CHICAGO -Illinois retiree healthcare premium subsidies are protected by the state constitution, the Illinois Supreme Court
The court's opinion in Kanerva v. Weems throws a potential wrench into an overhaul state officials estimated would save about $900 million over the next three years. The changes took effect in 2012, ending the automatic premium subsidies for members of three of the state's five pension funds based on length of service. Instead the subsidy level is now negotiated annually by the state's Department of Central Management Services.
The state's high court reversed a lower court's decision to dismiss the case and sent it back to the lower court for further review.
The court's opinion could also cut a wider swath, providing insight into justices' thinking as they consider a challenge to the state's sweeping pension overhaul approved in December. It could also impact the outcome of litigation challenging Chicago's move to cut its retiree healthcare benefits and an expected challenge of the city's recent overhaul of two of its four pension funds.
The decision will likely be viewed as ominous for the state pension overhaul, which cut some benefits, including automatic cost-of-living increases, as many legal analysts had said retiree healthcare subsidies held a weaker claim on state constitutional protections.
The court, however, will be considering additional legal factors in the pension case as the defense put forward by the state differs in the two cases. In the retiree healthcare base, the state claimed the benefit doesn't enjoy constitutional protections.
In the pension reform case, the state has argued that its precarious fiscal condition threatened the solvency of the funds and that it offered pension members "consideration" for the benefit cuts by restoring solvency to the funds and lowering employee contributions.
The Civic Committee of the Commercial Club of Chicago, which has pressed the state on pension reforms, noted the varying legal arguments. “Today’s state retiree health care ruling considered a different set of facts than that important legislation, and it is a fundamental premise of our legal system that a court cannot preemptively rule on a matter that is not yet before them,” it said in a statement. “Our state’s ability to continue providing crucial services, while securing public employee pensions, requires that the pension reform legislation take effect.”
Nationally, the opinion could reverberate in states with similarly strong constitutional protections of retirement benefits.
In the opinion, the court concludes: "The state's provision of health insurance premium subsidies for retirees is a benefit of membership in a pension or retirement system" under the state constitution, "and the General Assembly was precluded from diminishing or impairing that benefit for those employees, annuitants, and survivors."
The circuit court erred in dismissing, for failure to state a cause of action, the plaintiffs' claims that the challenged statute is void and unenforceable under the pension protection clause, according to the opinion.
Both Gov. Pat Quinn and Illinois Attorney Lisa Madigan's office, which is representing the state in the case, sought to distance the Thursday's opinion from the litigation challenging the state's pension overhaul.
"While this decision is very clear on the fact that the pension clause covers health care benefits, the arguments in the pension reform litigation are different than the ones in this healthcare case," Madigan's office said. "As a result, this opinion has no direct impact on the pension reform litigation arguments. We will continue to vigorously defend the pension reform law," its statement said.
"We're confident the courts will uphold this critical law that stabilizes the state's pension funds while squarely addressing the most pressing fiscal crisis of our time by eliminating the state's unfunded pension debt," Quinn's office said.
Passage of pension changes to deal with $100.5 billion of unfunded liabilities helped stave off further downgrades of the state's general obligation rating, the lowest among states at the low-single-A level, and helped trim interest rate penalties on recent state bond sales. The state's credit rating remains precarious given the General Assembly's failure to either make permanent an expiring income tax hike or enact spending cuts during its recent session.
The state has argued in its initial briefs on the pension reform litigation that the overhaul was needed given the state's dire financial condition and the weak condition of the pension funds. The opinion on the retiree healthcare benefits pointed to debate on the pension clause during the 1970 constitutional convention and concluded that the provision "was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them."
“The Illinois State Supreme Court’s decision today to protect health care benefits under the Pension Protection Clause puts a damper on any expectations that the state’s pension reform plan is a done deal,” said Richard Ciccarone, president of Merritt Research Services LLC. “The odds of achieving a successful effort to get the Court’s blessing should be far from assumed.“
At the heart of the case was whether the state's subsidies for healthcare retiree premiums count as a benefit of membership in the state's retirement system and whether Article XIII, section 5, of the state constitution applied. That pension protection clause provides that "membership in any pension or retirement system of the state shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."
Four lawsuits brought by pension fund members argued that the changes violated the pension clause. Two complaints alleged a violation of the contracts clause and one alleged a violation of the separation of powers clause.
On the central question of the protection clause, the pension fund members argued the changes "diminished or impaired this retirement system membership benefit."
The separation of powers allegation was based on the "invalid delegation of legislative authority" to the director of Central Management Services to negotiate the state's subsidy. The plaintiffs in their argument of a contracts clause violation claim the benefit is a contractual promise broken by the 2012 law.
The state in its filings countered that the pension clause applied only to "traditional pension benefits and does not encompass the state's obligations to contribute toward the cost of health care benefits for retired state employees and their survivors."
The state argued retiree healthcare subsidies are not codified in the pension code, are calculated with different forumulas, and are not paid from the assets of the retirement funds, making them fundamentally different from pension annuities.
Sangamon County Circuit Court Judge Steven Narduilli dismissed the lawsuits last year agreeing with the state that the benefits are not protected by the pension clause. He did not decide on the other alleged violations.
The Supreme Court rejected the state's arguments, concluded that that the plain and ordinary meaning of constitution makes all benefits awarded to retirees, including subsidized health care, a protected benefit of membership in a state pension or retirement system.
The justices note no language in the constitution that warrants a limitation excluding a benefit like retiree healthcare. They also called the fact that different calculations are used to set healthcare subsidy and pension annuities as "legally irrelevant."
"If they had intended to protect only core pension annuity benefits and to exclude the various other benefits state employees were and are entitled to receive as a result of membership in the state's pensions systems, the drafters could have so specified. But they did not," the opinion says of the drafters of the 1970 constitution.
The opinion cites in its support a recent decision in Everson v. State of Hawaii which addressed a similar question and concluded that because the health care benefits arise from and are conditioned on membership in a public retirement system, they qualify as a benefit of membership in the retirement system and fall within the protections of Hawaii's constitution.
The strength of the arguments aside, the court's opinion also cited settled Illinois law in noting that when there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner.
The state subsidies carried a price tag of more than $877 million in fiscal 2014. The state funds its other post employment benefits on a pay-as-you-go basis. Unfunded liabilities total about $33.3 billion and the changes were expected to trim $9 billion off that figure. The state's current union contract shaves $900 million off the state's bill for retiree health care over its three-year term.
There's no immediate impact on the state budget as the case has been remanded to the lower court for further adjudication.
The opinion was written by Justice Charles E. Freeman with Chief Justice Rita B. Garman and Justices Robert R. Thomas, Thomas L. Kilbride, Lloyd A. Karmeier, and Mary Jane Theis concurring.
Justice Anne M. Burke dissented. In her dissent, Burke concluded that the retiree subsidy is not a benefit of membership in the retirement system that is protected by any contractual rights or from impairment or diminishment.
