Jones v. Municipal Employees' Annuity & Benefit Fund , 2016 IL 119618 ( 2016 )

2016 IL 119618
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket Nos. 119618, 119620, 119638, 119639, 119644 cons.)
MARY J. JONES et al., Appellees, v. MUNICIPAL EMPLOYEES’ ANNUITY
AND BENEFIT FUND OF CHICAGO et al., Appellants.
Opinion filed March 24, 2016.
JUSTICE THEIS delivered the judgment of the court, with opinion.
Chief Justice Garman and Justices Thomas, Kilbride, and Karmeier concurred
in the judgment and opinion.
Justices Freeman and Burke took no part in the decision.
OPINION
¶1 The question presented in this consolidated appeal is whether Public Act
98-641 (eff. June 9, 2014) (Act), which amends the Illinois Pension Code as it
pertains to certain pension funds for employees of the city of Chicago, violates the
pension protection clause of the Illinois Constitution. Ill. Const. 1970, art. XIII, § 5.
On motions for summary judgment, the circuit court of Cook County declared the
Act to be unconstitutional in its entirety and permanently enjoined its enforcement
because it diminished pension benefits in violation of the pension protection clause.
For the reasons that follow, we affirm.
¶2 BACKGROUND
¶3 Illinois has established various public pension systems, including four pensions
for public employees of the city of Chicago (the City). These pension funds include
the Municipal Employees’, Officers’, and Officials’ Annuity and Benefit Fund
(MEABF) (40 ILCS 5/8-101 et seq. (West 2012)), the Laborers’ and Retirement
Board Employees’ Annuity and Benefit Fund (LABF) (40 ILCS 5/11-101 et seq.
(West 2012)), the Firemen’s Annuity and Benefit Fund (FABF) (40 ILCS 5/6-101
et seq. (West 2012)), and the Policemen’s Annuity and Benefit Fund (PABF) (40
ILCS 5/5-101 et seq. (West 2012)).
¶4 At issue in this appeal are the City pensions impacted by Public Act 98-641,
which include MEABF and LABF (collectively the Funds). Participants in the
MEABF include most civil servant employees of the City, as well as nonteacher
employees of the Chicago public school system. 40 ILCS 5/8-107 (West 2012).
Participants in the LABF include primarily labor service workers. 40 ILCS
5/11-110 (West 2012). These funds operate in a similar way to the state-funded
retirement systems, in many respects. The City pension funds are all subject to the
pension protection clause of the Illinois Constitution, which provides:
“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.” Ill. Const. 1970, art. XIII, § 5. Also, the City pension funds provide
traditional defined benefit plans under which members receive specified annuities
upon retirement generally based upon the member’s salary, years of service, and
age at retirement.
¶5 As with the state-funded pensions, prior to the enactment of Public Act 98-641,
for employees hired prior to January 1, 2011, annuity payments under the Funds
were subject to 3% automatic annual increases beginning after the member’s first
full year of retirement, and compounded annually. 40 ILCS 5/8-137, 8-137.1,
11-134.1, 11-134.3 (West 2012). For employees hired after January 1, 2011, the
annuity adjustments were tied to the Consumer Price Index. 40 ILCS 5/1-160 (West
2012).
¶6 The benefits under MEABF and LABF are funded from three sources:
contributions from the City, contributions from the employees, and investment
returns. Prior to Public Act 98-641, the employees contributed 8.5% of their salary
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toward their pension on an annual basis. 1 40 ILCS 5/8-137(b), 8-174(a), 8-182,
11-134.1, 11-170, 11-174 (West 2012). The City contributed an amount based on a
fixed multiplier, 1 or 1.25 times the annual employee contributions (40 ILCS
5/8-173(a), 11-169 (West 2012)), which was historically paid largely from property
tax proceeds.
¶7 As we explained in In re Pension Reform Litigation, 2015 IL 118585, ¶ 11
(hereinafter referred to as Heaton), the public pensions, including the City
pensions, have been historically inadequate to cover the benefits owed to members.
The specific concerns over funding deficiencies in the City pension funds have
been well documented. As reported in 1949, “every fund in Illinois suffers at this
time an actuarial insolvency.” Report of the Illinois Public Employees Pension
Laws Commission of 1949, 10 (1949). In 1969, the Illinois Pension Laws
Commission explained:
“The inadequacy of the provisions for financing the employer’s share of the
cost contained in the pension laws enacted many years ago has resulted in large
unfunded accrued liabilities. The revenue provisions have not been sufficiently
flexible to meet the increasing costs occasioned by salary increases and
additions to membership. The method of financing the employer’s obligation
by means of fixed tax levies or arbitrary state appropriations is outmoded and
fails to provide revenues sufficient to meet not only the accruing service cost
but also interest on the accrued liability.” Report of the Illinois Pension Laws
Commission of 1969, 106 (1969).
¶8 These concerns over the ongoing funding deficiencies led to the adoption of the
pension protection clause in 1970. At the constitutional convention, Delegate
Kinney raised specific issues relevant to the City pensions. She particularly noted
the concerns related to the proposed adoption of home rule powers for
municipalities, including that the municipalities might abandon their pension
obligations, leaving civil servants unprotected. 4 Record of Proceedings, Sixth
Illinois Constitutional Convention 2926 (statements of Delegate Kinney).
¶9 “The solution proposed by the drafters and ultimately approved by the people
of Illinois was to protect the benefits of membership in public pension systems not
by dictating specific funding levels, but by safeguarding the benefits themselves.”
1
This percentage includes contributions for the age and service annuity, widow’s annuity, and
the contributions toward the compounded annual annuity increases.
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Heaton, 2015 IL 118585, ¶ 15. The drafters intended that, by guaranteeing pension
benefits, the General Assembly would “take the necessary steps to fund the pension
obligations.” 4 Record of Proceedings, Sixth Illinois Constitutional Convention
2925 (statements of Delegate Green).
¶ 10 Despite the warnings that the funding mechanism was not sufficient to cover
the projected future benefits, and the adoption of the pension protection clause, the
method of funding remained static with respect to the MEABF and the LABF. The
Pension Code continued to set City contribution levels at a fixed multiple of
employee contributions. This contribution level had no relationship to the
obligations that the funds were accruing. Annual actuarial valuations of the Funds
continued to show that the actuarially required contributions needed to fund the
benefits were not being met.
¶ 11 For example, in the 2007 Comprehensive Annual Financial Report, the
MEABF Board reported that instead of a multiple of 1.25 times the employee
contributions received, the most recent actuarial valuation “shows that an employer
contribution multiple of 2.97 is needed to adequately finance the Plan.” Municipal
Employees’ Annuity and Benefit Fund of Chicago, 2007 Comprehensive Annual
Financial Report 9, available at http:www.meabf.org/assets/pdfs/pubs/
2007CAFR.pdf. The MEABF Board also noted that the “statutory employer
contributions have been less than the Annual Required Contribution (ARC) for the
past five years and are again expected to be less than the ARC for 2008.” Id. at 64.
The method of funding also failed to account for downturns in the economy which
affected the performance of the Funds’ investments. Thus, the City pension funds
continued to remain vulnerable, ultimately carrying significant unfunded liabilities.
¶ 12 It was undisputed that if the funds remained on the same trajectory they would
continue to pay out more in benefits than they received in contributions and
investment returns, leading to a path of insolvency. It is now projected that without
reforms, the MEABF and LABF will be insolvent in about 10 and 13 years,
respectively.
¶ 13 Against this backdrop, as with the state-funded pensions, the General Assembly
adopted several legislative strategies to deal with the underfunded City pensions. In
2011, the Pension Code was amended to require, starting in 2015, that the City
contribute amounts sufficient to enable the Chicago police and firefighter pension
funds to reach 90% actuarial funding by 2040. See Pub. Act 96-1495, § 5 (eff. Jan.
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1, 2011). 2 No such legislation was passed with respect to the MEABF and the
LABF at that time. Instead, in 2014, the General Assembly ultimately enacted
Public Act 98-641, the legislation at issue in this case.
¶ 14 Introduced as Senate Bill 1922, Public Act 98-641 was intended to “address an
immediate funding crisis that threatens the solvency and sustainability of the public
pension systems *** serving employees of the City of Chicago.” Pub. Act 98-641,
§ 1 (eff. June 9, 2014). The General Assembly expressly found that the financial
crisis could not be addressed by increased funding alone, without also increasing
employee contribution rates and reducing the annual adjustments for current and
future retirees. Id.
¶ 15 Under the Act, the City’s funding contribution progressively increases leading
to actuarially-based payments beginning in 2021 to bring the funds to 90% funding
levels by 2055. 40 ILCS 5/8-173(a-5), 11-169(a-5) (West 2014). However, for the
first five years, from 2016-2020, the City would continue to contribute under the
current multiplier framework, with an increased rate each year. Id.
¶ 16 Additionally, if the City fails to timely pay the required contributions, the
Funds may certify the delinquent amounts to the Comptroller. Beginning in 2016,
the Comptroller “must *** deduct and deposit into the Fund[s] the certified
amounts or a portion of those amounts” specified from the grants of state funds to
the City. 40 ILCS 5/8-173(a-10), 11-169(a-10) (West 2014). If the City fails to
make its contributions to the Funds, the Act provides a mechanism by which the
retirement boards of these Funds may initiate mandamus proceedings in the circuit
court. 40 ILCS 5/8-173.1(a), 11-169.1(a) (West 2014). The court may order a
reasonable payment schedule “without significantly imperiling the public health,
safety, or welfare.” 40 ILCS 5/8-173.1(b), 11-169.1(b) (West 2014).
¶ 17 The Act also increases the required employee contributions for members of the
Funds. Instead of contributing 8.5% of their salary, the Act increases member
contributions by .5% each year from 2015 to 2019, when the contribution reaches
11% of their salary. The contribution then remains fixed at 11% unless the funds
reach a 90% funding ratio, at which point member contributions would decrease to
9.75% so long as the fund maintains the 90% ratio. If the funds fall below that
2
An actuarial funding percentage is the value of plan assets, divided by plan liabilities. Thus, a
funding percentage of 90% would mean a fund has $0.90 for each $1 of fund liability.
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mark, the employee contribution increases again to 11% of their salaries. 40 ILCS
5/8-174, 11-170 (West 2014).
¶ 18 Similar to Public Act 98-599, which was found unconstitutional in Heaton, the
Act includes a comprehensive set of provisions designed to reduce annuity benefits
for members of MEABF and LABF. The Act replaces the former provisions under
which retirees receive flat 3% annual increases with a new system which limits the
amount of annual increases. The increase is now equal to the lesser of three percent
or half the annual unadjusted percentage increase in the Consumer Price Index. 40
ILCS 5/8-137(b-5)(3), 11-134.1(b-5)(3) (West 2014). The Act additionally
removes the compounding component, and instead of an annual increase,
eliminates the increases entirely in specific years, and postpones the time when a
retiree begins receiving the initial increase. 3 40 ILCS 5/8-137(b-5)(1), (2),
11-134.1(b-5)(1), (2) (West 2014).
¶ 19 After the Act was signed into law, two separate lawsuits challenging its
constitutionality were filed in the circuit court of Cook County in December 2014:
Jones v. MEABF, No. 2014 CH 20027 (Cir. Ct. Cook Co.), and Johnson v.
MEABF, No. 2014 CH 20668 (Cir. Ct. Cook Co.). The Jones plaintiffs include 14
individual participants in the MEABF, some of whom are current employees and
others who are retirees currently receiving an annuity, as well as four labor unions
whose members are participants in the MEABF. 4 The defendants include MEABF
and its board of trustees. The Johnson plaintiffs include one current employee
participant in the MEABF, three retiree participants currently receiving annuities
from the LABF, and the Municipal Employees Society of Chicago. The defendants
include MEABF and LABF.
¶ 20 Both complaints sought a declaration that Public Act 98-641 is unconstitutional
in violation of the pension protection clause because it diminishes pension benefits,
and sought to enjoin its enforcement. The City and the State were permitted to
intervene in both cases to defend the constitutionality of the Act. Thereafter, the
City filed an affirmative defense that the Act represented a valid exercise of the
City’s reserved sovereign powers to modify contractual rights and obligations.
3
For retirees with an annual annuity of less than $22,000, the increase may not be less than 1%
in non-suspended years and is equal to 1% in suspended years. 40 ILCS 5/8-137(b-5)(4),
8-137.1(b-5)(3) (West 2014).
4
These unions include the American Federation of State, County and Municipal Employees
Council 31, Chicago Teachers Union Local 1, IFT-AFT, Teamsters Local 700, and the Illinois
Nurses Association.
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However, during the pendency of the proceedings, this court entered its decision in
Heaton, 2015 IL 118585, invalidating Public Act 98-599 as a violation of the
pension protection clause. In light of this court’s ruling, the City advised the circuit
court that it would not proceed with its reserved sovereign powers affirmative
defense.
¶ 21 The parties ultimately filed cross-motions for summary judgment. The State
adopted the City’s motion. Defendants argued that the Act does not diminish or
impair benefits because it results in a “net benefit” for the Funds’ participants and
will save the Funds from an otherwise inevitable insolvency. The City additionally
maintained that any payment of benefits owed prior to the Act was not the
obligation of any government entity but, rather, was the obligation solely of the
Funds themselves, and that under the Pension Code “participants’ benefits [were]
limited to sums on hand in the funds.” Therefore, under the Act, the pension funds
will be saved from insolvency and put on a path to full actuarial funding, making
the Funds’ participants “better off” than without the Act. Additionally, defendants
argued that the modification of benefits under the Act is permissible as the product
of a bargained-for exchange between the City and the labor unions.
¶ 22 On July 24, 2015, the circuit court issued its thorough ruling, declaring the Act
unconstitutional. In rendering its opinion, the court found that the Act diminished
pension benefits in violation of the pension protection clause in the same manner as
the recent legislation struck down in Heaton. The court rejected the “net benefit”
argument as “contrary to the pension protection clause, its purpose, and the
Supreme Court’s interpretation of it.” The court reasoned that the argument rested
on a misapprehension of the scope of the protections in the pension protection
clause, disregarded settled distinctions between pension benefits and funding
choices, and failed to account for the fact that the so-called “net benefits” are
subject to legislative repeal at any time.
¶ 23 The court additionally rejected defendants’ assertion that the Act was a valid
bargained-for exchange, finding that (1) the unions were not acting as agents in a
collective bargaining process, (2) the unions could not have represented the retired
members while at the same time acting as representatives of the active employees,
and (3) nothing in the process that led to the enactment of the Act barred the
individual plaintiffs from asserting their constitutional rights or operated as a
waiver of those rights. Lastly, the court held that the unconstitutional provisions of
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the Act could not be severed and that the Act was therefore unenforceable in its
entirety.
¶ 24 The circuit court subsequently made the express written findings under Illinois
Supreme Court Rule 18 (eff. Sept. 1, 2006), required when a statute is declared
unconstitutional. The City and the Funds then appealed directly to this court
pursuant to Illinois Supreme Court Rule 302(a) (eff. Oct. 4, 2011), and the State
joined the City’s appeal. This court subsequently granted the City’s motion to
consolidate the appeals.
¶ 25 ANALYSIS
¶ 26 These consolidated appeals are procedurally before us as a result of the circuit
court’s ruling on cross-motions for summary judgment. See 735 ILCS 5/2-1005(c)
(West 2014). When parties file cross-motions for summary judgment, they
mutually agree that there are no genuine issues of material fact and that only a
question of law is involved. Gurba v. Community High School District No. 155,
2015 IL 118332, ¶ 10. Thus, our review is de novo. Id.
¶ 27 The sole question of law presented for our review is whether Public Act 98-641
violates the pension protection clause set forth in article XIII, section 5, of the
Illinois Constitution of 1970 (Ill. Const. 1970, art. XIII, § 5). That section provides:
“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.” Id.
¶ 28 This court has twice recently construed the plain language of this clause in
Kanerva v. Weems, 2014 IL 115811, and Heaton, 2015 IL 118585. We have
considered its object and purpose, and reaffirmed the scope of its protections,
consistent with earlier holdings from this court and the appellate court since the
pension protection clause was adopted in 1970.
¶ 29 As we have explained, under the clause, a public employee’s membership in a
pension system is an enforceable contractual relationship, and the employee has a
constitutionally protected right to the benefits of that contractual relationship.
Heaton, 2015 IL 118585, ¶ 46. Those constitutional protections attach at the time
an individual begins employment and becomes a member of the public pension
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system. Id. Thus, under its plain and unambiguous language, the clause prohibits
the General Assembly from unilaterally reducing or eliminating the pension
benefits conferred by membership in the pension system. Id. ¶ 46 & n.12.
¶ 30 Having reaffirmed these constitutional principles, this court explained in
Heaton that the provisions in Public Act 98-599 designed to reduce annuity
benefits, including the provisions which jettisoned the benefits related to the annual
annuity increases, diminished “the value of retirement annuities” for current
members. Id. ¶ 47; id. ¶ 27 (specifically referencing Public Act 98-599, the
replacement of the “flat 3% annual increases to [retirees’] annuities” with a
“variable formula” and elimination of “at least one and up to five annual annuity
increases”). This court held that those provisions “contravene the clear
requirements of article XIII, section 5.” Id. ¶ 47. We explained that “there is simply
no way that the annuity reduction provisions in Public Act 98-599 can be
reconciled with the rights and protections established by the people of Illinois when
they ratified the Illinois Constitution of 1970 and its pension protection clause.” Id.
Accordingly, we concluded that the General Assembly overstepped the scope of its
legislative power, and we declared those provisions invalid. Id.
¶ 31 The provisions in Public Act 98-641 have the same impact. They reduce the
value of annual annuity increases, eliminate them entirely for certain years,
postpone the time at which they begin, and completely eliminate the compounding
component. The Act expressly states that these changes “apply regardless of
whether the employee was in active service on or after the effective date of this
amendatory Act.” 40 ILCS 5/8-174(a), 11-170(a) (West 2014). These
modifications to pension benefits unquestionably diminish the value of the
retirement annuities the members of MEABF and LABF were promised when they
joined the pension system. Accordingly, based on the plain language of the Act,
these annuity reducing provisions contravene the pension protection clause’s
absolute prohibition against diminishment of pension benefits, and exceed the
General Assembly’s authority. 5
¶ 32 We are cognizant that in enacting Public Act 98-641, the General Assembly
expressly relied on the exigent circumstances of a fiscal crisis that threatens the
5
Notably, under the new provisions, not only are the benefits of current employees and retirees
diminished, the current employees are now required to contribute more to obtain the reduced
benefits. However, we need not consider the additional impact of these increased contributions in
this case.
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Funds’ solvency to justify its diminishment of benefits in the interest of the greater
public welfare. We do not dispute the accuracy of those findings. However, we
thoroughly considered and rejected this justification in Heaton. We explained that
there was “no possible basis for interpreting the provision to mean that its
protections can be overridden if the General Assembly deems it appropriate.”
Heaton, 2015 IL 118585, ¶ 75. To do so would require that we “ignore the plain
language of the constitution and rewrite it to include ‘restrictions and limitations
that the drafters did not express and the citizens of Illinois did not approve.’
[Citation.]” Id. We held that to accept the position “that reducing retirement
benefits is justified by economic circumstances would require that we allow the
legislature to do the very thing the pension protection clause was designed to
prevent it from doing.” Id.
¶ 33 Notwithstanding our holding in Heaton, that the annuity reducing provisions
plainly violated the pension protection clause, and that exigent circumstances
cannot serve as a basis for the General Assembly to unilaterally override those
constitutional protections, defendants contend that Public Act 98-641 survives
constitutional infirmity for two reasons: (1) the Act, when read as a whole, does not
diminish or impair pension benefits but, instead, saves them in a manner that
confers a “net benefit” or “offsetting benefit” to members; and (2) the Act was the
result of a bargained-for exchange supported by consideration.
¶ 34 I. “Net Benefit”
¶ 35 Defendants argue that the Act provides an offsetting benefit to members
because it rescues the Funds from insolvency and guarantees that the pensions will
be paid, by imposing an enhanced statutory funding obligation on the City, by
moving to a new method of actuarial based funding, and by providing statutory
enforcement mechanisms. Distilled to its essence, defendants’ argument is that the
Act’s new promise of financial stability offsets the diminishment of benefits,
thereby conferring a benefit when viewed as a whole.
¶ 36 The argument starts from the flawed premise that the provisions of the Act that
enhance the City’s funding obligation or change the method of funding to fully
fund the pensions are “benefits” entitled to constitutional protection. This notion
conflicts with settled precedent. As we explained in Kanerva, the benefits protected
by the pension protection clause include those benefits that are “attendant to
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membership in the State’s retirement systems” (2014 IL 115811, ¶ 41), including
“subsidized health care, disability and life insurance coverage, eligibility to receive
a retirement annuity and survivor benefits.” Id. ¶ 39. Legislative funding choices,
however, remain outside the protections of article XIII, section 5, as consistently
explained by this court over the past 40 years in People ex rel. Illinois Federation of
Teachers v. Lindberg, 60 Ill. 2d 266 (1975), McNamee v. State, 173 Ill. 2d 433
(1996), and People ex rel. Sklodowski v. State, 182 Ill. 2d 220 (1998).
¶ 37 In each of those cases, the plaintiffs argued that certain statutory pension
funding schemes or appropriations of pension funding were to be treated as
enforceable contractual rights protected by the pension protection clause, and
created a binding funding obligation. The plaintiffs asserted that the failure to
adhere to those funding provisions diminished or impaired their contract rights
under the pension clause. Lindberg, 60 Ill. 2d at 271; McNamee, 173 Ill. 2d at
436-37; Sklodowski, 182 Ill. 2d at 229. Particularly, in McNamee, the plaintiffs
claimed that amendments to the statutory scheme “violated their constitutionally
protected right to the ‘benefit’ of a more secure fund created by the prior funding
method.” McNamee, 173 Ill. 2d at 439. Notably, in both McNamee and Sklodowski,
the State responded, relying on this court’s precedent, that the “pension protection
clause creates enforceable contractual rights only to receive benefits, not control
funding” (Sklodowski, 182 Ill. 2d at 229), and “does not encompass how those
benefits are funded” (McNamee, 173 Ill. 2d at 439).
¶ 38 This court agreed with the State and rejected the plaintiffs’ claims. After an
exhaustive review of the constitutional convention debates regarding the purpose of
the clause, we explained that “[t]he framers of our constitution simply did not
intend that [the pension protection clause] control the manner in which the state and
local governments fund their pension obligations.” McNamee, 173 Ill. 2d at 446.
Rather, “the purpose of the amendment was to clarify and strengthen the right of
state and municipal employees to receive their pension benefits, but not to control
funding.” Id. at 440. We held that the clause “creates an enforceable contractual
relationship that protects only the right to receive benefits.” Id. at 446. Thus,
consistent with Lindberg, McNamee and Sklodowski, passing a funding statute that
aims to provide full funding by increasing the multiplier used to determine the
City’s contribution, or by changing the method of funding to an actuarially based
funding requirement to ensure the Funds reach 90% funding by 2055 and beyond
does not create a “benefit” protected by the pension protection clause.
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¶ 39 Furthermore, we reject the proposition that Public Act 98-641 evinces a
legislative intent to establish an enforceable contractual right to full actuarial
funding that would be protected against impairment by subsequent legislation. To
address this argument, we begin with the understanding that “the principal function
of a legislature is not to make contracts, but to make laws that establish the policy
of the state.” National R.R. Passenger Corp. v. Atchison Topeka & Santa Fe Ry.
Co., 470 U.S. 451, 466 (1985). These policies are “inherently subject to revision
and repeal.” Id. Otherwise, “ ‘the essential powers of a legislative body’ ” would be
drastically limited. A.B.A.T.E. of Illinois, Inc. v. Quinn, 2011 IL 110611, ¶ 34
(quoting National R.R. Passenger Corp., 470 U.S. at 466); see also Envirite Corp.
v. Illinois Environmental Protection Agency, 158 Ill. 2d 210, 215 (1994) (“There is
no vested right in the continuance of a law. The legislature has an ongoing right to
amend a statute.”); Choose Life Illinois, Inc. v. White, 547 F.3d 853, 858 n.4 (7th
Cir. 2008) (“It is axiomatic that one legislature cannot bind a future legislature.”).
¶ 40 Based on these principles, it is presumed “that laws do not create private
contractual or vested rights, but merely declare a policy to be pursued until the
legislature ordains otherwise.” Sklodowski, 182 Ill. 2d at 231-32 (citing Fumarolo
v. Chicago Board of Education, 142 Ill. 2d 54, 104 (1990)). The presumption that a
statute does not create contractual obligations is not overcome “absent some clear
indication that the legislature intends to bind itself contractually,” and that intention
must be “clearly and unequivocally expressed.” National R.R. Passenger Corp.,
470 U.S. at 465-66.
¶ 41 Despite the City’s reliance on the General Assembly’s stated purpose in
enacting the legislation to save the Funds from insolvency and the inclusion of
enforcement mechanisms, nothing in the Act’s funding provisions expressly
provides for an enforceable contractual right to an “actuarial funding guarantee.”
Indeed, the language in the enforcement provisions is qualified in many respects.
40 ILCS 5/8-173.1, 11-169.1 (West 2014). For example, the Act provides that the
Funds may bring a mandamus action at their discretion if the City fails to make its
required annual contributions, and limits any repayment plans to those that do not
“significantly imperil[ ] the public health, safety, or welfare.” 40 ILCS
5/8-173.1(b), 11-169.1(b) (West 2014). Nothing in that language supports a
legislative intent to establish clearly and unequivocally an enforceable contractual
right of the members of the Fund to an “actuarial funding guarantee.” Accordingly,
for all of these reasons, the statutory funding provisions are not a “benefit” that can
be “offset” against an unconstitutional diminishment of pension benefits.
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¶ 42 Finally, and most importantly, we reject the City’s assertion that the funding
provisions in the Act must be regarded as a “benefit” because they replace an
illusory set of unfunded statutory promises. The City maintains that prior to the
Act, members of the Funds only had a right to the money available in their
respective funds upon retirement. The City’s argument rests on section 22-403 of
the Pension Code, which provides that “[a]ny pension payable under any law
hereinbefore referred to shall not be construed to be a legal obligation or debt of the
State, or *** city ***, but shall be held to be solely an obligation of such pension
fund.” 40 ILCS 5/22-403 (West 2012).
¶ 43 The City’s contention, if adopted by this court, would be inconsistent with the
plain meaning of the pension protection clause, would undermine our holding in
Heaton, and would lead to an absurd and unjust result. Rather, as we have
explained, the Illinois Constitution mandates that members of the Funds have “a
legally enforceable right to receive the benefits they have been promised”—not
merely to receive whatever happens to remain in the Funds. Heaton, 2015 IL
118585, ¶ 46; Lindberg, 60 Ill. 2d at 271 (holding that the pension protection clause
was a guarantee that members of the pension system would receive pension
payments when they became due at retirement). The whole purpose of establishing
the clause was “to eliminate any uncertainty as to whether state and local
governments were obligated to pay pension benefits to their employees.”
Sklodowski, 182 Ill. 2d at 228-29. The clause was “intended to force the funding of
the pensions indirectly, by putting the state and municipal governments on notice
that they are responsible for those benefits.” McNamee, 173 Ill. 2d at 442. How the
benefits would be financed “was a matter left to the other branches of government.”
Heaton, 2015 IL 118585, ¶ 16. Thus, the General Assembly and the City have been
on notice since the ratification of the 1970 Constitution that the benefits of
membership must be paid in full, and that they must be paid without diminishing or
impairing them.
¶ 44 Since members of the Funds already have “a legally enforceable right to receive
the benefits they have been promised” (id. ¶ 46), the clause already guarantees that
pension participants will receive the money due them at the time of their retirement.
By offering a purported “offsetting benefit” of actuarially sound funding and
solvency in the Funds, the legislation merely offers participants in those funds what
is already guaranteed to them—payment of the pension benefits in place when they
joined the fund. To put it simply, in 10 years, the members of the Funds will be no
less entitled to the benefits they were promised. Thus, the “guaranty” that the
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benefits due will be paid is merely an offer to do something already constitutionally
mandated by the pension protection clause. Since participants already enjoy that
legal protection, we reject the notion that the promise of solvency can be “netted”
against the unconstitutional diminishment of benefits.
¶ 45 To the extent that section 22-403 of the Pension Code purports to establish that
MEABF and LABF members only have a right to amounts the Funds have on hand
by virtue of the legislatively-prescribed funding choices, that section cannot
overcome the constitutional guarantee. Id. ¶ 80 (“[A]ll [legislative] acts, contrary
[to] or in violation of the constitutional charter, are void.”). Section 22-403 was
originally enacted in 1945 (see 1945 Ill. Laws 1670 (§ 3)), prior to the 1970 Illinois
Constitution and, thus, prior to the establishment of a contractual relationship
between employer and employee. See Arnold v. Board of Trustees of the County
Employees’ Annuity & Benefit Fund, 84 Ill. 2d 57, 60-61 (1981) (at that time, the
retirement annuity provided to members of most pension funds was not
characterized as contractual in nature). Thus, by declaring a contractual
relationship rather than a gratuitous one, the pension clause established a legal
obligation to pay pension benefits to the employees where previously there had
been none. Sklodowski, 182 Ill. 2d at 228.
¶ 46 Section 9 of the Transition Schedule of the 1970 Illinois Constitution provides
in pertinent part:
“The rights and duties of all public bodies shall remain as if this
Constitution had not been adopted with the exception of such changes as are
contained in this Constitution. All laws, *** not contrary to, or inconsistent
with, the provisions of this Constitution shall remain in force, until they shall
expire by their own limitation or shall be altered or repealed pursuant to this
Constitution.” Ill. Const. 1970, Transition Schedule § 9.
Thus, to the extent that section 22-403 is inconsistent with the mandate in the
pension protection clause, it did not survive ratification of the Illinois Constitution.
See, e.g., Kanellos v. County of Cook, 53 Ill. 2d 161, 166-67 (1972) (referendum
provision in pre-1970 statute invalid under section 9 where it conflicted with home
rule powers granted under the 1970 Constitution).
¶ 47 Ultimately, the City’s “offsetting benefit” theory rests on the proposition that
what it deems as “modest” diminishments are necessary to prevent insolvency in
the future. Although we recognize that fiscal soundness is important, the General
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Assembly may not utilize an unconstitutional method to achieve that end. Maddux
v. Blagojevich, 233 Ill. 2d 508, 528 (2009) (“If a statute is unconstitutional, courts
are obligated to declare it invalid” and “[t]his duty cannot be evaded or neglected,
no matter how desirable or beneficial the legislation may appear to be.”). To allow
such a construct to justify diminishing benefits would be merely an end run around
the reserved sovereign powers argument, as explained in Heaton. The City’s theory
would allow the legislature “through its funding decisions, [to] create the very
emergency conditions used to justify its suspension of the rights conferred and
protected by the constitution.” Heaton, 2015 IL 118585, ¶ 85. This is the very
circumstance that the pension protection clause was intended to foreclose. To be
clear, the constitution removed the option of unilaterally diminishing benefits as a
means of attaining pension stability. Whether members of the Funds may be “better
off” under the new terms of the Act despite the unconstitutional diminishment of
their benefits, as defendants contend, is not for the General Assembly to decide
unilaterally. The fundamental point here is that determination must be made, if at
all, according to contract principles by mutual assent of the members, and not by
legislative dictates.
¶ 48 II. Bargained-for Exchange
¶ 49 The City next contends that the Act was not a product of unilateral action but,
instead, codified a bargained-for exchange made between the City and the unions
representing the Funds’ participants. The City maintains that the legislation was the
result of negotiations between the City and its unions, over several years. In
support, the City presented the affidavit of Matthew Brandon, the
Secretary/Treasurer and Chief of Staff of Service Employees International Union
Local 73 (SEIU).
¶ 50 Brandon stated that “a working group drawn from the 31 MEABF and LABF
member unions was formulated to participate in negotiations with city
representatives pertaining to the terms of such legislation.” Over a period of about
two and a half years, representatives of the City “met with this working group to
discuss developing a mutually beneficial solution to the pension crises.” As a result
of the negotiations, the City representatives and the unions’ working group arrived
at a proposal, which was presented to the legislature.
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¶ 51 Brandon asserted that before the proposed legislation was presented to the
General Assembly, elected representatives from the 31 unions met to determine
whether the unions could reach a consensus to support the terms of the proposed
legislation. As a result of the meeting, 28 of the 31 unions represented at the
meeting voted in favor of the proposed legislation. Following the vote, union
representatives met with legislators to confirm their support for the proposed
legislation.
¶ 52 The affidavit presented by Brandon also refers to “an affiliated committee
comprised of and established for the benefit of SEIU retirees,” and states that he
apprised the committee members of the “status and progress of the negotiations,”
and that he informed the committee of the “final terms” of the bill, and that no
committee members voiced an objection to the proposed negotiated terms. The
legislation was promoted as the “product of arms-length negotiations between the
City of Chicago and the duly elected representatives of the unions that advocated
on behalf of the union members and retirees.”
¶ 53 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.”).
¶ 54 In the context of the collective bargaining process for public employees,
employees designate a particular union as their exclusive agent for collective
bargaining negotiations. See 5 ILCS 315/6 (West 2014). The cases that defendants
rely upon to support a bargained-for exchange argument involved agreements
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reached through the collective bargaining process. See Ballentine v. Koch, 674
N.E.2d 292, 296 (N.Y. Ct. App. 1996) (“[B]ecause plaintiffs designated the PBA as
their agent for the collective bargaining negotiations at issue here and were thus
bound by its actions taken on their behalf during the negotiation process [citation],
the PBA’s waiver of the constitutional protections of [New York’s pension
protection clause] is valid as to plaintiffs ***.”); Schacht v. City of New York, 346
N.E.2d 518, 519 (N.Y. Ct. App. 1976) (“Plaintiff, having designated the union to be
her agent for collective bargaining purposes, is bound by agreements made by that
union on her behalf.”).
¶ 55 In this case, it is undisputed that the unions were not acting as authorized agents
within a collective bargaining process. Thus, we need not resolve whether the vote
taken by union representatives as expressed in the Brandon affidavit bound
members of the Funds in a collective bargaining process. Rather, we agree with the
trial court that “these negotiations were no different than legislative advocacy on
behalf of any interest group supporting collective interests to a lawmaking body.”
The individual members of the Funds have done nothing that could be said to have
unequivocally assented to the new terms or to have “bargained away” their
constitutional rights. Accordingly, nothing in the legislative process that led to the
enactment of the Act constituted a waiver of the Funds members’ constitutional
rights under the pension protection clause.
¶ 56 III. Severability
¶ 57 Finally, we must consider whether the invalid provisions may be severed from
the remaining provisions of the statute, which is a question of legislative intent.
Heaton, 2015 IL 118585, ¶ 91. We look first to the statute’s own severability
provision, which creates a rebuttable presumption of legislative intent. Id. ¶ 95. To
rebut the presumption, the court must determine whether the legislature would have
passed the law without the invalid parts. Id. We consider “whether the legislative
purpose in passing the act is significantly undercut or altered by the elimination of
those invalid sections.” Id.
¶ 58 Applying these principles to the present case, the Act’s severability provision
specifies certain sections of the Act that are declared “mutually dependent and
inseverable.” Pub. Act 98-641, § 93 (eff. June 9, 2014). These sections include the
provisions pertaining to the annual annuity increases, which we have found to be
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unconstitutional, as well as the provisions pertaining to the City’s financing
obligations and the enforcement mechanisms. With respect to these sections, the
severability clause provides, “If any of those provisions is held invalid other than as
applied to a particular person or circumstance, then all of those provisions are
invalid.” Id.
¶ 59 The circuit court found that this expression of legislative intent was confirmed
by the General Assembly’s express findings along with the representations made
by legislative proponents that the legislation intended to tie the reduction in
employee benefits to the funding and enforcement provisions of the Act “as part of
a unified package.” Accordingly, the circuit court held that “the General Assembly
would not have enacted Public Act 98-641 without the invalid provisions.” The
parties do not dispute the circuit court’s conclusion, and we agree with the circuit
court’s assessment that the Act is unenforceable in its entirety.
¶ 60 CONCLUSION
¶ 61 For all of the foregoing reasons, the judgment of the circuit court declaring
Public Act 98-641 to be unconstitutional and permanently enjoining its
enforcement is affirmed.
¶ 62 Affirmed.
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