On May 8, 2015 the Illinois Supreme Court issued its Opinion in In Re Pension Reform Litigation.
Public Act 98-599 (SB-1) reduced pension benefits for members of the State Retirement Systems (Articles 2, 14, 15, and 16) hired before January 1, 2011. The law (1) raised the retirement age for members under age 46; (2) capped pensionable salary; (3) abolished the fixed 3% COLA; (4) eliminated COLAs in particular years; and (5) altered how the base annuity is calculated for the money purchase formula. The plaintiffs sued and argued that the law violated article XIII section 5 of the Illinois Constitution (pension protection clause), article I section 16 (the contract clause), article I section 17 (the takings clause), and article I section 2 (the equal protection clause – because the judges in Article 17 were not included). The trial court entered judgment in favor of the plaintiffs and found the law unconstitutional. The State filed a petition for leave to appeal and argued that it had the authority to reduce pension benefits pursuant to its reserved sovereign powers (police powers). The Illinois Supreme Court rejected the State’s argument and affirmed the trial court’s decision that the law is unconstitutional.
The Supreme Court framed three issues: (1) Does PA 98-599 violate the pension protection clause? (2) If so, is the reduction of pension benefits a valid exercise of the State’s police power? (3) If not, are the invalid provisions severable from other provisions in PA 98-599 (ie., does the funding mandate survive?).
The Supreme Court held that the issue of whether PA 98-599 violated the pension protection clause was “…easily resolved.” The law did violate the pension protection clause. The Supreme Court held that the protections afforded by article XIII, section 5 attach once an individual first embarks on employment and not when the individual retires. Subsequent changes to the Pension Code that reduce benefits cannot be applied to an individual after the individual is hired. The Supreme Court held that retirement benefits are unquestionably a benefit of a contractually enforceable relationship resulting from membership in a pension fund. Therefore, any reductions or changes that diminished benefits violated article 13, section 5. The Supreme Court noted that the State essentially conceded that the law diminished pension benefits.
The Supreme Court held that the State’s argument that it could invoke its police power to reduce pensions because the State’s finances were “dire” also failed. The Supreme Court held that “…departure from the law is impermissible unless justification for that departure is found within the law itself. Exigent circumstances are not enough. Neither the legislature nor any executive or judicial officer may disregard the provisions of the constitution even in case of a great emergency.”
The Supreme Court also rejected the State’s argument that it had the authority to modify or invalidate contracts when necessary to secure the State’s fiscal health and its citizens’ general welfare. The Supreme Court noted that increased judicial scrutiny is required when the State wants to invalidate a contract to which it is a party. Additionally, the Supreme Court held that impairment was not necessary to advance an important public purpose because the State created the financial problem by not properly funding pensions. “The General Assembly may find itself in crisis, but it is a crisis which other public pension funds managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible.” Additionally, the Supreme Court rejected the State’s argument that it could not select less drastic means of addressing the pension funding crisis. The Supreme Court instead described the law as an “expedient to break a political stalemate.” The Supreme Court also noted that article XIII, section 5 does not contain “reservation of authority” language that allows the State to utilize its police powers to diminish or impair benefits. However, such language is found in other State constitutional provisions.
The Supreme Court held that “accepting the State’s position that reducing retirement benefits is justified by economic circumstances would require that we allow the legislature to do the very thing the pension protection clause was designed to prevent it from doing. Article XIII, section 5 would be rendered a nullity.” Ultimately, the Supreme Court held that the sovereign and supreme power resides in the people. The people approved the constitutional provision and the General Assembly does not possess sovereign power, let alone the sovereign power to exceed the constraints imposed by the constitution. The Supreme Court held that if it accepted the State’s arguments, the State could create the very emergency conditions used to justify its suspension of the rights conferred and protected by the constitution.
Finally, the Supreme Court held that none of the provisions of the law were severable and that the entire law must be held unconstitutional. Therefore, the funding mandate also failed.