Looking ahead in Illinois: A pension discussion with Glen Brown.

klonsky-brown-2

Glen,

Like you, I recognize that the threat to Illinois’ public employee pensions is an existential one. We always must be vigilant when it comes to our pensions and the threat of pension theft. The ruling of the Illinois Supreme Court confirmed the language of the 1970 Constitution, known as the pension protection clause that prohibited any reduction or impairment of our retirement benefits. For the current period, I think that current retirees are therefore protected. I also think the Court extended this protection to all current employees. The pension protection clause covers them from the time they were hired and entered into the pension system. Do you agree?

I agree, Fred.

Based upon several antedated court cases (that began with Kraus v. Board of Trustees of the Police Pension Fund of the Village of Niles, 1979), law existing at the time of “vesting” is incorporated into an employee’s agreement. Pension benefits commence at the time employee contributions begin. The Illinois General Assembly cannot modify benefits. “The Clause protects pension benefit rights as an enforceable contractual relationship that is subject to modification [only] through contract principles” (Eric M. Madiar, Is Welching on Public Pension Promises an Option for Illinois, 2011).

The Pension Protection Clause has safeguarded current employees’ pensions consistently for 36 years since Kraus. Most recently, The Illinois Supreme Court had ruled that Public Act 98-599 violated the Pension Protection Clause, the Contracts Clause, and the Takings Clause of the Illinois Constitution on May 8, 2015. 

Moreover, consider what Gino DiVito and John Fitzgerald (Tabet, DiVito & Rothstein, LLC) stated in a Memorandum to Gov. Quinn on April 12, 2010: 

“Vesting of an employee’s rights in the system occurs either at the time the employee entered the system or in 1971, when the Illinois Constitution became effective, whichever is later.’ Carr v. Bd. of Trustees of Police Pension Fund of Peoria, 158 Ill. App. 3d 7, 8 (3d Dist. 1987); see also Schroeder v. Morton Grove Police Pension Bd., 219 Ill. App. 3d 697, 700 (1st Dist. 1991); Hannigan v. Hoffmeister, 240 Ill. App. 3d 1065, 1073 (1st Dist. 1992); Barber v. Bd. of Trustees of Vill. of S. Barrington Police Pension Fund, 256 Ill. App. 3d 814, 820 (1st Dist. 1993 (same, quoting Carr, 158 Ill. App. 3d at 8)…

“Thus, a State employee’s pension rights are ‘governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system.’ Di Falco v. Bd. of Trustees of Firemen’s Pension Fund of Wood Dale Fire Protection Dist. No. 1, 122 Ill.2d 22, 26 (1988); see also McNamee v. State, 173 Ill.2d 433, 439 (1996); People ex rel. Sklodowski v. State, 182 Ill.2d 220, 229 (1998)…

“Kraus held that the Pension Protection Clause ‘prohibits legislative action which directly diminishes the benefits to be received by those who became members of the pension system prior to the enactment of the legislation, though they are not yet eligible to retire.’ See Kraus, 72 Ill. App. 3d at 849… Kraus also noted… that a State employee may agree, ‘for consideration, to accept a reduction in benefits.’ Id. at 849… [Furthermore], an end run around the Pension Protection Clause is directly prohibited by Kraus. As that decision explains, the legislature cannot ‘directly’ diminish the pension rights of current State employees, and legislative action that incidentally affects pension rights is permissible only if it is ‘directed toward another aim.’ See Kraus, 72 Ill. App. 3d at 849… [T]o directly diminish the pension rights of current State employees… would therefore violate the Pension Protection Clause…” (Memorandum by Gino L. DiVito and John Fitzgerald to the then Governor of Illinois, Pat Quinn, May 5, 2010). 

Nevertheless, there will be another attempt, not long after the election, for a “modification of contract principles.” Any attempt at modifications of the Pension Protection Clause by the Illinois General Assembly should be seen for what it is: another challenge by the current General Assembly and governor to steal money from the public pension systems so they can avoid addressing the real causes of the state’s budget deficits: the pension ramp, the resultant pension debt, and the state’s insufficient flow of revenue. 

I have written many times: contracts supported by consideration are often one-sided, advantageous arrangements, especially a consideration from the Illinois General Assembly that would be in exchange for reductions of originally-vested benefits assured by the Illinois Constitution.

-Glen

Glen,

Once again you have laid out the legal case as well as any legal scholar. I tend to look at things politically. The ability of the state legislature to mount another attack on public employee pensions involves political calculations. You constantly remind us that the promise of a pension to the state’s workers is a moral and legal obligation of the state. However, to most politicians in our legislature pension obligations are neither a moral nor a legal problem for them. They only consider political cost and benefit.

First, I would say that there is the Quinn factor. The election of Bruce Rauner as Governor can be directly tied to the decision of former Governor Pat Quinn to make so-called pension reform his signature issue. It cost him his political career. Even the most venal of legislators can figure that out.

Secondly, pension theft has become, with the election of Bruce Rauner, a more partisan issue. Some pension-theft Democrats have become born-again Progressives.

I am willing to welcome that. I believe that for the immediate future, current retirees can feel pretty secure that their pensions will be paid. I believe that current employees can also feel secure, if slightly less so. As you point out above, the argument for consideration and “a modification of contract principles” will be pursued by the Governor and perhaps Senate President John Cullerton.

We can only hope – no demand – that the two state teacher unions and other public employee unions stand firm and resist these attempts. If the past actions of the current union leadership is a predictor of future performance I can understand anyone’s skepticism.

Rank and file union teachers must organize to prevent any deals that the leadership makes that claims an exchange of current benefits for something else. As you correctly point out, no exchange of current benefits for consideration can possibly be in the interest of current teachers.

My biggest concern is for Tier 2 and future teachers. Who even pretends to represent their interests?

-Fred

 

I agree, Fred.

“Rank and file union teachers must organize to prevent any deals that the leadership makes that claims an exchange current benefits for something else.”

Although retirees are not part of the collective bargaining process, active employees are. The Illinois Supreme Court suggested that a consideration supported by collective bargaining for current employees is a possibility. However, one would think that a legitimate consideration means not taking away an already existing constitutionally-guaranteed benefit! 

The Illinois General Assembly will probably be arguing for consideration based upon Eric Madiar’s recent research. Here is a synopsis:

According to Madiar, “…Aside from the Senate President’s contractual proposal, the Illinois Supreme Court’s Chicago Pension Reform decision strongly indicates that pension benefits may also be modified by public sector labor unions acting as authorized agents within the collective bargaining process for their members under Illinois law.

“The court found that the legislation at issue violated the Pension Clause because the labor unions ‘were not acting as authorized agents within the collective bargaining process.’ To support this proposition, the court referenced two New York court decisions cited by the City of Chicago.

“In these decisions, the New York Court of Appeals held that duly designated labor unions could bind their members to the terms of collective bargaining agreements that waived the constitutional protections the members enjoyed under the New York Constitution’s pension clause. As another New York court succinctly explained, the purpose of its pension clause ‘was merely to insure that pension and retirement benefits would not be subject to the whim of the Legislature or the caprice of the employer.’ The court continued that:

“‘Whereas unilateral action by the employer or the Legislature may not impair such benefits, the parties are not prevented from negotiating a reduction. The Union is free to waive any right of its members to certain benefits in exchange for other consideration and the parties are free to negotiate less beneficial terms for new employees hired after the agreement expires. As long as the contractual benefits are not unilaterally diminished, there is no constitutional violation.’

“In short, New York court decisions indicate that duly authorized unions may collectively bargain over and waive the protected pension benefit rights of their members in exchange for consideration.

“Whether Illinois courts will reach the same broad conclusion as New York courts with respect to Illinois public sector labor unions under our Pension Clause remains to be seen. Mayor Rahm Emanuel of Chicago, however, has expressed interest in not waiting long to find out.

“Shortly after the Illinois Supreme Court issued its decision, Mayor Emanuel stated that he intends to restart negotiations with the City’s labor unions to forge a pension reform agreement through collective bargaining given ‘the opening’ provided by the decision.

“If a new accord with labor unions cannot be reached, then Mayor’s office may pursue ‘work ­rule changes, lower break-­in pay for new employees, another round of health care reforms, and other cost­-saving concessions and dedicate those savings to pensions.’

“It is important to note that as this Article went to press the Illinois Supreme Court issued its decision in Matthews v. Chicago Transit Authority. In that decision, the court further confirmed that ordinary contract principles may be used to modify the existing pension benefits of current employees, and that public sector labor unions have the authority to modify the existing pension benefits of its active members through the collective bargaining process.

“The Matthews decision appears to provide a clear path for the use of the collective bargaining process as a contractual means to modify the pension benefits of current public employees who belong to unions…” (Eric M. Madiar, Illinois Public Pensions: Where To From Here?, 33 Ill. Pub. Employee Labor Report (Winter/Spring 2016). This will be another argument for the Illinois Supreme Court to consider.

And to answer your question: “Who even pretends to represent [Tier II and future teachers’] interests?” No one is currently talking about the injustice.

According to Bob Lyons, TRS Trustee, “the financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.

“In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.”

Moreover, as stated by Dick Ingram, TRS Executive Director: “Tier II is the pension benefit structure created by the General Assembly in 2010 for anyone who had not contributed to TRS or another Illinois public pension system before January 1, 2011. Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions mean reduced long term costs for the state.

“If Tier II is left alone, it will accomplish its mission. The $61.6 billon TRS unfunded liability will shrink over several decades and eventually be eliminated because the state will pay less to the ever-growing number of Tier II members. In fact, at some point in the future, we estimate that Tier II members actually will help create a surplus of funds for TRS that effectively could eliminate the need for any state government contribution to the System.

“But the core of Tier II – the reduced benefits structure – is a problem the Teacher Recruiting and Retention Task Force will review. The benefit structure is unfair to all Tier II members. Right now, a Tier I member’s pension costs roughly 20 percent of an active member’s salary. Because of the benefit reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an active member’s salary. However, by law, active Tier II members of TRS, like [Ingram], pay the same 9.4 percent salary contribution to the System that active Tier I members pay.

“What all this means is that Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members” (Topics and Report, Teachers Retirement System of the State of Illinois, winter 2015).

-Glen 

7 thoughts on “Looking ahead in Illinois: A pension discussion with Glen Brown.

  1. I agree with everything you guys said. I think you are ok if you have signed your irrevociable intent because that is a contract within a contract. I dont think we can point out enough that the crisis is either temporary or phoney because of tier 2. It would become a real crisis if the feds showed up and asked for a FICA contribution

    • They will as soon as the first tier 2 retires and doesn’t qualify for “safe harbor.” Then the shit will really hit the fan.

  2. They finally won maybe that will divert attention. We used to have season tickets. Did see the 89 playoff game. With these crowds just fine to watch at home.

  3. Gentlemen,

    Do you think this current California case may affect us here in Illinois?

    Thank you for all your pension posts.

    By MAURA DOLAN. LOS ANGELES TIMES
    PUBLISHED: October 30, 2016 at 2:13 pm | UPDATED: November 2, 2016 at 11:19 am

    In a potentially huge win for advocates of cutting government pensions, a San Francisco-based appeals court in August declared that public retirement plans were not “immutable” and could be reduced. The three-judge panel said the law merely requires government to provide a “reasonable” pension.

    That unanimous ruling, now before the California Supreme Court, could be a vehicle for reducing a shortfall amounting to hundreds of billions of dollars in state and local pension systems. If upheld, the decision could lead to the kinds of cutbacks previous courts blocked.

    Emory University Law Professor Alexander Volokh called the decision “a big change from what the doctrine has been so far” and expressed doubt that it would be upheld. But University of Minnesota Law Professor Amy B. Monahan described the ruling as “novel” and the outcome “hard to predict.”
    The decision has attracted national attention because of California’s influential role in pension law. Like California, other states are facing massive shortfalls in public pensions and wrangling with ways to head off staggering debts.

    Standing in the way have been decades of court decisions that created what is called the “California Rule.” It guarantees government workers the pension that was in place on the day they were hired.

    The formula for calculating retirement income generally can be changed only if it is neutral or advantageous to the employee, courts have ruled. It cannot be reduced, except for new hires.

    “It is a rule that makes it extremely difficult for states to reform their pensions,” Volokh said, “and lots of states have really big pension problems now.”

    Until the last century, the law generally treated government pensions as gifts that could be taken away. People didn’t live long, and pensions were not considered particularly important.

    That changed as lifespans rose and government employees sued to protect their retirement earnings. California law now treats government pensions as contracts protected by the state constitution.

    Twelve other states eventually adopted the California Rule, although not all interpret it so strictly. Now that public pension systems are facing massive debts, many states are again looking to California for possible answers.

    The case that could weaken the California Rule stems from a “pension reform” law state legislators passed in 2012. The law cut pensions, raised the retirement ages for new government employees and banned “pension spiking” for existing workers.

    Judges, who generally have benefited from past public pension rulings, were exempted. “They stuck it to pretty much everybody except the judges,” said Gregg McLean Adam, who is representing unions in the case.

    Some unions objected to the law’s prohibition on pension spiking for longtime employees. The practice involves inflating an employee’s pay during the period on which retirement is based — usually at the end of a worker’s career. This can be done by cashing in years of accumulated vacation or sick pay or volunteering for extra duties just before retirement.

    In some cases, spiking has created pensions higher than the workers’ salaries.

    The Marin County retirement system, relying on the new law, decided to remove pay from pension calculations for various on-call duties and for waiving health insurance. Unions sued, contending that employees had long been promised that benefit and took jobs because of it. They argue the rules for new workers will eventually end the pension shortfalls.

    In a ruling written by Justice James A. Richman, a former Alameda County Superior Court judge appointed by former Gov. Arnold Schwarzenegger, the state’s First District Court of Appeal said the Legislature can alter pension formulas for active employees and reduce their anticipated retirement benefits.

    “While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” wrote Richman, joined by Justices J. Anthony Kline and Marla J. Miller, both Gov. Jerry Brown appointees.

    In most states, this sort of law easily would be upheld and perhaps not even challenged, legal scholars said. “But in California, it’s a tough issue,” Minnesota’s Monahan said.

    Unions appealed the decision to the California Supreme Court. “This a frontal assault on 60 years of California pension law,” Adam said.

    The state’s top court is now reviewing written arguments on the case. It could agree to take up the appeal, let the decision stand as precedent or limit its effect only to Marin County.

    Scholars agree the decision stands apart in the state’s long jurisprudence on public pensions. But the state high court might want to shift the law to meet new economic realities, they said. “Specific facts in different cases really drive the development of the law, “ Monahan said.

    She attributed the origins of the California Rule in part to a 1947 case brought by a public employee whose story stirred sympathy.

    In that case, Kern v. City of Long Beach, a firefighter sued because the city abolished pensions for all working employees 32 days before he was entitled to retire. The firefighter had been contributing toward his pension for 20 years.

    “So the court came up with a rule that was going to protect this person from losing his pension,” the law professor said. “The Kern facts were really awful for the government.”

    The real “bombshell” came in 1955 in Allen v. City of Long Beach, when the California Supreme Court ruled that any cutbacks in pensions for current employees must be offset by comparable new advantages, Monahan wrote in a law review.

    Unlike private pensions, which are governed by a federal law and must be insured, public retirement systems depend on government revenue if obligations exceed contributions and investment income.

    Numerous attempts have been made around the country to reel in pension costs, with mixed success. Even in dire consequences, some courts have refused to retreat from protective pension law.

    In Illinois, which has similar — or stronger — pension protections, shortfalls caused bond ratings to plummet. Chicago and the state passed reform measures, both of which the Illinois Supreme Court soundly rejected.

    A decision by the California Supreme Court on whether to review the Marin County dispute is likely to be weeks or even months away.

    Another ruling on the new pension law, by a Contra Costa County judge in 2014, is pending in the same appeals court that decided the Marin County case but before different judges.

    That decision, responding to lawsuits bought by public employees in Contra Costa, Alameda and Merced counties, upheld the anti-spiking provisions but allowed some employees to count pay for regular and required on call duties toward their pensions.

    Linda Ross, who represented a county agency in that case, said the Marin decision went further.

    It “kind of rewrote the rule” that made it impossible to reduce pensions without providing equivalent benefits, she said.

    “That is what prevented changes over the years,” Ross said, “because if you have to give someone something equivalent you are not saving money.”

    Public employee unions say the decision, if upheld, would spark endless litigation.

    “The court says you can reduce current employee pensions to a point of reasonableness.” Adam said. “Where that point is, your guess is as good as mine.”

    This story is part of an ongoing project on pensions involving the Los Angeles Times, CALmatters and Capital Public Radio.

  4. The legal basis for protection of public pension rights under state law in California is contract.
    The legal basis for protection of public pension rights under state laws in Alaska, Illinois and New York (both past and future); Arizona (past and maybe future); Hawaii, Louisiana, and Michigan (past only) is State Constitution.

  5. Thanks for the heads up about New York. Just went to a pension seminar- Thank goodness for the pension! All the talk about the health insurance coverage, which is good, still made me wish for single payer like many other countries. I would definitely pay a “cadillac tax” so everyone could have healthcare.

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