CHICAGO — Illinois is squaring off against opponents of its 2013 pension reform legislation before the Illinois Supreme Court.
The high court is set to hear oral arguments at 2:30 P.M. Central Time Wednesday in the state's appeal of a lower court ruling last year that voided the legislative package that cut benefits for four of the state's five pension funds.
Due to high interest in the case, the arguments will be broadcast through the
The state is arguing that its grim fiscal prospects force it to cut benefits in the face of its plummeting bond rating and rising pension contribution levels that are squeezing its ability to provide basic services.
Unions and pension fund participants counter that the state constitution protects those benefits from the chopping block no matter how dire the state's fiscal condition.
Observers will be paying close attention to questions justices ask hoping for signals on 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.
There is national interest in the case as governments weigh their public employee retirement liabilities.
The argument the high court is asked to settle centers on the interpretation of the pension clause adopted at the 1970 state constitutional convention.
The state says its sovereign police powers trump the clause's contractual protection of pension benefits.
In their brief, public employee unions argue that the 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 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 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 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 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.
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.
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.
Some believe clues to the justices' predisposed positions can be found in their majority ruling last year in Kanerva v. Weems, finding that state retirees' healthcare premium subsidies are protected by the constitution. The court did not rule on whether state changes violated those protections, just that the pension clause applied. The case was sent back to the lower courts to debate whether a violation occurred.
When it rules, the court could uphold the lower court in a finding that the pension clause protections are absolute and the legislation impaired public employees and retirees' contractual rights.
The court could side with the state and rule that the state's sovereign powers should be considered in the case and send it back to the lower court to consider arguments on whether the threshold for acting in the public good to impair a contract was met.
Or, the court could issue a broader opinion finding that the higher purpose of protecting the public good against a loss of services and financial instability overrides the clause's protections and that the state acted appropriately to modify a contract because it could no longer afford the benefits' costs.
A fourth scenario involves both sides reaching some form of settlement, Spiotto said.
"Settlements are good," he said.
Either side could eventually petition the U.S. Supreme Court to consider the case through a writ of certiorari.
"The U.S. Supreme has been clear that a government cannot bargain or contract away its mandate to protect the health, safety, and welfare of the public welfare which are the essence of government," Spiotto said.
The state would argue the debate poses a federal constitutional issue. The unions could argue that even though they believe the protections are absolute the threshold for violating the contract was not met by the state. The U.S. Supreme Court has previously considered cases involving state obligations and contracts, but has never settled a case over pension benefits, Spiotto said.
