Gov. Bruce Rauner is touting a Senate plan to fix Chicago’s pension system after the Illinois Supreme Court rejected the city’s bailout plan.
The court ruled unanimously Thursday that the law reducing benefits and increasing employee contributions to fill an $8 billion hole in two retirement programs violated the state constitution’s protection of promised benefits. It ruled the same way on a state-pension overhaul last year.
According to audio released by his office, Rauner told reporters at a school visit in Paxton that benefits already accrued should be untouched. He backs a plan by Senate President John Cullerton — a Chicago Democrat — to offer employees a choice of less-expensive future retirement options.
* From yesterday’s Supreme Court decision…
Even taking as true the facts advanced to support the City’s claim, we hold that as a matter of law, members of the Funds did not bargain away their constitutional rights in this process. To be sure, ordinary contract principles allow for the modification of pension benefits in a bargained-for exchange for consideration. Buddell v. Board of Trustees, State University Retirement System, 118 Ill. 2d 99, 104-05 (1987) (pension rights can be modified “in accordance with usual contract principles”). As we explained in Heaton, the pension protection clause was not intended to prohibit the legislature from providing “additional benefits” and requiring additional employee contributions or other consideration in exchange. Heaton, 2015 IL 118585, ¶ 46 n.12. Likewise, nothing prohibits an employee from knowingly and voluntarily agreeing to modify pension benefits from an employer in exchange for valid consideration from the employer. Kraus v. Board of Trustees of the Police Pension Fund, 72 Ill. App. 3d 833, 849 (1979); see also York v. Central Illinois Mutual Relief Ass’n, 340 Ill. 595, 602 (1930) (“one party to a contract cannot by his own acts release or alter its obligations. The intention must be mutual.”).
* Now, here’s the Cullerton plan as described by Mike Schrimpf on Jan 22, 2016…
Pension Plan Summary
Tier 1 members (hired before January 1, 2011) in SERS, SURS, TRS, and GARS are provided two choices and must make an election between the two choices.
· COLA is the lessor of 3% OR ½ CPI, simple interest on the originally granted annuity.
In Exchange For
· Future increases in salary will count as pensionable salary.
· No changes to current level of pension benefits; COLA remains at 3% annually, compounded.
In Exchange For
· Future salary increases will not count as pensionable salary.
* From the Illinois Constitution…
SECTION 5. PENSION AND RETIREMENT RIGHTS
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.
* From our resident pension expert RNUG, who has been proven right every time…
Let’s take a look at the legislation through the lens of the most recent decision that basically says you can’t change things except, MAYBE, by the consideration contract model.
A court would take up the issue of diminishment under the Pension Clause first, then look at contract law consideration.
First, there is no “keep what you have” option. The proposed choice is coerced, so it’s not going to be judged as voluntary under contract law and that is before we even look at any consideration or diminishment issue.
In Choice 1, the so-called consideration is that future salary increases will count as pensionable salary. How is that different from today? It isn’t; today any raise received will be part of the salary used in the pension calculation formula. So you get nothing new in exchange for giving up your 3% compounded AAI. Doesn’t sound like any kind of valid consideration and, in fact, diminishes your future pension payments.
In Choice 2, the so-called consideration is keeping your existing 3% compounded AAI in exchange for diminishing the salary basis used for calculating the pension. You get to keep what you are already entitled to in terms of pension payments, but we won’t let you have a higher Final Average Compensation than you have today. In other words, we will limit one of the factors used to calculate your pension. That is clearly diminishment, and there have been a number of prior rulings that, to paraphrase, say you don’t have to give raises, but if you do, it counts towards the pension.
Without citing the various cases, it’s clear to me that both Choice 1 and Choice 2 would likely be ruled unconstitutional.
Now if you added “keep what you have”, it might be legal enough to pass the constitutional test but it might still have issues as to whether or not is was “valid” consideration … although the IL SC did tend to imply if you were fool enough to voluntarily agree to a bad deal, it might be legal.
I can’t imagine anyone who understood it taking either choice voluntarily.
And if forced to make a choice, personally, I would refuse to choose - while undoing things after any court ruling - so I could later argue to the IRS that “irrevocability” did not apply because I never agreed to the change.