U.S. Seventh Circuit - The FindLaw 7th Circuit Court of Appeals Opinion Summaries Blog

Unconstitutional to Reduce Pension Benefits: Ill. Supreme Court

Illinois, like many states, was facing a funding crisis: State liabilities to public employees on pensions have been on the rise as more and more employees retire, with no proportional increase in funding for those pensions. The state could either raise more money or cut benefits.

Which one did legislators pick?

In 2013, the Illinois legislature passed a law restructuring the state pension system. Of particular note were provisions that reduced annuity benefits to members of four different state retirement systems, delaying retirement age, decreasing annuity increases, and giving some pensioners smaller base pensions.

You can guess what happened next.

Boom Goes the Pension Restructuring Law

Plaintiffs sued, challenging the law based on Illinois constitutional provisions prohibiting laws "impairing the obligation of contracts," laws prohibiting state retirement benefits from being "diminished or impaired," and a state version of eminent domain.

The Illinois Supreme Court ruled last week that, not only was the reduction in benefits unconstitutional, but the particular provisions at issue were so central to the legislation that "the entire statute must fall." Nor did the court buy the state's arguments that the law was either an exercise of its police power or of its "reserved sovereign powers." Particularly troubling was that the state sought to "impair a contract to which it is itself a party," where the state would benefit financially. This type of legislative action, the U.S. Supreme Court said in 1977, warrants scrutiny.

While the court was receptive to arguments that the state had to balance its budget somehow, the state couldn't unilaterally jettison the protected benefits of one group to do so. Actually, the court said, the fact that the benefits are ensconced in the state constitution meant that the legislature has been on notice for a long time that paying retirement benefits was going to be an issue. Retirees shouldn't pay the price for "a crisis for which the General Assembly itself is largely responsible."

The World's Biggest Bake Sale

In response to the opinion, State senator John Cullerton of Chicago proposed an alternative in which workers can choose "between keeping more generous yearly cost-of-living increases or continuing to count pay raises in calculating their retirement benefits."

The governor himself floated an alternative: Creating a new retirement plan and amending the constitution to remove the retirement benefit guarantee, according to Bloomberg Business. A constitutional amendment would require three-fifths of each house of the state legislature agreeing to put it on the ballot, then being approved by three-fifths of voters.

They're going to have to work quickly: As a result of the opinion, Moody's downgraded the City of Chicago's credit rating to "Ba1" status -- "junk" in non-investor-speak. That's particularly bad because Chicago has been borrowing to pay city employee retirement benefits. As it stands, Chicago is going to have to come up with about $2 billion to fund its immediate obligations.

That's a lot of cupcakes and Rice Krispie squares.

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