The 7th Circuit Court of Appeals recently sidestepped the chance to apply the newly issued holding of the Supreme Court in analyzing whether retiree health insurance benefits vest pursuant to a collective bargaining agreement, while addressing another federal constitutional challenge on the subject. In Underwood v. City of Chicago, the plaintiffs, including retired employees, sued the City of Chicago after it raised the premium contribution for retirees and changed the health insurance plan design upon expiration of the City’s ordinance that secured those benefits. Plaintiffs argued that the reduction in benefit levels and increase in premium contribution violated the Illinois Constitution’s Pensions Clause which prohibits the diminution or impairment of pension benefits. They also alleged that the City violated the Contracts Clause of the U.S. Constitution which prohibits states from passing any law that interferes with contract rights.
The 7th Circuit held in Underwood last week that no Contracts Clause violation existed because at best the City breached their agreement, rather than enacted legislation which impaired an agreement. Having disposed of the U.S. Constitution question, the court sent the remainder of the case to the state court for decision. Although the court addressed the issue of possible Contracts Clause violation, the question of whether Illinois public employers can lawfully revise retiree health insurance benefits is still up in the air.
For those who have been following the court battles over retiree health care rights, last year the Illinois Supreme Court held in Kanerva v. Weems that the Pensions Clause also protects against diminution of state granted rights to retiree health insurance as part of pension benefits. In the Kanerva case, the right of certain state retirees to retiree health insurance at no cost was secured by the State Employee Group Insurance Act, and the court found that an attempt by the legislature to amend that statute violated the state constitution. The Kanerva v. Weems case, though, did not analyze the issue of whether retirees have vested rights to health insurance pursuant to the terms of their collective bargaining agreement at the time of their retirement.
The U.S. Supreme Court addressed this issue in M & G Polymers, USA v. Tackett. That decision resolved a split in the federal courts over how to interpret whether retirees have a vested right at the time of retirement to health insurance benefits pursuant to their collective bargaining agreement. Prior to the Supreme Court’s decision in Polymers, the 7th Circuit Court of Appeals applied the test as to vesting that if a collective bargaining agreement contained any ambiguity as to the vesting of retiree insurance rights then extrinsic evidence was admissible to determine the parties’ intent. Other circuits applied different standards. In applying its standard, the 7th Circuit often found that contractual reference to changes in retiree insurance once a retiree reached the age of 65 years of age was enough to create such ambiguity, despite other contract terms which guaranteed contractual rights only for the term of the agreement. Illinois courts were in accord. Post M&GPolymers, courts are now required to apply standard rules of contract interpretation, which will likely change the outcome of analysis on such terms.
The new Polymer standard may be put to the test in the Matthews v. CTA case, which is pending before the Illinois Supreme Court. The Matthews plaintiffs, who are retired CTA employees, have asserted that the CTA breached their right to certain retiree health insurance benefits secured through a collective bargaining agreement in effect at the time of their retirement when the CTA increased retiree premium contribution and changed benefit levels.
In the meantime, Illinois public employers continue to struggle with managing the legacy of free or heavily subsidized retiree health insurance and fiscal responsibility. Hopefully the court will give guidance this year on that issue. Meanwhile, public employers should work closely with their attorneys to examine their current options on this important question.