CHICAGO -
The high court's justices are set to hear oral arguments March 11 in the state's appeal of a lower court ruling last year voiding the legislative package that cut benefits for four of the state's five pension funds.
The argument the high court is asked to settle centers on the interpretation of the pension clause adopted at the 1970 state constitutional convention and whether the state's sovereign police powers trump the contractual protection of pension benefits.
In their brief, public employee unions argue that the Illinois constitution's pension clause is absolute in its protection of state public pension benefits and not subject to the whim of lawmakers under the state's sovereign police powers.
The state government defends the pension legislation with the argument that Illinois' need to protect the public welfare under its sovereign police powers trumps the contractual rights granted to public pension benefits by the state constitution.
Unions object strenuously.
"The pension clause's goal of guaranteeing pensions, indeed its entire existence will become meaningless if the state is permitted to apply the police power to diminish pensions," they argue in their filing.
"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," the clause says. The state is among just a few that afford such strong protections to pension benefits in their constitution.
The court's ruling will impact the state's battered credit ratings and, depending on the scope of the ruling, has the potential to influence Chicago's. Its reach could go further, affecting negotiations over local government public safety pension reforms.
The state's pension reforms sought to shave about $145 billion off state contributions in the coming decades, including $1.1 billion in fiscal 2016, while bringing the system to full funding in 30 years. About $21 billion would be pared from the unfunded obligations' current tab of $111 billion.
The high court agreed to expedite the state's appeal of a November ruling by Sangamon County Circuit Court Judge John Belz. The judge found the benefit cuts in the pension legislation to be unconstitutional and voided the legislation.
The unions argue that the constitution's pension clause does much more than simply give pension benefits a contractual guarantee - it protects benefits from state police powers.
"The word 'shall not be diminished or impaired' must reflect a constitutional protection against the state's use of the police power to 'diminish or impair' pension benefits," the unions' argument says. The unions further contend that the plain language of the clause must be observed and the text does not include language subjecting pension benefits to sovereign police powers.
Illinois Attorney General Lisa Madigan's office, in a response to the unions' filing posted Monday, asserts that the U.S. Supreme Court has long held that a state can't enter into binding contracts that would preclude it from exercising its police power in the future.
"Both this Court and the U.S. Supreme Court have rejected the first argument and have concluded the State's police power is not limited to health, morals, and safety. It extends to economic needs as well," says the filing from state solicitor general Carolyn Shapiro.
The unions argue that the state's police powers are not applicable on the subject of pension legislation because of its role as a contractor and the financial nature of the legislation.
"The state is attempting to breach contracts and unilaterally change their terms to obtain a better financial deal, something no court would permit of a private party," the filing argues. "The state is therefore engaging in commerce, rather than acting as the sovereign, and it therefore cannot invoke the police power."
The state is accusing the unions of seeking to elevate the protection of pension benefits into "an unprecedented and unalterable super-contract."
"But the Pension Clause does not elevate one type of contractual commitment above all other government functions, at the expense of protecting the public welfare in extraordinary circumstances," the state asserts in its new filing. The state is asking justices to overturn the lower court ruling and send the case back for further consideration of whether it has acted properly under its police powers.
The state contends the pension legislation was needed to fix a dire situation that threatened its fiscal foundation and ability to deliver essential services. The state's struggles are underscored by its credit ratings deterioration and a backlog of unpaid bills measuring in the billions of dollars.
"Municipalities of all sizes and in all parts of the state are in desperate financial straits, squeezed between their pension obligations and limits on their ability to raise revenues," the state's latest filing says.
"As a result, some municipalities may conclude that they must, for example, lay off police or firefighters or privatize their public safety functions," it continues. The brief also cites rating reports on Chicago warning that its "massive and growing" pension liabilities "threaten the city's fiscal solvency" and its ability to deliver essential services.
Madigan's initial filing accused Belz of erring as his ruling included "virtually no discussion or analysis of the police-powers limitation."
In his ruling, Belz gave little credence to that defense. Belz said the state did not make the case that such powers were sufficient — or that they even existed — to ignore the "plain language" of the pension clause protecting annuities.
Belz cited language in state Supreme Court rulings that assert the plain language of the constitution cannot be rewritten.
Madigan also argues that Belz erred in overturning the legislation in its entirety without consideration given to upholding some pieces.
The Illinois Policy Institute, the Civic Committee of the Commercial Club of Chicago, the International Municipal Lawyers Association and Chicago filed amicus briefs in support of the state's position but the court declined to accept them given the limited time allowed by an expedited review.
If the high court upholds the lower court decision, state lawmakers and Gov. Bruce Rauner must go back to the drawing board to craft a fix for a system that is only 39% funded with payments of more than $7 billion due in the next fiscal year. Rauner proposed in his fiscal 2016 budget additional reforms that would protect accrued benefits with cuts going forward.
The pension changes remain on hold because Belz made permanent a temporary injunction banning the state from implementing the changes.
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 would be guaranteed and pension funds could ask the courts to compel the state to make the payments, although lawmakers could vote to change them.
The state's A-minus level bond ratings, the weakest among states, are at risk. In a Standard & Poor's report revising the state's credit outlook to negative from developing, analysts warned of the impact if the pension reforms were declared unconstitutional or implementation delayed and lawmakers fail to act on the structural budget gaps and payables outstanding.
"We believe there could be a profound and negative effect on Illinois' budgetary performance and liquidity over the next two years and that this could lead to a downgrade," analysts wrote.
Chicago too could suffer. It carries ratings from Moody's Baa1 to A-plus from Standard & Poor's, with negative outlooks.
Moody's, downgrading Chicago to Baa1 Friday, warned of the factors that could trigger further deterioration in the city's credit rating including a "determination by the Illinois Supreme Court that the state of Illinois' pension reform package is unconstitutional, which, depending on the court's rationale, could increase the risk that the city's own pension reform would be overturned."
The city's overhaul of its municipal employees and laborers fund is the subject of litigation by unions.
Madigan's office is also represented by assistant Attorneys General Richard Huszagh, Gary Caplan and Clifford Berlow. The unions and their members are represented by Aaron Maduff, Walker Lawrence, and John Carr of Maduff & Maduff LLC.
