Looking at the Pension Decision

The Illinois Supreme Court ruled invalid the law that would cut public pension benefits.

The vote was 7-0.

Justice Lloyd A. Karmeier wrote the ruling.

The decision lays out the background of the case, including in Paragraph 11,

For as long as there have been public pension systems in Illinois, there has been tension between the government’s responsibility for funding those systems, on the one hand, and the costs of supporting governmental programs and providing governmental services, on the other.

In the resulting political give and take, public pensions have chronically suffered.

The Court cites a 1917 report from the [Legislative] Pension Laws Commission.

Negative references to the adequacy of funding continues to the year before the 1970 State Constitution, including one which declared, “actuarial insolvency” existed in every fund.

In a foot note, the Court compares the Cost-of-Lilving increases with the 3% annual hike in state pension funds:

By way of comparison, data published by the Social Security Administration show that Social Security increases, which are tied to the cost of living, averaged 3.98%, nearly a percentage point more than under the Illinois formula, between 1975 and 2014. http://www.ssa.gov/ OACT/COLA/colaseries.html.

The 1970 Constitutional Convention was held at the Old State Capitol in Springfield.

The 1970 Constitutional Convention was held at the Old State Capitol in Springfield.

Laying the groundwork for the Constitutional provision in question Constitutional Convention Delegate Paul M. Green said [see Paragraph 13],

“[i]n the past twenty-two years the unfunded accrued liabilities of these pension plans in Illinois have increased from about $359,000,000 to almost $2,500,000,000, and the unfunded accrued liabilities are real and are not theoretical obligations based upon service already rendered.”

Delegate Louis F. Bottino added (Paragraph 14],

“participants in these pension systems have been leery for years of the fact that the—this matter of the amount the state has appropriated [for pensions] has been made a political football, in a sense. In other words, in order to balance budgets, you see, the party in power would just use the amount of the state contribution to help balance budgets, and this had gotten to the point where many of the so called pensioners under this system were very concerned…”

Paragraph 15 explains how the delegates solved the problem:

The solution proposed by the drafters and ultimately approved by the people of Illinois was to protect the benefits of membership in public pension systems not by dictating specific funding levels, but by safeguarding the benefits themselves.

As Paragraph 16 explains,

The purpose of the clause and its dual features have never been in dispute…

the clause “served to eliminate any uncertainty as to whether state and local governments were obligated to pay pension benefits to the employees,” and its “plain language” not only “makes participation in a public pension plan an enforceable contractual relationship,” but also “demands that the ‘benefits’ of that relationship ‘shall not be diminished or impaired.’”

The “politically sensitive area” of how the benefits would be financed was a matter left to the other branches of government to work out.

What happened after the people approved the 1970 State Constitution is described in Paragraph 17:

Despite Delegate Green’s hope that prohibiting the State from diminishing retirement benefits would induce the General Assembly to meet its funding obligations…that did not occur.

Dawn Clark Netsch

Dawn Clark Netsch

In 1993, Paragraph 18 lays out, State Comptroller Dawn Clark Netsch wrote,

Underappropriated pension contributions are like unpaid credit card bills.

The liability does not go away just because you choose not to pay the bill when it is due.

You still owe the unpaid balance, plus interest.

In 1995 a bill was passed to increase pension benefit for state employees along with a plan to pay for it by 2045.

As a Spokesman of the Appropriations Committee handling highways, among other agencies, I was summoned to a meeting in Governor Jim Edgar’s office right before the end of the session.

After the explanation of the bill, I asked why we weren’t doing what Missouri had just passed.

In Missouri, the defined benefit pension program had just been cut in half with the other half being a new defined contribution plan (like a 401(k)).

I was told it was too late to change the plan.

Paragraph 19 tells of the U.S. Securities and Exchange Commission criticizing Illinois pension system:

““the Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding.

“The resulting underfunding of the pension systems (‘Structural Underfunding”) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.”

The Court continues talking about the SEC’s criticism of the Illinois pension system in Paragraph 20:

That the funding plan would operate in this way did not catch the State off guard.

In entering a cease-and-desist order against the State in connection with misrepresentations made by the State with respect to bonds sold to help cover pension expenses, the SEC noted that the State understood the adverse implications of its strategy for the State-funded pension systems and for the financial health of the State.

According to the SEC, the amount of the increase in the State’s unfunded liability over the period between 1996 and 2010 was $57 billion.

The SEC order found that “[t]he State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.”

The opinion, in Paragraph 21, points out that the unfunded liability in 1970, when the Con-Con delegates were meeting was 41.8%. Last June it was 41.1%.

Noted is the funding for the Illinois Municipal Retirement Fund (IMRF) is 96.7%.

The difference is that in the late 1960’s, when I was McHenry County Treasurer, IMRF sent out a letter, pursuant to a new state law, I assume, telling local governments that over a 40-year period contributions would have to be made to IMRF sufficient to fully fund the retirement plan.

The difference between IMRF and the state plans was that property taxes were authorized to be raised which were high enough to pay for the plan.

Local governments did not have the option of skipping payments, as the Illinois General Assembly did.

Wisconsin's welcome sign north of Richmond.

Wisconsin’s welcome sign north of Richmond.

In foot note 6, the Court notes the funding percentages of some surrounding states;

  • Wisconsin – 105.3%
  • Indiana – 87.9%
  • Iowa – 82.7%
  • Missouri – 73.3%

As financial conditions worsened [and there was no restraint in spending after Governor George Ryan left office in January, 2003], the pension reform bill was passed [Public Act 98-599 or Senate Bill 1].

The bill is then detailed.

As Paragraph 27 points out,

The centerpiece of Public Act 98-599, however, is a comprehensive set of provisions designed to reduce annuity benefits for members of GRS, SERS, SURS and TRS…

Some of the Senate debate is included in the opinion in Paragraph 30:

SENATOR [TOI] HUTCHINSON: So, then, is it fair to say that we are sacrificing a substantial amount of people’s pension benefits to protect the State’s finances? ***

SENATOR [KWAMI] RAOUL: Yeah, I—you know, that’s a harsh characterization, but—but I—I suppose yes.

The history of the suit comes next.

Paragraph 37 lays out the case:

1. through the State’s police power, the General Assembly possesses inherent authority to override and modify obligations imposed on it by the Illinois Constitution when, in its judgment, such action is reasonable and necessary to advance an important public purpose;

2. because of the “dramatic squeeze on the State’s finances” caused by the Great Recession, the strain on the State’s revenues which would result from having to meet current pension obligations, the poor condition of the State’s economy, and the continued deterioration of the State’s credit rating, notwithstanding the State’s attempts to employ other remedial measures, action was needed in the interest of the public good; and

3. the reduction in retirement annuity benefits which would result from implementation of Public Act 98-599 to these fiscal challenges is fair and reasonable under the circumstances.

The Sangamon County Circuit Court ruled the law unconstitutional.

With Paragraph 43, the analysis begins.

The court says there are three questions:

1. does Public Act 98-599’s reduction of retirement annuity benefits owed to members of the GRS, SERS, SURS and TRS retirement systems violate the pension protection clause set forth in article XIII, section 5, of the Illinois Constitution of 1970 (Ill. Const. 1970, art. XIII, § 5)

2. if so, can the law’s reduction of those benefits nevertheless be upheld as a proper exercise of the State’s police power; and

3. if not, are the invalid provisions of Public Act 98-599 severable from the remainder of the statute?

These are all questions of law.

Our review is therefore de novo.

Illinois Supreme Court Building

Illinois Supreme Court Building

Paragraph 45 states the Court’s position on question number 1:

The first issue, whether Public Act 98-599’s reduction of retirement annuity benefits violates this State’s pension protection clause, is easily resolved. The pension protection clause clearly states: “[m]embership in any pension or retirement system of the State *** shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” (Emphasis added.)

The Court quoted its decision in the health insurance reduction of benefits case:

 “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.”

Paragraph 46 notes:

…members of pension plans subject to its provisions have a legally enforceable right to receive the benefits they have been promised…

The protections afforded to such benefits by article XIII, section 5 attach once an individual first embarks upon employment in a position covered by a public retirement system, not when the employee ultimately retires.

Foot note 12 explains,

Additional benefits may always be added, of course…

the additional benefits cannot be unilaterally diminished or eliminated.

Paragraph 47 says,

If allowed to take effect, Public Act 98-599, would clearly result in a diminishment of the retirement annuities [of the retirees]…

In enacting the provisions, the General Assembly overstepped the scope of its legislative power. This court is therefore obligated to declare those provisions invalid.

The Court then references a similar case in Arizona.

Moving onto the second question, whether the state’s reserved sovereign powers,” that is, police powers can override the pension protection clause in the State Constitution.

The answer is “No.”

The circumstances presented by this case are not unique. [Paragraph 53]

A case from the Great Depression is referenced in which Chicago tried to cut the salaries of judges [Paragraphs 54, 55 and 56].

We held, however, that any 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.”

Citing a 70-year old case, the Court wrote in Paragraph 57:

“No principle of law permits us to suspend constitutional requirements for economic reasons,” we held, “no matter how compelling those reasons may seem.”

So it is with the case before us today.

The Attorney General cited the state’s police power as being able to override the Constitutional provision, but the Court concluded in Paragraph 60:

This argument was rejected by the circuit court.

We reject it as well.

In Paragraph 61, the ruling points out,

…legislation impairing contracts has actually been upheld against contract clause challenges only rarely.

Paragraph 62 notes,

While impairment of a contract may survive scrutiny under the contracts clause if reasonable and necessary to serve an important public purpose, “ ‘[t]he severity of the impairment measures the height of the hurdle the state legislation must clear.’ ”,,, Changes in the factors used to compute public pension benefits constitute an impairment which is “obviously substantial.”

Paragraph 63 quotes a 1977 U.S. Supreme Court decision:

“… Any financial obligation could be regarded in theory as a relinquishment of the State’s spending power, since money spent to repay debts is not available for other purposes. Similarly, the taxing power may have to be exercised if debts are to be repaid. Notwithstanding these effects, the Court has regularly held that the States are bound by their debt contracts.”

The question of whether the problem was foreseeable is address in Paragraph 65:

In assessing claims by the state that impairment of a contract is “necessary” to advance the public interest, courts consider whether the provisions which the state seeks to change had effects which were unforeseen and unintended by the legislature when initially adopted and whether the state could achieve its purposes through less drastic measures.

Continuing in Paragraph 66, the Illinois Supreme Court lays the blame on the General Assembly:

As this opinion has previously observed, our economy is and has always been subject to fluctuations, sometimes very extreme fluctuations.

Throughout the past century, market forces have periodically placed significant pressures on public pension systems. The repercussions of underfunding those pension systems in such an environment have been well-documented and were well-known…

The General Assembly had available to it all the information it needed to estimate the long-term costs of those provisions, including the costs of annual annuity increases, and the provisions have operated as designed. [FN 13]

The General Assembly understood that the provisions would be subject to the pension protection clause. In addition, the law was clear that the promised benefits would therefore have to be paid, and that the responsibility for providing the State’s share of the necessary funding fell squarely on the legislature’s shoulders.

Accordingly, the funding problems which developed were entirely foreseeable.

The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible.

= = = = =

FN 13. While the automatic [3%] annual increases have sometimes exceeded changes in the cost of living, these adjustments are not cost of living adjustments, and as indicated earlier in this disposition, the increases have actually lagged the average increases granted by the Social Security Administration, which are tied to the cost of living

= = = = =

Pointing to the possibility of a new amortization table or enacting higher taxes, Paragraph 67 says,

…no possible claim can be made that no less drastic measures were available when balancing pension obligations with other State expenditures became problematic…While it did pass a temporary income tax increase, it allowed the increased rate to lapse to a lower rate even as pension funding was being debated and litigated.

Paragraph 68 points this out about the bill’s sponsor, House Speaker Mike Madigan:

As noted earlier in this opinion, the chief sponsor of the legislation stated candidly that other alternatives were available. Public Act 98-599 was in no sense a last resort. Rather, it was an expedient to break a political stalemate.

[Remember that Madigan is largely responsible for putting a majority of the Supreme Court members on the bench.]

In Paragraph 69, a U.S. Supreme Court ruling is again referenced:

The United States Supreme Court has made clear that the United States Constitution “bar[s] Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole…”

Through Public Act 98-599, however, the General Assembly addressed the financial challenges facing our State by doing just that.

It made no effort to distribute the burdens evenly among Illinoisans.

It did not even attempt to distribute the burdens evenly among those with whom it has contractual relationships.

[The law,] if allowed to take effect, would actually negate substantive terms of their contractual relationships and reduce the benefits due and payable to them in a real and absolute way.

Under all of these circumstances, it is clear that the State could prove no set of circumstances that would satisfy the contracts clause.

Its resort to the contracts clause to support its police powers argument must therefore be rejected as a matter of law.

Piling on in Paragraph 70 and 71, the ruling says,

The State’s police powers defense is fatally flawed for other reasons as well.

{Examples of legislative limitations on Constuttional guarantees allowed under the 1970 State Constitution are cited–the right to bear arms, habeas corpus, religious freedom and a healthy environment.]

When it came time to address the rights conferred by membership in public pension systems, however, the drafters included no similar reservation of authority.

The Court’s concludes in Paragraph 72,

This decision was not inadvertent…

Under the plain language of article XIII, section 5, not only may the benefits not be impaired, they also may not be “diminished.”… notwithstanding the State’s claims of economic hardship.

Paragraph 73 points out that the Illinois Public Employees Pension Laws Commission [a legislative commission] criticized the Constitutional Convention language

on the grounds that it would curtail the powers of the legislature and limit its authority.

It recommended that additional introductory language be added specifying that the rights conferred thereunder were “[s]ubject to the authority of the General Assembly to enact reasonable modifications in employee rates of contribution, minimum service requirements and the provisions pertaining to the fiscal soundness of the retirement systems.”

After reviewing some more rejected advise to make the clause more flexible, the Illinois Supreme Court wrote in Paragraph 75,

Given the history of article XIII, section 5, and the language that was ultimately adopted, we therefore have no possible basis for interpreting the provision to mean that its protections can be overridden if the General Assembly deems it appropriate (see id.), as it sometimes can be under the contracts clause.

To confer such authority on the legislature through judicial fiat would require that we ignore the plain language of the constitution and rewrite it to include “restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve.”

Paragraph 76 rubs salt on the loss:

The State protests that this conclusion is tantamount to holding that the State has surrendered its sovereign authority, something it may not do.

The State is incorrect.

Article XIII, section 5, is in no sense a surrender of any attribute of sovereignty.

Rather, it is a statement by the people of Illinois, made in the clearest possible terms, that the authority of the legislature does not include the power to diminish or impair the benefits of membership in a public retirement system.

This is a restriction the people of Illinois had every right to impose.

The Court then gives a lesson in constitutional government.  This is in Paragraph 79:

It is through the Illinois Constitution that the people have decreed how their sovereign power may be exercised, by whom and under what conditions or restrictions.

Where rights have been conferred and limits on governmental action have been defined by the people through the constitution, the legislature cannot enact legislation in contravention of those rights and restrictions…

“From the decrees of the constitution there can be no appeal, for it emanates from the highest source of power, the sovereign people.

“Whatever condition is assigned to any portion of the people by the constitution, is irrevocably fixed ***.” [Quoting from an 1828 decision of the Illinois Supreme Court.]

Paragraph 80 continues the spanking:

In contrast to a constitutional mandate, a legislative act is but “the will of the legislature, in a derivative and subordinate capacity. The constitution is their commission, and they must act within the pale of their authority, and all their acts, contrary or in violation of the constitutional charter, are void.” (Emphasis added.)

In Paragraph 82, the refrain continues:

Article XIII, section 5, of the Illinois Constitution (Ill. Const. 1970, art. XIII, § 5) expressly provides that the benefits of membership in a public retirement system “shall not be diminished or impaired.”

Through this provision, the people of Illinois yielded none of their sovereign authority.

They simply withheld an important part of it from the legislature because they believed, based on historical experience, that when it came to retirement benefits for public employees, the legislature could not be trusted with more…

As…noted earlier in this opinion, delegates to the constitutional convention were “mindful that in the past, appropriations to cover state pension obligations had ‘been made a political football’ and ‘the party in power would just use the amount of the state contribution to help balance budgets,’ jeopardizing the resources available to meet the State’s obligations to participants in its pension systems in the future.”

… they wanted to make certain “that irrespective of the financial condition of a municipality or even the state government, that those persons who have worked for often substandard wages over a long period of time could at least expect to live in some kind of dignity during their golden years ***.”

Paragraph 83 goes to the record of Con-Con:

When Delegate Green presented article XIII, section 5, to the Convention, he summed it up as follows:

“‘What we are trying to do is to mandate the General Assembly to do what they have not done by statute. ***

“Now, I think they either ought to live up to the laws that they pass or that very quickly we ought to stop when we are hiring public employees by telling them that they have any retirement rights in the state of Illinois.

“If we are going to tell a policeman or a school teacher that, ‘Yes, if you will work for us for your thirty years or until whenever you reach retirement age, that you will receive this,’ if the state of Illinois and its municipalities are going to play insurance company and live up to these contributions, then they ought to live by their own rules. ***.”

Paragraph 84 says the delegates’ concern was “well-founded.”

Paragraph 85 goes even further:

…if police powers could be invoked to nullify express constitutional rights and protections whenever the legislature (or other branches of government) felt that economic or other exigencies warranted, it is not merely pension benefits of public employees that would be in jeopardy.

No rights or property would be safe from the State.

Today it is nullification of the right to retirement benefits.

Tomorrow it could be renunciation of the duty to repay State obligations. Eventually, investment capital could be seized.

Under the State’s reasoning, the only limit on the police power would be the scope of the emergency.

The legislature could do whatever it felt it needed to do under the circumstances.

And more than that, through its funding decisions, it could create the very emergency conditions used to justify its suspension of the rights conferred and protected by the constitution.

Abraham Lincoln

Abraham Lincoln

If financial markets were rational, this prospect would not buoy our economy, it would ruin it.

After citing the U.S. Supreme Court case on Abraham Lincoln’s suspension of habeas corpus during the Civil War the Illinois Justices explain,

Crisis is not an excuse to abandon the rule of law.

It is a summons to defend it.

How we respond is the measure of our commitment to the principles of justice we are sworn to uphold.

James Madison is even quoted in Paragraph 88:

James Madison

James Madison

More than two centuries ago, as adoption of the Constitution of the United States was being considered by the citizens of our new nation, James Madison wrote:“If men were angels, no government would be necessary. *** In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.” James Madison, Federalist No. 51 (1788).

The key line in Paragraph 89 is

Obliging the government to control itself is what we are called upon to do today.

The rest of the decision is related to whether parts of the law could stand while the main thrust fell.

The answer was “No.”


Looking at the Pension Decision — 8 Comments

  1. A second year law school student would have come up with the same answer though not quite so verbose.

    It is embarrassing that Mr. Madigan and his cohorts would attempt to fool us through this charade.

  2. Ah, Bishop’s description is perfect, “charade”.

    I wonder how people would feel about this critical ruling, if they knew what this so called Supreme Court, was really comprised of.

    Three representing Cook County, four the entire rest of the State.

    Including Chicago Alderman Ed Burke’s wife and an ex Chicago Bear kicker.

    All political hacks, fed every 10 years in election bids by unions and political party’s.

    Gee that’s who I want deciding the fate of Illinois.

    Although we already knew this outcome, by the ‘Kangaroo Court’s’ health benefit decision (6-1).`Maybe taxpayers could have got a closer vote, if we showed up in Springfield with a wheelbarrow full of money.

    This should be the final nail in the Taxpayers coffin.

  3. Lets hope more big corporations move out of Illinois for the good of their workers.


  4. Let them move to Oklahoma or Texas where there is drought and tornadoes.

    No climate change.

  5. Also this will teach the people and politicians not to promise what they can’t give.

  6. It is disgraceful how much pension benefits have been hiked to underfunded pensions since the pension sentence was added to the Illinois State Constitution by voter referendum on December 15, 1970.

    The pension sentence was one of many changes to the Constitution approved on that day.

    There was no mention during the Illinois Constitutional Convention about hiking benefits to underfunded pension funds.

    Yet in 1971, the practice of the Illinois General Assembly hiking benefits to underfunded pensions funds escalated, a practice which continues via extensions to previously enacted laws and various other techniques to the this day.

    The Illinois General Assembly is an organized predatory entity with taxpayers being the prey.

    They are a disgrace to democracy.

  7. Perhaps we need a ‘balanced hiring amendment’ to ensure that personnel levels in jobs funded by public money be constrained by the amount of funding available to guantee all pensions owed by law.

  8. It is irrational to believe that anything will change when those empowered to effect change have elected not to do so.

    It is irrational to expect that ‘disgrace’ is a factor among those empowered to reward themselves at a level which insulates them from any ill effect of ‘disgrace’.

    “Disgrace” can only be a factor when those recipients of benefits perceive value in maintaining good opinion of the society in which they function.

    Empowered individuals may perceive value only in the good opinion of only those who maintain symbiotic sustenance from the system of taking from the many by force in order to disproportionally benefit their own narrow circle of interest.

    They do not function (in my opinion)in any way meaningful to themselves in the society of those whose resources they are extracting.

    I believe this observation is supported by past performance of empowered individuals in Illinois, as evidenced by 4.6% property tax rates and billion dollar pension deficits. Other States have different history.

    It is rational to surrender.

    Taxpayers must admit defeat and now direct all efforts to avoiding paying into the system which rewards those empowered to skew it toward their own narrow benefit.

    As a practical matter, that means economic boycott.

    Individual taxpayers must make conscious economic choices which ‘punish’ those individuals who are in position to profit by manipulation of the legal/political system toward their own narrow benefit.

    On a State and national level this may be impossible.

    On a local level it may be somewhat effective; many insider benefits are insulated from public impact by virtue of being grants or contracts awarded as a function of insider access.

    Homeowners who cannot afford to ‘vote with their feet’ have only the self defense mechanism of being unable to spend money locally.

    This may not actually ‘punish’ those empowered to create this economic environment, because as home values crash it becomes profitable for investors to buy foreclosures and rent out at a reasonable return.

    Renters who are subsidized by dollars from outside the local economy enable foreclosure-investment-for-rental to be profitable even at 4.6% property tax rates.

    Investors may be supportive of those empowered to create such favorable (to investors) conditions.

    So if local citizens want to ‘vote with their wallets’, what can they effectively do?

    Officeholders are largely insulated, when the government is their main client, or is empowered to create anomalous profitable circumstances directed toward some private citizens but not others.

    The only rational conclusion is to decide to emulate the only conditions which are not odds-on losers:

    1. Obtain government direct employment

    2. Obtain government funded second-order employment (compete, if possible, for grants, tax abatements, and public money giveaways or government outsource contracts for legal or financial professional services)

    3. Obtain government social service awards as a beneficiary

    This will eventually create a system which is wholly dependent on outside sources of funding.

    When the outside funding dries up, the system may collapse and rebuild in a rational, self-supportive fashion.

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