United States: A Looming Crisis: Illinois Supreme Court Strikes Down Statute Reducing Benefits

On May 8, 2015, the Supreme Court of the State of Illinois struck down recently enacted state public pension reform legislation on the grounds that the legislation violated the “pension protection clause” of the Illinois constitution. The legislation had sought to reduce Illinois’s pension liabilities by reducing annuity benefits to some members of the State’s public pension systems. The Illinois Supreme Court’s ruling limits the options that Illinois now has for dealing with its deepening fiscal crisis and, in turn, may force Illinois to propose additional legislative measures, possibly including legislation authorizing its municipalities to file for protection under chapter 9 of the United States Bankruptcy Code. In re Pension Reform Litig., 2015 IL 118585 (May 8, 2015).

The Challenge to the Pension Reform Act

Illinois has five State-funded retirement systems, which have been chronically underfunded almost since their inception. Following downgrades in Illinois’s credit rating, the State General Assembly passed Public Act 98-599 (“the Act”) in the fall of 2013, and then-Governor Pat Quinn signed the Act into law on December 5, 2013. The Act primarily affected four of the five State-funded retirement systems and contained provisions designed to reduce annuity benefits for the members of those systems who had previously been entitled to the highest level of benefits. Among other things, the Act provided for decreased annual annuity adjustments and increased retirement ages for the affected members.

Almost immediately after the Act was signed into law, members of the Illinois retirement systems brought five separate actions challenging the Act’s validity, among other things on the grounds that the Act violated the Illinois constitution’s “pension protection clause.” The pension protection clause provides, “Membership 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.” Illinois Const. art. XIII, sect. 5. The five actions were ultimately consolidated in the circuit court of Sangamon County, which found the Act to be unconstitutional in its entirety as a violation of the pension protection clause. Because the circuit court’s judgment invalidated a State statute, appeal lay directly to the Illinois Supreme Court.

Illinois Supreme Court Strikes Down the Act

The Illinois Supreme Court affirmed the circuit court’s ruling that the Act was an unconstitutional violation of the Illinois constitution’s pension protection clause. The Court characterized the issue of whether the Act violated the pension protection clause as “easily resolved,” because the pension protection clause expressly provides that State pension benefits “shall not be diminished or impaired.” The Court had already held in earlier cases that the protections of this clause attach as soon as an individual first embarks upon employment in a position covered by a public retirement system, and not when the employee ultimately retires. Accordingly, once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the Illinois Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to that individual.

The Court rejected the State’s major affirmative defense, which was that State finances had become so dire that the General Assembly was compelled to invoke the State’s police power to override the pension protection clause. The Court concluded that the circumstances surrounding the enactment of the Act were not sufficiently unique to justify an invocation of the State’s police power. Furthermore, Illinois Supreme Court precedents reaching back to the Great Depression hold that exigent circumstances alone are not sufficient to justify a deviation from “plain and unequivocal” provisions of the Illinois constitution.

The State attempted to buttress its police power argument by citing to cases permitting the police power to override the “contracts” clauses of the State and federal constitutions (as opposed to the more specific pension protection clause), but the Court noted that the judicially-recognized “police power” exception to the State and federal contracts clauses is actually quite narrow, and that attempts by a state to impair contracts to which the state itself is a party are subject to particular scrutiny. Specifically, a state’s impairment of its own contracts is generally viewed as appropriate only where the relevant contractual provisions had effects that were “unforeseen and unintended” by the legislature and where the state was unable to achieve its purpose through less drastic measures. The Court concluded that it was impossible for the State to make these necessary showings.

The Court also noted that the drafters of the pension protection clause could have, but chose not to, make that clause subject to the State’s police power. It cited its own precedents to the effect that the General Assembly cannot enact legislation that conflicts with provisions of the Illinois constitution unless the constitution specifically grants it such authority. The Court also cited numerous examples of provisions in the Illinois constitution where the drafters specifically made particular constitutional guarantees subject to the State’s police power.

The Court also agreed with the circuit court that the unconstitutional annuity reduction provisions of the Act were not severable from the remainder of the statute, meaning that the Act was invalid in its entirety. The Court noted that the Act’s own severability provision lists 39 specific sections that are “inseverable” from each other, including some of the provisions that impermissibly reduce retirement annuity benefits. Thus, invalidation of the annuity reduction provisions also required elimination of the other “inseverable” provisions, with the end effect being that the Act effectively “evaporates.” In any event, the Court noted that severability provisions are not conclusive, and that an entire statute will be held unconstitutional if “the legislature would not have passed the law without the provisions deemed invalid,” as the Court concluded was the case with the Act.

Conclusion

Illinois’s inability to restructure its pensions directly through state legislation now leaves the State with one less option for dealing with its fiscal crisis. Furthermore, because the Illinois constitution’s pension protection clause protects municipal as well as State-funded pensions, the Court’s ruling could severely limit the options of Illinois municipalities, such as the City of Chicago, as they seek to deal with their own substantial unfunded pension liabilities.

As one possible solution, the current Illinois governor, Bruce Rauner, has proposed a constitutional amendment under which the State constitution’s pension protection clause would protect only benefits already earned by current members and, unlike the existing version, would no longer protect current members’ unearned future benefits. In addition, Governor Rauner has also discussed legislation authorizing Illinois municipalities to file for protection under chapter 9 of the Bankruptcy Code. Such legislation might provide a means of circumventing state constitutional restrictions on the ability to impair public pension benefits. Bankruptcy courts, including in the Detroit, Michigan and Stockton, California chapter 9 cases, have ruled that the federal Bankruptcy Code overrides state law protections for pensions.

Within four days of being rendered, the Illinois Supreme Court’s decision resulted in the plummet of Chicago’s credit rating to junk status, making Chicago reportedly the only U.S. city with a population over 500,000 people, other than Detroit, to have such low ratings.1 With optimism as to the ability to formulate a plan to deal with the looming debt crisis and significant pension liabilities now dwindling, it remains to be seen whether the political will exists in Illinois to enact a chapter 9 authorization statute or other reforms, and if so, which State and municipal pension systems might be affected. With focus shifting from Detroit, it seems that all eyes are now turning to Illinois.

Footnote

1. See Hal Dardick & Heather Gillers, Chicago Credit Rating Plummets to Junk Status Following Pension Ruling, Chicago Tribune, May 12, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions