Monday, March 28, 2016

Pension Crises: What a Difference a Constitution Makes

On March 24, the Illinois Supreme Court handed down its decision in Jones v. Municipal Employees Annuity and Benefit Fund of Chicago, 2016 IL 119618.  The question in that case was whether Public Act 98-641, which amended the Illinois Pension Code with respect to several City of Chicago pension funds, violated the Illinois Constitution.  To the surprise of no one, the Court found the statute to be unconstitutional.

Public Act 98-641 was passed by the General Assembly in 2014 to “address an immediate funding crisis that threatens the solvency and sustainability of the public pension systems … serving the City of Chicago”.  Among other provisions, the Act increased required employee contributions for members of the affected pension funds and changed the formula for the calculation of annuity benefits for two of the funds, effectively reducing those benefits over time.  The Court found that these effects violated Article XIII, Section 5 of the Illinois Constitution, which provides that “[m]embership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired”.  This holding was predictable in light of the Court’s decision in In re Pension Reform Litigation, which found Public Act 98-599 – a previous attempt by the General Assembly to enact legislation designed to address the State’s pension crisis – unconstitutional.  

In presenting its case to the Court, the City made two primary arguments:  first, that the statute produced a “net benefit” to the members of the pension funds by guaranteeing the funds’ solvency, thereby offsetting the reduction of benefits with financial stability; and second, that the statute was the product of a “bargained-for exchange”, whereby the City promised to increase its annual contributions to the funds in return for the agreement of the unions representing affected employees to support the legislation.

Finding that “the constitution removed the option of unilaterally diminishing pension benefits as a means of attaining pension stability”, the Court noted that to hold otherwise would allow the legislature, by means of its funding mechanisms, to create the very condition of insolvency that a reduction of benefits then would be designed to correct.  With respect to the “bargained-for exchange” argument, the Court found that the unions were not acting as the collective bargaining representatives of the members of the funds when they agreed with the City to support the challenged legislation; rather, the negotiations between the City and the unions were “no different than legislative advocacy supporting collective interests….”

The decision, while dealing a blow to advocates of pension reform, did leave open one potential option, short of a constitutional amendment, for dealing with the crisis.  According to the Court, the pension rights created by the Constitution are contractual in nature.  For any member of a pension fund, the contractual prohibition against reduction or impairment of pension benefits begins when the contractual relationship is formed – when the member is hired and becomes subject to the provisions of the applicable pension fund.  Pension benefits, therefore, can be reduced prospectively for members not yet in being, but, as a matter of contract, cannot be reduced for current members contributing to or receiving benefits from a public pension fund.