BILL GIVING AG AUTHORITY TO CHALLENGE PENSIONS ADVANCES

The Illinois House approved House Amendment #3 to Senate Bill 2809.  The proposed bill would authorize the Attorney General to file suit pursuant to 40 ILCS 5/1-115 notwithstanding the Administrative Review Law or a contrary Pension Code provision, to enjoin the payment of benefits to person convicted of a service related felony.  The proposed bill appears poised for easy passage in the Illinois Senate.

The proposal is the legislature’s response to the Illinois Supreme Court’s holding in People ex rel. Madigan v. Burge.

PUBLIC ACT 98-599 FOUND UNCONSTITUTIONAL

On November 21, 2014 Sangamon County Circuit Court Judge John Belz entered an Order holding that the pension reform law (Public Act 98-599) is unconstitutional.  Citing Article XIII section 5 of the Illinois Constitution and the Illinois Supreme Court’s Opinion in Kanerva v. Weems, the court held, “The Illinois legislature could not have been more clear that any attempt to diminish or impair pension rights is unconstitutional.”  The court held that Public Act 98-599 diminished pension benefits because it (1) reduced cost-of-living increases, (2) mandated that certain pensioners would not receive cost-of-living increases in certain years, (3) imposed a pensionable salary cap, (4) raised the retirement age for certain employees, and (5) altered the effective rate of interest to calculate pensions under Articles 15 and 16.

The court held that the Act “unquestionably diminishes and impairs the benefits of membership in State retirement systems” and that the “protection against the diminishment and impairment of pension benefits is absolute and without exception.”

The court rejected the defendants’ argument that the Act is a valid exercise of the State’s police powers or reserved sovereign powers.  The court noted that Article XIII section 5 contained no such exception and that courts have consistently refused to find an implied State right to reduce pension benefits.

Notably the court held that the entire Act was inseverable and void in its entirety. Therefore, the court also struck down the Act’s funding mandate and the funding enforcement provisions.

The court concluded by holding, “In summary, the State of Illinois made a constitutionally protected promise to its employees concerning their pension benefits. Under established and uncontroverted Illinois law, the State of Illinois cannot break this promise.”

The court thereby entered a permanent injunction preventing the enforcement of the Act.

The State will appeal the decision to the Illinois Supreme Court.

JUSTUS v. STATE

On October 20, 2014 the Colorado Supreme Court issued its Opinion in Justus v. State. The Colorado legislature passed a law that reduced the automatic 3.5% cost of living increase (“COLA”) for state pensioners.  The state pensioners filed suit.  The trial court ruled that the pensioners did not have a contractual right to the automatic 3.5% COLA and entered summary judgment for the state.  The appellate court reversed.  The Colorado Supreme Court reversed and affirmed the trial court’s order.

The Colorado Supreme Court held that legislation providing for cost of living adjustments does not establish any contract between the retirement system and its pensioners entitling the pensioners to perpetual receipt of the specific COLA in place on the date that each pensioner became eligible for retirement.  The Supreme Court outlined on the contract clause balancing test to determine whether the State breached the pensioners contract rights.  The analysis requires three inquiries: (1) does a contractual relationship exist; (2) does the change in the law impair the contractual relationship; and, if so, (3) is the impairment substantial?  If the answer to the three questions is “yes”, then the Court must determine whether the impairment is “justified as reasonable and necessary to serve an important public purpose.”   Therefore, the contract clause is not absolute.

In this case, the Supreme Court held that the COLA statutes did not establish a contractual relationship.  The COLA laws did not create a “clear indication” of the legislature’s intent to create vested contractual rights for the pensioners.  As such, the pensioners could not satisfy the first part of the test and the pensioners’ claim failed.