CHICAGO - Illinois' landmark overhaul of state public pensions is headed to the state Supreme Court following a lower court ruling Friday that the benefit cuts violate the state constitution.
After the pension legislation passed in December 2013, unions, retirees, and employees sued, arguing the reform package violated state constitutional protections of pension benefits. The state countered that a fiscal emergency gave it the right to alter its contract with retirees and employees under its sovereign and police powers.
Belz soundly rejected the state's arguments.
"In summary, the state of Illinois made a constitutionally protected promise to its employees concerning their pension benefits," Belz wrote in his six-page ruling granting the plaintiffs request for a summary judgment in the case. "Under established and uncontroverted Illinois law, the state of Illinois cannot break this promise."
Union representatives cheered the ruling.
"We are gratified by the court's ruling today, which makes clear that the Illinois Constitution means what it says," the We Are One union coalition said in a statement.
While the ruling is considered a setback for the state and offers a significant glimpse into a judge's interpretation of the arguments and constitutional law, it's the Illinois Supreme Court that will have the final word.
"We plan to immediately appeal the decision to the Illinois Supreme Court so that we can obtain a final resolution of these important issues and allow the governor and General Assembly to take any necessary action," Attorney General Lisa Madigan, whose office is representing the state, said in a statement. "We will ask the court to expedite the appeal given the significant impact that a final decision in this case will have on the state's fiscal condition."
If the ruling holds, it will fall on Gov.-elect Bruce Rauner, a Republican, and a Democratic led General Assembly to find a new fix for a pension system that's just 39.3% funded and saddled with $111 billion of unfunded obligations. Quinn, who called solving the state's pension mess a "mission," will hand the reins over to Rauner Jan. 12.
Illinois' pension woes have driven deep declines to the state's bond ratings, now at the A-minus and A3 level, the lowest among states. All three rating agencies assign a negative outlook.
Rating agencies have said the state's weak credit rating could stabilize if the pension changes are upheld and the state shores up its budget. Investors have penalized the state for its credit woes by demanding steep yield penalties that shrunk after passage of the pension reforms but rose again after lawmakers this year rejected Quinn's push to make permanent 2011 hikes in income tax rates that partially expire Jan. 1.
The pension changes are aimed at shaving about $145 billion off state payments in the coming decades, including $1.1 billion in fiscal 2016, while bringing the system full funding in 30 years. About $21 billion would be pared from the unfunded obligations' tab.
The legislation would limit cost-of-living increases, cap pensionable salaries and raise the retirement age for some, while cutting employee contributions by 1%, shifting contribution calculations to a more actuarially sound method, and giving the pension funds enforcement rights over state payments. Much of the expected savings from the pension overhaul stems from the COLA increases annuitants now receive.
Under the package, the state would shift to an actuarially based method that moves the state's system to full funding by 2044. State contributions are guaranteed and pension funds could ask the courts to compel the state to make the payments although lawmakers can vote to change them.
Belz earlier this year consolidated a series of five complaints challenging the reforms and halted the June 1, 2014 effective date of the legislation. His decision Friday followed oral arguments on the plaintiffs' request for a summary judgment challenging the state's sovereign power argument.
Belz' decision fell squarely on the state constitution's pension protection clause that states: "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 benefit of which shall not be diminished or impaired." It's one of the strongest in the country.
The court agreed with the plaintiffs in finding that many of the changes built into the pension legislation will harm future annuities.
"The act without question diminishes and impairs the benefits of membership in State retirement systems. Illinois Courts have consistently held over time that the Illinois Pension Clause's protection against the diminishment or impairment of pension benefits is absolute and without exception."
Belz rejected the state's argument that it acted within its sovereign power to alter the state's contract with retirees due to a fiscal emergency and cited in his finding the Illinois Supreme Court's language used in its summer opinion affording constitutional protections to retiree healthcare benefits.
"The court 'may not rewrite the pension protection clause to include restrictions and limitations that the drafters [of the state constitution] did not express and the citizens of Illinois did not approve,'" the new ruling said.
"The pension protection clause contains no exception, restriction or limitation for an exercise of the state's police powers or reserved sovereign powers," Belz wrote. "Illinois courts, therefore, have rejected the argument that the State retains an implied or reserved power to diminish or impair pension benefits."
The court also found that the various pieces of the legislation cannot be severable as they are part and parcel of a broad package intended to impose sweeping changes. He found the law inseverable and void in its entirety. Belz did not tackle other questions of law in the complaint.
Rauner has said he believes the courts will eventually overturn the pension reform package. He has said he favors shifting to a 401(k)-style defined benefit retirement plan but has not released details.
"My preference is probably to wait until the Supreme Court rules so we have some ground rules for what probably works and won't work," Rauner said during a Thursday news conference.
Ty Fahner, president of the Civic Committee of the Commercial Club of Chicago, which had launched a public campaign urging passage of reforms, said in a statement: "The finding of any lower court is significant, however, only the determination of the Illinois Supreme Court will resolve the constitutionality of the pension reform law." The committee recently launched a new public campaign to outline the devastating impact on services and tax rates if the pension legislation is overturned.
Raunder said after the ruling he hoped for speedy action by the high court justices. "Today's ruling is the first step in a process that should ultimately be decided by the Illinois Supreme Court. It is my hope that the court will take up the case and rule as soon as possible. I look forward to working with the legislature to craft and implement effective, bipartisan pension reform," he said. The ruling makes permanent a preliminary
Quinn issued a statement saying he thinks the law still has legal legs. "We're confident the Illinois Supreme Court will uphold this urgently-needed law that squarely addresses the most pressing fiscal crisis of our time," Quinn said.
