Heaton v. Quinn (In re Pension Reform Litig.)

• Citation: 32 N.E.3d 1
• Decision Date: 08 May 2015
• Docket Number: No. 118585.,118585.
• Parties: In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants).
• Court: Supreme Court of Illinois

32 N.E.3d 1

In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees,
v.
Pat Quinn, Governor, State of Illinois, et al., Appellants).

No. 118585.

Supreme Court of Illinois.

May 8, 2015.

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Lisa Madigan, Attorney General, of Springfield (Carolyn E. Shapiro, Solicitor General, and Richard S. Huszagh, Gary S. Caplan and Clifford W. Berlow, Assistant Attorneys General, of Chicago, of counsel), for appellants.

Aaron B. Maduff, Walker R. Lawrence and John D. Carr, of Maduff Maduff, LLC, Gino L. DiVito, John M. Fitzgerald, Brian C. Haussmann and Uri B. Abt, of Tabet DiVito & Rothstein LLC, and Michael D. Freeborn, John T. Shapiro, John E. Stevens and Dylan Smith, of Freeborn & Peters LLP, of Chicago, Michael T. Reagan, of Ottawa, and Donald M. Craven, of Springfield, for appellees.

OPINION

Justice KARMEIER delivered the judgment of the court, with opinion.

¶ 1 At issue on this appeal is the constitutionality of Public Act 98–599 (eff. June 1, 2014), which amends the Illinois Pension Code (40 ILCS 5/1–101 et seq. (West 2012)) by reducing retirement annuity benefits for individuals who first became members of four of Illinois' five State-funded pension systems prior to January 1, 2011. Members of the retirement systems affected by Public Act 98–599 and groups representing those members brought five separate actions challenging the validity of the

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new law on the grounds that it violated numerous provisions of the Illinois Constitution of 1970, including article XIII, section 5 (Ill. Const. 1970, art. XIII, § 5 ), popularly known as the pension protection clause.

¶ 2 All five actions were consolidated in the circuit court of Sangamon County. On motions for partial summary judgment, judgment on the pleadings, and to strike an affirmative defense, the circuit court found plaintiffs' challenge to be meritorious, declared Public Act 98–599 to be unconstitutional in its entirety as a violation of the pension protection clause, and permanently enjoined its enforcement. In so doing, the circuit court rejected defendants' contention that the Act could be upheld, notwithstanding its violation of the pension protection clause, based on the State's reserved sovereign powers. Because the circuit court's judgment invalidated a statute of the State of Illinois, appeal lay directly to this court. Ill. S.Ct. R. 302(a)(1) (eff. Oct. 4, 2011). At the request of the State, we expedited briefing and argument.¹ For the reasons that follow, we affirm.

¶ 3 BACKGROUND

¶ 4 Illinois has established five State-funded retirement systems for public employees: the General Assembly Retirement System (GRS) (40 ILCS 5/2–101 et seq. (West 2012)); the State Employees' Retirement System of Illinois (SERS) ( 40 ILCS 5/14–101 et seq. (West 2012)); the State Universities Retirement System (SURS) (40 ILCS 5/15–101 et seq. (West 2012)); the Teachers' Retirement System of the State of Illinois (TRS) (40 ILCS 5/16–101 et seq. (West 2012)); and the Judges Retirement System of Illinois (JRS) ( 40 ILCS 5/18–101 et seq. (West 2012)). These systems provide traditional defined benefit plans under which members earn specific benefits based on their years of service, income and age. All are subject to the pension protection clause of our state 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.

¶ 5 Among the benefits which members of the five State-funded retirement systems are entitled to receive are retirement annuities. Kanerva v. Weems, 2014 IL 115811, ¶ 3, 383 Ill.Dec. 107, 13 N.E.3d 1228. The amount of a member's retirement annuity and how soon a member is eligible to begin receiving annuity payments depends on when the member first began making contributions into one of the retirement systems. Members who first contributed prior to January 1, 2011, receive what are known as “Tier 1” annuity benefits. Members first contributing on or after January 1, 2011, receive a lower

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level of benefits designated as “Tier 2.” See Pub. Act 96–889 (eff. Apr. 14, 2010). Public Act 98–599, the legislation challenged in this case, is directed primarily at Tier 1 annuities and is limited in its application to benefits earned under the GRS, SERS, SURS and TRS systems. Annuities paid to judges under the JRS system were intentionally excluded from the law and are not affected by it.

¶ 6 Tier 1 retirement annuity benefits and eligibility requirements differ somewhat between the various systems. Because they all operate in approximately the same way, however, we will choose just one, SERS, to illustrate their basic features.

¶ 7 Members of SERS are eligible to retire at age 60 if they have at least eight years of credited service. They may retire with full benefits at any age if their age plus years of service credit equal 85. They are also eligible to retire if they are between the ages of 55 and 60 and have at least 25 years of credited service, but their benefit will be reduced by half of 1% for each month they are under the age of 60. 40 ILCS 5/14–107, 14–108 (West 2012).

¶ 8 The amount of the retirement annuity benefit under SERS is calculated based on (1) the member's final average compensation, which is the average monthly compensation they received during their highest-paid 48 consecutive months of service over the previous ten years, (2) their total credited service, and (3) a multiplier, which changes depending on (a) whether or not the member is also covered by Social Security or (b) qualifies for an “alternative retirement annuity” (applicable to, e.g., pilots and state policemen). 40 ILCS 5/14–107, 14–108, 4–110 (West 2012). For members who do have Social Security and are not subject to the alternative retirement annuity rules, the multiplier is 1.67% per year of credited service. 40 ILCS 5/14–108(b) (West 2012). Accordingly, a member of SERS who is eligible to retire, who has also paid into Social Security, and who has final average compensation of $1800 per month and 30 years of credited service will receive a retirement annuity of $901.80 per month (30 x .0167 x $1800).

¶ 9 SERS members may earn a retirement annuity of up to 75% of their final average compensation (40 ILCS 5/14–108(d) (West 2012)), although for members covered by Social Security, it would take nearly 45 years of State service to do so. These annuity payments are subject to 3% automatic annual increases beginning after the member's first full year of retirement, except that some members who retire before 60 and do not meet the rule of 85 will not receive the increases until they turn 60 and have been retired at least one full year. 40 ILCS 5/14–114(a) (West 2012). The annual annuity adjustments are built-in to the pension benefit and are not tied to the cost of living. As a result, the real value of annuities may either increase or erode depending on economic conditions, notwithstanding the adjustments.²

¶ 10 Funding to pay benefits under each of Illinois' five State-funded systems is derived from three basic sources: contributions by the State through appropriation by the General Assembly; contributions by or on behalf of members based on their salaries; and income, interest and dividends derived from retirement fund deposits and investments. 40 ILCS 5/2–124 to 2–126, 14–131 to 14–133.1, 15–155 to 15–157.1, 16–152, 16–154, 16–158, 18–131 to

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18–133.1 (West 2012). The contributions to the systems by or on behalf of members of the systems have not been problematic. There is no dispute that employees have paid their full share as required by law at all times relevant to this litigation. That has not been the case with respect to the contributions owed by the General Assembly.

¶ 11 For as long as there have been public pension systems in Illinois, there has been tension between the government's responsibility for funding those systems, on the one hand, and the costs of supporting governmental programs and providing governmental services, on the other. In the resulting political give and take, public pensions have chronically suffered. As long ago as 1917, a report commissioned by the General Assembly characterized the condition of State and municipal pension systems as “one of insolvency” and “moving toward a crisis” because of financial provisions which were “entirely inadequate for paying the stipulated pensions when due.” Report of the Illinois Pension Laws Commission 272 (1917). Similar warnings were issued by the Illinois Public Employees Pension Laws Commission in biennial reports it published between 1947 and 1969. See, e.g., Report of the Illinois Public Employees Pension Laws Commission of 1949, 10 (1949) (revenues allocated to pension funds have not kept pace with obligations and, with few exceptions, “every fund in Illinois suffers at this time an actuarial insolvency”).

¶ 12 As the deficient contributions continued even during the post-WWII boom, the Commission wondered: “[i]f the State of Illinois and local governments are today...