benefits. In the future, when Tier II members are the 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 and school districts will be responsible for making up the difference. Furthermore, these teachers will receive a TRS pension that will be less than Social Security; thus, it will be in violation of the Safe Harbor provision of the Social Security Administration, which states that anyone who does not receive Social Security must receive a benefit equal to a Social Security benefit.

Special note: teachers do not receive Social Security; the State of Illinois saves billions of dollars by not having to pay into Social Security. 

SB 1946:

--Minimum eligibility to draw a retirement benefit: age 67 with 10 years of service (age 67 will probably be reduced to 62 (pending HB 3075);

--Salary cap is at $106,800, which will be increased at a rate of less than 3% or ½ of the annual increase in the CPI (Consumer Price Index).  It is not compounded;

--Survivor benefit increased to 66.7%.

Discriminatory Federal Laws:

GPO (Government Pension Offset)
--Reduces spousal survivor benefit.

WEP (Windfall Elimination Provision)
--Reduces any earned Social Security in other jobs because of the state pension benefit.

Current Legislative Proposals:

SB 105/ HB 149 did not get out of committee, though this legislation will most likely emerge in another bill (SB 512):

--Keep the current TRS benefit package, either Tier I or Tier II, but in return the annual payroll contribution by teachers in both tiers would increase, originally proposed at 28% of salary (probably will be 12-14% according to Representative and sponsor Tom Cross);

--Tier I teachers could elect to convert their benefit package to the Tier II structure: a teacher would not be eligible for full retirement benefits until age 67 (or 62?);

--It is estimated that Tier II benefits will be 30 percent less than benefits for a Tier I teacher if final average salary and creditable service time for both are equal.  New Teachers in the Tier II system will not make as much as Social Security recipients.  Their income will be worth 4 – 4.5% and not the 9.4% that they will have contributed during their career (IEA).  Teachers should consider this fact before choosing a Tier II option, if it comes to pass.

Tier-Three Pension Plan:

--A 401(k)-style Defined-Contribution Savings Benefit plan:

--Teachers would pay 6% of their salaries under this plan. If school districts decide to participate in this option, they would match teacher contributions;

--A Defined-Contribution Plan is not a guaranteed pension plan;

--Benefits are based on investment earnings; there are no survivor or disability benefits; investment fees are paid by member.

Sample Letter:

Dear Senator/Representative:

Please vote against any pension reform that will “diminish or impair” our constitutional rights and benefits. It is morally and legally wrong. Moreover, the proposed changes for current teachers will weaken our pension system.  As you are aware, teachers have consistently paid 9.4% of their salary into the pension system, even though the State of Illinois has failed to fully fund the State’s pensions and honor its financial obligations for decades.  Our pension is all that we have for retirement. Thank you,

Sincerely,

Name

Street Address

City, IL Zip

Phone #

A Response to a Legislator's Echoing Pension Reform

Pension reform could alleviate cuts by Darlene Senger

"As we approach the end-of-session crunch, many tough decisions will be necessary to balance the state’s budget and bring spending under control; regardless of how much effort is put into prioritizing our spending, many cuts will still be necessary.

"However, please consider this: The majority of these cuts would not be necessary had years of poor decisions not been made in regard to our state’s pension system. We currently have $85 billion in unfunded liabilities, and that number is increasing exponentially. So while revenue is indeed up this year, thanks in large part to a 67 percent tax increase passed against the strenuous objection of most Republicans, cuts will still be necessary to vital state services because our state’s pension payments and debt services are growing so quickly.

"This year alone, $4 billion of the state’s estimated $33 billion will be going to the pension system. It ranks third in expenditures, behind only health care and education.

"This number will only double over the next decade, putting us in a position where it is likely that upward of 40 percent of our state’s revenue will be heading to retirees by the year 2045. The system is insolvent.

"Without overhauling the state’s unsustainable pension system, less and less of our revenue will be going toward day to day functions. If we act now, more and more of our hard-earned tax dollars can go to education, the infrastructure that we depend on and the other vital services that our state provides."

Dear Representative Senger:

The teachers’ pension is sustainable.

The size of unfunded liabilities that you refer to in your recent letter in the Daily Herald “does not give a full view” of the State’s pension fund. Unfunded liabilities are amortized over 40 years in Illinois; using a “riskless rate” to calculate fund liabilities does not reflect the amount that the State and local governments need to deposit in their pension funds (Center on Budget and Policy Priorities).

Moreover, as markets and economy improve, so do the assets in the pension funds.  “Since June 30, 2009, a date in which many recent studies on the financial condition of State pension trusts are based, investment returns have rebounded sharply – nearly 25% higher since then” (National Association of State Retirement Administrators, NASRA).  

It is also important to note that “State and local government pensions are not paid from general operating revenues but, rather, from trusts to which retirees and their employers contributed” (NASRA).

Legislators who claim that the pension system is “unsustainable” most likely use outdated information, “particularly at the low-point of the market recovery [June 2009]” (NASRA).

If we look at the Teachers’ Retirement System (TRS), for instance, the numbers to focus on are the amounts TRS pays out in pensions and benefits in a year. During the last fiscal year, TRS paid out $3.9 billion in benefits, but collected $6.8 billion in revenue, more than enough to meet current obligations (Illinois Education Association, IEA).   Furthermore, the total value of TRS assets continues to improve. At the end of FY 2009, the TRS fund held $28.5 billion. At the end of FY 2010, the TRS fund held $31.3 billion. It currently holds $37.3 billion. That’s a 23.6 percent increase in less than two years (IEA).  While the media fret about the unfunded liability, the total amount is never due all at once.

What could be done about the State’s budget crisis:

You and other legislators need to "generate enough revenue growth to both maintain service levels from one year to the next and cover the state’s actuarially-required employer contribution to its five pension systems."  How can you and other legislators do this?

1.    Restructure the current debt to a lower interest rate.

2.    Expand the sales tax to include services.

3.    Tax corporations -- “state and local governments gave nearly $70 billion to corporations,” and most of these corporations are not creating jobs or putting money back into the States’ economy.

4.    Tax high-income people, including retirees who make more than $100,000.

5.    Create a progressive income tax in Illinois.

6.    Cut wasteful spending.

7.    Stop giving money to special-interest groups and tax breaks to those who supported your and other legislators’ election.

8.    Enact structural-spending reforms that do not "diminish or impair" the public employees’ constitutional rights to a pension (Article XIII, Section 5 of the Constitution of the State of Illinois).

9.    Do not attempt to pass a “law impairing the obligations of contracts” (Article I, Section 16, of the Constitution of the State of Illinois).

10.  Do not pass any law “impairing the obligations of contracts” (Article I, Section 10, of the Constitution of the United States of America).

11.  Hire an "impartial and independent" legislative analyst not paid for by the Civic Committee of the Commercial Club of Chicago.
12.  Bankruptcy is not an option, even though Senator Mark Kirk might think so.

Why should you and other legislators consider these suggestions:

To let the courts decide is a reckless disregard of your duty to uphold the State of Illinois and the United States Constitutions. There will be costly lawsuits at the taxpayers’ expense. Moreover, it’s reprehensible to set public and private employees in opposition by claiming that the funding of public pensions will take money away from education and other programs. It’s scheming to shift the burden of responsibility of the State to local taxpayers; it’s conspiratorial to allow Big Businesses to drive legislation in their favor.

If you believe changing the current teachers’ pension system is the answer to the problem that legislators have created, then all of you are ultimately going to destroy the pension system (Is this is your and other legislators’ unstated objective?).

What could be the effects if bills such as Senate Bill 105 proposed by Senator Chris Lauzen and HB 149 proposed by Representative Tom Cross are passed this May or in the future?  Presumably, many young teachers will not continue to work in Illinois and roll over their pensions when the opportunity arises.   Furthermore, the “best and brightest” college candidates will either not become teachers, or these young aspirants will find teaching positions in other states, where the education of children and their teachers are valued.  Thus, current teachers and retirees with a Tier-One pension plan will lose an essential financial resource needed for pension sustainability.

What other consequences are there for creating the worst teachers’ pension plan in the country? Students across Illinois will be deprived of receiving an excellent education from the best teachers available, and they will all become the unintended victims of this injustice and charade.

-Glen Brown

Illinois Is Broke: an Insidious Scheme

It is unjust to attempt to “diminish and impair” the current and retired teachers’ pension.  All teachers rely on one another for their pension’s sustainability, their financial future, and their dignity. All teachers’ compensation is earned, including “deferred” pension monies. This compensation is also protected by a “constitutional” pension clause.

It is ironic that public employees are blamed for the State’s budget deficit. Why? Last year, “state and local governments gave nearly $70 billion to corporations.  [These are] massive subsidies and welfare for these large corporations… even though corporate profits have increased 60 percent, and corporations have almost $2 trillion in cash… [Corporations] are not investing this money. They are not creating jobs. They are hoarding this money that they have pulled out of the economy” (David Cay Johnston, Pulitzer Prize-winning investigative journalist). 

The State’s underfunding of the pensions for several decades, interest payments for debts incurred, subsequent tax breaks for the wealthy, the decrease in tax revenues, corporate fraud and greed, and the prior stock-market crash have caused the State’s budget problems. 

Nevertheless, teachers and other public employees have become scapegoats because media and certain devious groups perpetrate lies such as “teachers and other public employees do not contribute to their pension funds or healthcare,” and “taxpayers pay [for nearly all of the] public pension benefits.” 

Teachers and other public employees are victims of falsehood because wealthy members of the Civic Committee of the Commercial Club of Chicago use “questionable statistics to imply that all public-sector retirees who receive large pension payouts are representative of all public-sector pensioners, and that is the cause of [the State’s financial mess]” (Government Finance Review).  

The Civic Committee's website, Illinois Is Broke, also “fails to acknowledge any contrary data,” such as the significant recovery in the equity market; it also fails to admit that “Two-Tier TRS benefits [and the proposed Defined-Contribution Savings Plans] will not provide enough retirement income for school districts to avoid the expense of paying into the Social Security System [which will be even more expensive for taxpayers]” (State Journal Register).  

Robbing teachers of their pensions is a way for corporate CEOs “to deflect attention from the theft of some $17 billion in wages, savings and earnings among American workers… from speculators on Wall Street who looted the U.S. Treasury…, [who] stymied any kind of regulation… and [who] avoided criminal charges, [and this is perhaps the most insidious scheme]” (Chris Hedges, from The Promotion of Liberty). 

-Glen Brown