CHICAGO - A group of current and retired Illinois educators say they relied on the state constitution's pension guarantee as they planned their careers, retirement timing, and children's education, and that lawmakers violated that guarantee when they overhauled the state pension system.
And so begins the fight unions and groups representing state employees and retirees promised before the ink dried on the legislation approved in early December. It scales back on what are now automatic cost-of-living adjustments, raises the retirement age for some, and caps pensionable salaries.
The fight over pensions in Illinois is among the most prominent such debates around the country as state and local governments from California to Puerto Rico confront pension liabilities.
To date, three complaints have been filed challenging the constitutionality of the pension overhaul, two in Sangamon County Circuit Court in Springfield, the state capital, and one in Chicago's Cook County Circuit Court. Others are expected to follow ahead of the law's effective date in June.
At the heart of the complaints is Article XIII, Section 5 of the state constitution known as the state's pension clause: "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 guarantee was counted on by teachers and administrators as they planned their retirement, sent their children to college, and decided against moving to the private sector, plaintiffs argue. "The guarantee on which so many relied has been violated," asserts the educators' complaint in Cook County.
Several of the complaints also lay out other key arguments behind union and retirement groups' positions. They cite the state constitution's contract clause and attempt to show the "intent" of participants in the 1970 constitutional convention during which the pension clause was established to protect pension benefits.
The state will be represented by Attorney General Lisa Madigan's office. Her father, House Speaker Michael Madigan, D-Chicago, is a key architect of the final legislation.
The Illinois conflict is similar to fights in several other states, but most experts say out-of-state precedents aren't transferable and the outcome will rest in Illinois law which affords pension benefits strong constitutional protections.
Supporters say the Illinois overhaul is needed to avert a fiscal calamity driven by underfunded pensions.
"We believe the new law is as constitutionally sound as it is urgently needed to resolve the state's pension crisis," Gov. Pat Quinn's spokeswoman Brooke Anderson said in a statement after the first challenge was filed Dec. 27.
"This historic law squarely addresses the most pressing fiscal crisis of our time. It will ensure retirement security for those who have faithfully contributed to the pension systems, end the squeeze on critical education and human services and support economic growth," she said.
Sponsors say if all pieces are upheld, the overhaul will shave $160 billion off scheduled payments to the system, pare about $21 billion off the state's $100.5 billion of unfunded liabilities, and $1.5 billion off upcoming annual state contributions. Final actuarial assessments are still in the works.
The primary savings will come from changing cost-of-living adjustments to grow at a slower rate on most portions of an annuitant's pension. Up to five COLA adjustments will be skipped.
The legislation also creates an optional 401(k)-style defined contribution plan although participation is limited. Employee contributions will drop by 1% and the state will make supplemental contributions in future years. Under the new law, the state will 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.
The state will argue that those latter provisions offer a buffer for employees and retirees under the legal theory of "consideration" in which some improvements are offered in exchange for negative modifications to a contract.
A lengthy preamble to the legislation lawmakers said underscores their "intent" in passage of the law offers another legal avenue for state lawyers to pursue - that fiscal doom lies ahead for the state and the pension system without reforms.
Illinois carries the lowest bond ratings among states at the low-single-A level. Fitch Ratings and Moody's Investors Service have called the changes a positive and Standard & Poor's shifted the state's outlook to "developing" from negative after the legislation passed. Interest rate penalties demanded by investors also narrowed when Illinois sold general obligation sale after the overhaul passed.
The bill's preamble outlines the dire status of the pension system and its drain on state coffers, the spending cuts and tax increases already implemented to help shore up the state's books, and the state's sharp credit deterioration.
The complaints assail the state's arguments. The RSEA lawsuit mocks the legislation's preamble, calling it "pure political theater and not a valid statement of intent."
The law "rewrites history and proposes to balance the state budget on the backs of retirees, making retirees the scapegoat for the state's fiscal sins," the RSEA complaint reads. It cites the state's past practice of sometimes shortchanging annual payments to the funds while requiring state employees to meet their commitments.
The framers of the 1970 constitution approved during a constitutional convention and ratified by voters "left unmistakable evidence of their intent" as they debated the clause, asserts one complaint.
In 1970, the state's unfunded liabilities were $2.5 billion and the system just 41.8% funded. The system is currently 39.3% funded. The clause's sponsor Henry Green said it would put the General Assembly on notice that membership in a system is an enforceable contract.
Another participant said the intent was to guarantee that benefits in place at the time employees joined the system have an enforceable right irrespective of the sponsoring government's financial condition.
Plaintiffs go on to further argue that their contract is enforceable under the state constitution's contract clause that reads: "No ex post facto law, or law impairing the obligation of contracts or making an irrevocable grant of special privileges or immunities, shall be passed."
Legal precedent exists in past state Supreme Court rulings, the teachers' lawsuit argues. It quotes past cases in which the court said it "consistently invalidated amendments to the pension code where the result is to diminish benefits" with the contractual relationship governed by the terms of the pension code in place at the time an employee enters the system.
"No principle of law permits us to suspend constitutional requirements for economic reasons, no matter how compelling those reasons may seem" is quoted from another case.
One complaint also argues that the label of COLA is inaccurate with state references dating back to 1969 referring to the annuity perk as an automatic increase.
Complaints also argue the law violates the state's equal protection clause as the changes impact four of the state's five retirement systems', leaving out the judges who will decide the law's fate, and they cite legal precedent for their position in past Illinois Supreme Court rulings.
There are eight named plaintiffs in the case filed Dec. 27 in Cook County who are current and retired teachers and school officials. The group is represented by Tabet, DiVito & Rothstein LLC and names as defendants Quinn, Comptroller Judy Baar Topinka, and trustees of the Teachers Retirement System.
The Retired State Employees Association lawsuit was filed in Sangamon County Circuit Court on Jan. 2. In addition to Quinn and Topinka, it also names Treasurer Dan Rutherford and trustees for the State Employees Retirement System. The group is represented by Rabin & Myers PC.
The Illinois State Employees Association Retirees also filed suit on Jan. 2 in Sangamon County. The association and its members named as plaintiffs are represented by Craven Law Office. It names as defendants Quinn, Topinka, Rutherford, and the board of trustees of the four impacted retirement systems.
The complaints all ask the court to overturn the pension law and seek class action status.
Legal experts are divided over whether the entirety of the new law, or portions of it, can withstand a challenge and one of the complaints specifically notes concerns voiced by Senate President John Cullerton, D-Chicago, who participated in final negotiations.
Court tests on pension changes across the country offer a mixed bag and don't necessarily provide a road map given the variances of individual state and constitutional law, especially on the central issue of COLA changes. Illinois is considered to have among the most stringent pension protections, similar to New York and Arizona.
Some rulings have granted stronger status solely to accrued benefits or retirees. In a Minnesota case, COLA changes were upheld for current retirees. Lower courts in Arizona have struck down pension cuts imposed by lawmakers, but a final ruling from the state's high court is still pending.
The Civic Federation of Chicago's Institute for Illinois' Fiscal Sustainability offered an overview of COLA changes enacted in other eight other states in a report published last week. The report - citing Amy Monahan a pension law expert at the University of Minnesota -- said court decisions on whether states have the ability to reduce COLAs have varied widely, making it difficult to predict whether such reductions are a viable option for states.
Final rulings in a few states are still pending before their high court while parties involving Rhode Island's changes are in court-ordered mediation, according to the Civic Federation citing information based partly on a report by the Laura and John Arnold foundation.