* Gino L. DiVito and John M. Fitzgerald asked if I’d publish a “short” legal analysis of Eric Madiar’s latest pension reform idea. It ain’t exactly short, but it is interesting…
We were honored to represent Doris Heaton and certain other plaintiffs in Heaton v. Quinn, the litigation that resulted in a unanimous opinion by the Illinois Supreme Court which invalidated Public Act 98-0599 (Senate Bill 1). As attorneys who have a longstanding interest in protecting the pension rights of public sector employees in Illinois, we deeply appreciate the legal scholarship of Eric Madiar. Mr. Madiar is an outstanding lawyer and legal scholar, and his analysis of the Pension Protection Clause of the Illinois Constitution (Art. XIII, § 5) is mandatory reading for anyone who wants to understand that constitutional provision.
Mr. Madiar recently authored an article for the Illinois Public Employee Relations Report with the title, “Illinois Public Pensions: Where To From Here?” The article combines Mr. Madiar’s exhaustive and illuminating legal analysis with bold prescriptions for pension reform. One of those bold ideas, however, gives us pause. Mr. Madiar ascribes a certain pension reform proposal to Illinois Senate President John J. Cullerton and explains it as follows:
The proposal offers Tier 1 employees in the three largest State pension systems—TRS, SURS, and SERS—a choice of either agreeing to a lower annual annuity increase (i.e., “COLA increase”) or rejecting the requested change. Specifically, the legislation provides an election process wherein Tier 1 employees are expressly asked in the legislation to agree to waive their right to the current annual 3 percent compounded COLA increase they would otherwise receive in retirement, and instead receive the Tier 2 COLA increase. The Tier 2 COLA increase would annually increase a participant’s retirement annuity amount by the lesser of 3 percent simple or half the rate of inflation, and delay the receipt of those increases to the earlier of five years after retirement or age 67.
Tier 1 employees who agree to the lower COLA increase will receive, at a minimum, one item of legal consideration for giving up their current compounded 3 percent COLA. In the legislation itself, the State expressly and irrevocably promises, as an employer, to never offer future salary increases on a nonpensionable basis. The waiver of this right creates a new legal detriment on the State, as an employer, that benefits employees who accept the offer.
Tier 1 employees who reject the COLA change will continue to keep their current annual 3 percent compounded COLA increases in retirement. For these employees, however, the State will exercise its legal right as an employer and only offer all future salary increases to these employees on a nonpensionable basis. Put differently, a Tier 1 employee rejecting the COLA change will still be offered salary increases in the future, but only on the express condition that the increases, if accepted, will not apply in the calculation of the employee’s pension at retirement.
While we appreciate that bold and creative ideas are necessary to address the problem of pension system underfunding, this particular idea could not withstand judicial scrutiny. As described in Mr. Madiar’s article, the Cullerton proposal would force upon pension system members a choice between two diminishments of their constitutionally protected pension rights. The fact that a “choice” is offered does not matter. Either “choice” would be a pension diminishment and a violation of the Pension Protection Clause of the Illinois Constitution.
As the Illinois Supreme Court has explained, “once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to that individual.” In re Pension Reform Litigation (Heaton v. Quinn), 2015 IL 118585, ¶ 46; see also Kanerva v. Weems, 2014 IL 115811, ¶ 38; Jones v. Municipal Employees’ Annuity & Benefit Fund of Chicago, 2016 IL 119618, ¶¶ 36-47.
Applying this constitutional rule, our courts have repeatedly invalidated amendments to the Illinois Pension Code that would change the calculation of a pension system member’s pensionable salary so as to diminish that member’s pension benefits. In Heaton, the Illinois Supreme Court invalidated legislation which, among other things, “cap[ped] the maximum salary that may be considered when calculating the amount of a member’s retirement annuity.” Heaton, 2015 IL 118585, ¶ 27 (describing P.A. 98-0599). Likewise, in Felt v. Board of Trustees of Judges Retirement System, our Supreme Court invalidated legislation that changed a judge’s pensionable salary from the “salary of the judge on the last day of judicial service” to “the average salary for the final year of service as a judge.” See Felt, 107 Ill. 2d 158, 161-63 (1985). Likewise, in Kraus v. Board of Trustees of Police Pension Fund of Village of Niles, the Illinois Appellate Court held that a police officer on disability could not constitutionally be denied his right under the Pension Code to “receive a pension of one half the salary attached to his rank for the year preceding his retirement on regular pension.” While the Pension Code had been amended so as to change that formula, that Pension Code amendment could not be applied to the officer because it was enacted after he joined the pension system. See Kraus, 72 Ill. App. 3d 833, 843-51 (1979). In other words, it is clear that variables in the pension formula that are tied to a pension system member’s salary cannot be changed to that member’s detriment after he or she has joined the pension system.
But the Cullerton proposal would do exactly that. In Mr. Madiar’s words, pension system members who choose not to “agree” to a diminishment of their COLAs (or, more accurately, statutory “automatic annual increases” in the pension annuity) would be offered future salary increases only “on the express condition that the increases, if accepted, will not apply in the calculation of the employee’s pension at retirement.”
Under existing law, pension system members’ salary increases are factored into the formula that is used to calculate their pension annuities. By way of example, under section 16-121 of the Pension Code, a TRS member’s salary is defined as the “actual compensation received by a teacher during any school year and recognized by the system in accordance with rules of the board.” That “actual compensation” will incorporate any salary increases a teacher has earned over the course of his career, and that teacher’s “salary” will be a variable in the formula used to determine his pension annuity. The Cullerton proposal would change the formula to freeze a pension system member’s pensionable salary as of the date he refused to “agree” to another pension diminishment. Thus, section 16-121 would presumably be amended to define a TRS member’s “salary” as something less than his or her “actual compensation” if that TRS member refused a COLA reduction. Under the Cullerton proposal, a TRS member’s “salary” would instead be his “actual compensation” as of the date he turned down the COLA-reduction option, not the “actual compensation” he subsequently “received.”
Such a pensionable salary freeze does not stand on any different footing from the pensionable salary changes that were held unconstitutional in Heaton, Felt and Kraus. The principle is simple: One’s pensionable salary is a key variable in the pension formula. A pension system member currently enjoys the right to have any future salary increases factored into his or her pensionable salary. The Cullerton proposal would change that statutory formula so as to freeze pensionable salaries as of a date certain and thereby reduce pensions. That is a violation of the Pension Protection Clause of the Illinois Constitution.
Of course, public sector employers generally may simply decide not to give their employees a raise. But that is beside the point. The Cullerton proposal would diminish pensions by changing the way the Pension Code calculates pension annuities; specifically, by freezing one’s pensionable salary as of a date certain. That is not permitted by the Pension Protection Clause.
Mr. Madiar concedes that Illinois decisions have “invalidated legislation that unilaterally narrowed the statutory definition of pensionable salary,” but he argues that none of those decisions “involved an express offering of future salary increases on a non-pensionable basis” (emphasis in original). To us, that is a distinction without a difference. Changing the law to provide that future salary increases will not count towards one’s pensionable salary constitutes a diminishment of one’s constitutionally protected pension rights. Such a change would suffer the same fate as other changes to the Pension Code’s formulation of one’s pensionable salary.
Nor is the outcome different simply because a pension system member is given a “choice” between two alternative pension diminishments. Mr. Madiar argues that a diminishment of pension rights may be constitutionally valid if it is part of a “bargained-for exchange.” This argument may have persuasive force if a pension system member is being offered some new benefit in exchange for surrendering a pension right. In the Cullerton proposal, however, there is no new benefit. Under that proposal, at best, a pension system member is permitted to keep the current statutory treatment of his or her pensionable salary.
Mr. Madiar relies heavily on Carroll v. Grumet, 281 A.D. 35, 36-38 (N.Y. App. Div. 1952). But in that case, a New York City firefighter was offered a “cost of living bonus” and agreed, apparently from the outset, that this new benefit would never count towards his pensionable salary. We believe Carroll is distinguishable. Unlike the plaintiff in Carroll, who apparently never had a legal right for the “cost of living bonus” to be counted towards his pensionable salary, members of Illinois public sector pension systems have an existing legal right for any salary increases that they may earn between now and their retirement to be factored into their pensionable salary. We should add that Kanerva counsels against overreading the holdings of New York decisions in this area. See Kanerva, 2014 IL 115811, ¶ 52 (agreeing with the Hawaiian Supreme Court’s holding that a certain New York decision interpreting the New York Constitution’s pension protection provision was “distinguishable and unpersuasive”). We see no reason to believe that the Illinois Supreme Court would adopt the expansive reading of Carroll suggested by Mr. Madiar.
Mr. Madiar also argues that the “choice” imposed on pension system members by the Cullerton proposal is not tantamount to duress. Even if true, that point would be irrelevant. If both options presented by the Cullerton proposal are unconstitutional pension diminishments, then the proposal would be invalid regardless of whether it constitutes duress in the legal sense.
In conclusion, we applaud Mr. Madiar for his continued scholarship on this crucial legal subject. We also agree that creative ideas will be necessary to address the chronic problem of pension system underfunding in this State. We strongly believe, however, that this particular proposal is unconstitutional.
About the authors: Gino L. DiVito and John M. Fitzgerald are partners at the Chicago law firm Tabet DiVito & Rothstein LLC. Mr. DiVito is a retired justice of the Illinois Appellate Court.