By Dave Strausfeld, J.D. An Illinois law enacted to improve the solvency of Chicago’s municipal employee pension systems by reducing the level of benefits violated the Illinois Constitution’s pension protection clause, which makes membership in a public pension system “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired,” ruled the Illinois Supreme Court, in declaring Public Act 98-641 unconstitutional. Although fiscal soundness is important, the General Assembly may not utilize an unconstitutional method to achieve that end (Jones v. Municipal Employees’ Annuity and Benefit Fund of Chicago, March 24, 2016, Theis, M.). State constitution’s pension protection clause. Concerns over funding deficiencies in Chicago’s municipal pension funds have been well documented, the high court noted. In fact, funding questions led, in 1970, to the adoption of the pension protection clause. The idea was that with a constitutional provision in place, public employees’ benefits would be guaranteed. Unfortunately, funding mechanisms did not keep pace with pension obligations, and it is now expected that some City of Chicago employee pension funds will become insolvent in as little as 10 years. Fiscal crisis. To address the situation, the General Assembly passed Public Act 98-641 two years ago. The law was intended to “address an immediate funding crisis” that threatened the solvency and sustainability of Chicago’s public pension systems. The Act included a comprehensive set of provisions designed to reduce annuity benefits for many city employees. Among other things, the Act limited the amount of annual cost-of-living adjustments. Legal challenges to the law were immediately filed, leading ultimately to a showdown in the Illinois Supreme Court over whether the law was consistent with the state constitution’s pension protection clause. Heaton decision. The state supreme court had construed the pension protection clause before. In a 2015 decision, In re Pension Reform Litigation (Heaton), it reaffirmed that a public employee’s membership in a pension system is an enforceable contractual relationship and the employee has a “constitutionally protected right to the benefits of that contractual relationship.” By its plain and unambiguous language, the pension protection clause “prohibits the General Assembly from unilaterally reducing or eliminating the pension benefits conferred by membership in the pension system,” Heaton stated. Same problem here as in Heaton. Like the law found unconstitutional in Heaton, Public Act 98-641 reduced the value of annual annuity increases, eliminated them entirely for certain years, postponed the time at which they began, and completely eliminated the compounding component. These modifications to pension benefits “unquestionably diminish” the value of the retirement annuities the city employees were promised when they joined the pension system. Accordingly, the law’s annuity-reducing provisions “contravene the pension protection clause’s absolute prohibition against diminishment of pension benefits, and exceed the General Assembly’s authority.” Fiscal crisis no excuse. It was not a legitimate justification that the city’s pension systems were in the throes of a fiscal crisis. To allow public employees’ pension benefits to be reduced due to economic exigency “would require that we allow the legislature to do the very thing the pension protection clause was designed to prevent it from doing,” as Heaton concluded. Not a “bargained-for exchange.” But public employee unions had a role in drafting Public Act 98-641, the city emphasized. An affidavit of a union official revealed that a working group had been formulated to negotiate with city representatives, and over a period of about two and a half years, meetings were held to discuss developing a mutually beneficial solution to the pension crises. As a result of these negotiations, a proposal was then presented to the legislature. However, the unions were not acting as authorized agents within a collective bargaining process, the high court stressed. Rather, these negotiations were no different than “legislative advocacy” on behalf of any interest group. “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.” The high court, affirming a lower court order permanently enjoining Public Act 98-641 from being enforced, also rejected the city’s argument that the Act provided an “offsetting benefit” because it rescued the funds from insolvency.
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