CHICAGO - Illinois' need to protect the public welfare in the face of a fiscal emergency by cutting pension benefits trumps their state constitutional protections, Illinois' solicitor general told the state's high court Wednesday.
Solicitor General Carolyn Shapiro was first up in oral arguments presented to the Illinois Supreme Court. The court's seven justices will decide the fate of legislation approved in December 2013 that trimmed benefits with the goal of stabilizing a system saddled with $111 billion in unfunded obligations that has dragged down the state's bond ratings and threatened its fiscal solvency.
A circuit court judge last November voided the legislation in its entirety finding it violated the pension clause adopted in the 1970 constitutional convention that grants contractual status to pensions and protects them from impairment or diminishment.
Shapiro summed up the legal issue as viewed by the state.
The justices must decide whether the state is correct in its position that "the pension clause provides the same robust but not absolute constitutional protections provided to all contracts," she said.
Or it can side with unions and the plan participants who are challenging the changes and find that it "is instead a "categorical and absolute ban on any reductions to pensions even under extraordinary circumstances," Shapiro said.
"Plaintiffs position is remarkable," she said. "If the state's bond rating collapsed rendering borrowing prohibitively expensive, pensions would be entirely off limits regardless of the essential state services that might have to be eliminated."
If a natural disaster struck, pensions could not be even temporarily reduced, she added.
"These scenarios may seem extreme. They are. But that is what plaintiffs are asking for," Shapiro said in attacking the unions' position. "It is the state's solemn responsibility to protect the public interest, the public health, safety and welfare in extreme situations but the necessary consequence of what plaintiffs are demanding and circuit agreed would tie the state's hands when its need to act is most pressing."
Shapiro sought to portray the diminished and impaired language as a reference to the enforceable contract status afforded to pensions, not to the pension benefits themselves and argued that past contract law precedent over the last 150 years allow the state to modify a contract under some circumstances.
The plaintiffs' position "would tie the state's hands when its need to act is most pressing," Shapiro said, arguing that there is little debate that the state is not facing a fiscal crisis given its budget deficit, massive unpaid bill backlog between $5 billion to $6 billion, and a credit rating that is the weakest among states.
"Like all contracts, they can be altered they are not absolute," Shapiro said. The state argued that if the protections are absolute the clause does not legally meet the definition of a contract as the state constitution allows for contract modifications.
Union attorney Gino DiVito, of Tabet DiVito & Rothstein, asked the court to look at both the plain language of the pension clause and the intent of the delegates to the 1970 constitutional convention that established the pension clause.
It is "explicit, clear and unambiguous" and "is subject to no stated exception," DiVito said, adding that the language is so "simple and plain" that the voters' guide on the constitutional changes simply said "this section is new and self-explanatory."
The drafters anticipated the very situation that the court is now reviewing by which a General Assembly would act during a time of fiscal distress to "invalidate a constitutional protection" and so created "a binding contractual relationship for public employees," DiVito said.
The state constitution lays out situations where the state can act and "those limitations are not in the pension clause," said Aaron Maduff, of Maduff & Maduff. "A constitution is not a guideline. A constitution tells us how we limit the power of the government."
Maduff also warned of potential fallout should the court find the state can alter a contract because of police powers in a time of fiscal distress.
What if the state says "police power" and doesn't pay its bonds, he asked.
"This is a situation of the state's making, what credit will the state have as we go forward on any other contract it has," Maduff said.
The two sides also tussled during 55 minutes of oral arguments over their interpretation of federal constitutional law. The state contends 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 to protect the public welfare while the unions accuse the state of wrongly applying federal law.
Only a few justices asked questions, leaving few clues about how a majority may lean.
Justices pressed the state's lawyers on whether a ruling in its favor would give it too much power, potentially unleashing future attacks on statutory and constitutional provisions. Justice Robert R. Thomas asked whether granting the use of police powers would give the state too great a "license" to modify its contractual obligations.
Shapiro stressed that the state constitution provides only a few exceptions for such modifications. She further argued that if the justices agree that the pension benefits are subject to police powers, a check on its power lay in future arguments that would be made at the circuit court level.
"The lower court will conclude whether the circumstances justify the state's actions," she said. Justices also questioned how the state's pension funds sunk so low, suggesting it was a mess of the state's own making. The state pinned the blame on the recession and economic conditions with inflationary levels driving big cost-of-living adjustments and stressed that the pension cuts don't put the tab for past underfunding on employees but only the costs going forward.
Justice Thomas also questioned whether the state faces what it considers a dire budget situation due to the state General Assembly's failure to extend the 2011 income tax hike. The higher rates partially expired and lawmakers have not acted to make up the lost revenue. New Gov. Bruce Rauner has proposed a budget that doesn't raise any taxes.
Shapiro sought to put off such questions over the state's fiscal situation as a matter for debate at the lower court.
The two sides attacked each other's arguments as to the intent of delegates at the 1970 constitutional convention. The court asked the state how the court should consider what looks to be "clear evidence" that delegates sought to protect benefits from the legislative chopping block during trying economic times.
Shapiro asserted the state's position that it was only the delegates' intent to afford pensions a contractual safeguard and any further protections would raise an issue over their constitutionality.
Justices questioned why the state --if it in the midst of fiscal emergency - has asked the court to decide only whether the pension contract is subject to modification under state police powers and to then send the case back to the lower court for review. Justices said the case only would land back before them delaying legislative action possibly on new reforms. The state said it believed there would be sufficient time for lawmakers to act.
The case is formally known as Doris Heaton, et al, v. Pat Quinn, et al. The pension reforms were signed into law by former Gov. Pat Quinn.
While some will look to the justices' questions as a harbinger of their position, municipal bankruptcy and restructuring veteran James Spiotto cautioned that it's difficult sometimes to discern the motive behind a judge's question.
"Is the question being asked to provoke an answer or is it rhetorical and being asked simply to affirm what a justice is thinking?" said Spiotto, co-publisher of the website MuniNet Guide. "It's hard to guess but it will be interesting to watch what kind of questions will be asked with regard to higher public purpose."
The decision, expected to be rendered in the coming months, could impact the state's battered credit ratings. Depending on the scope of the ruling, Chicago's rating could also be impacted if the ruling's reach extends to 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. They raise the retirement age for some, cap pensionable salaries, and limit cost-of-living increases while lowering employee contributions.
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.
