Civics Wed Dec 24 2014

The Illinois Constitution and Pension Impairment

By Ramsin Canon

Why are your FICA taxes -- Social Security and Medicare -- distinct from the rest of your taxes?

When Franklin Roosevelt proposed the social security program -- which he termed an "old-age pension" -- to the Congress, he said that it was necessary that the funding of old-age pensions should not come from "general taxation" -- where they are subject to the vicissitudes of the annual appropriations process. The point of Social Security was to create some measure of predictability and safety for workers reaching the end of their working life. The source of the funds should be stable and dedicated. Without that, it could hardly be called a safety net.

As soon as it was created, Social Security was attacked in the courts by employers who argued the program was unconstitutional, as outside the scope of Congress's powers. The Supreme Court ultimately held that Congress had the power under the Commerce Clause to require private sector employers to contribute to social security. Governments, however, are not typically understood as engaging in "interstate commerce," one of the required elements for exercise of Commerce Clause powers.

So employees of government are not among the workers covered by the Social Security Act. Their retirement security is provided for by state statutes, which can be amended or changed by legislatures. The acts of the legislature one year cannot bind subsequent elected legislatures -- this is known as the reserved power doctrine.

You can see how this could undermine one of the purposes of old-age retirement insurance: predictability.

It was for this reason that at the 1970 Constitutional Convention, delegates from all over Illinois included a provision in the constitution that barred state legislatures from impairing or diminishing pension payments promised to public employees. Absent such a provision, legislatures could compete in the labor market with promises of pension benefits that would supplant the social security benefits they otherwise would not get, and then cut those benefits when it was politically expedient.

This is Section 5 of Article XIII of the Illinois Constitution, and it is under this provision that public sector workers have brought lawsuits challenging various efforts to cut pension benefits. This includes the recent case in Sangamon County that resulted in an opinion striking down a major pension reform bill, known as Public Act 098-0599.

Just last week, a group of Chicago city employees covered by the Municipal Employees'
Annuity and Benefit Fund of Chicago ("MEABF") sued to enjoin enforcement of a similar bill that empowered that Fund to increase employee contributions and cut benefits by modifying cost of living increases.

Historically when the state or subdivisions of the state (like the MEABF or the City of Chicago) have defended pension impairment bills, they do not deny that benefits are being impaired, but argue that they have the power to do so under the reserved powers and police powers doctrines. In their essence, these legal doctrines state that sovereigns, like state governments, cannot bargain or contract away certain powers, including their police powers, which permit them to legislate for the health, safety, and general welfare.

Thus in the MEABF statute, the bill's authors make a point of the fact that unfunded liabilities constitute an existential threat to City government:

The City, even as a home rule unit, lacks the ability and flexibility to raise sufficient revenues to fund the current level of pension benefits of these Pension Funds while at the same time providing important public services essential to the public welfare....Personnel costs constitute approximately 75% of the non-discretionary appropriations for the City. As such, reductions in City expenditures to fund pensions would necessarily result in substantial cuts to City personnel, including in key services areas such as public safety, sanitation, and construction....In sum, the crisis confronting the City and its Funds is so large and immediate that it cannot be addressed through increased funding alone, without modifying employee contribution rates and annual adjustments for current and future retirees. The consequences to the City of attempting to do so would be draconian. Accordingly, the General Assembly concludes that, unless reforms are enacted, the benefits currently promised by the Pension Funds are at risk.

The state and its subdivisions have tried to float this argument up to the Supreme Court of Illinois in hopes that that Court will identify an exception to the Constitution's Pensions Clause that will allow legislatures to diminish benefits when predictions of insolvency are sufficiently dire. The cards are stacked against them in these arguments; in a case called McNamee, the Supreme Court laid out its general course in pension impairment cases: "[We have] consistently invalidated amendment to the Pension Code where the result is to diminish benefits." Judge Belz in his recent opinion was even more clear: "[T]he Illinois Pension Clause's protection against the diminishment or impairment of pension benefits is absolute and without exception."

The problem for state and local governments is that the reserved powers doctrine protects the powers of the sovereign from individual instances of improperly bargained or contracted-away powers as a result of a statutory or administrative action. For example, if the 2013 General Assembly passed a law prohibiting the 2014 General Assembly from putting vendor contracts out to bid. But all of the government's powers are defined by the state constitution.

Any act of the state or local governments that is beyond the power given to it by the state Constitution are ultra vires. Only the state Supreme Court can read an exception into the otherwise "absolute and without exception" Pension Clause -- and based on the arguments the state has raised in these lawsuits, they anticipate that this exception will be based on a sort of "emergency" rationale -- that the Pensions Clause cannot mean impairment is ultra vires where non-impairment would result in bankruptcy or collapse of government bodies.

Is the Supreme Court ready to make such a holding? In their briefs to the court, attorneys for state employees pointed out that any existing crisis is the result of legislative inaction and even chicanery; refusing to make sufficient contributions and using pension dollars for other projects. The Court may take that into consideration -- that the state cannot both create and cry emergency. However, it is important to keep in mind that courts, even the Supreme ones, exist in a political context and even long-standing legal doctrines can be undermined by the political exigencies of the time.

The Chicago employees who filed suit last week can reasonably expect a favorable ruling; however, the Supreme Court may take up an appeal from the Sangamon County decision and stay the MEABF court decision until it rules.

Can the pension situation created by the legislature's behindhand funding justify an exception not written in the Constitution? The retirement security of tens of thousands of people hangs in the balance.