Jones v. Mun. Employees' Annuity & Benefit Fund Chi.

• Decision Date: 24 March 2016
• Docket Number: No. 119639 , No. 119644.,No. 119618 , No. 119638 , No. 119620 ,119618
• Citation: 50 N.E.3d 596,401 Ill.Dec. 454
• Parties: Mary J. JONES et al., Appellees, v. MUNICIPAL EMPLOYEES' ANNUITY AND BENEFIT FUND OF CHICAGO et al., Appellants.
• Court: Illinois Supreme Court

50 N.E.3d 596

401 Ill.Dec. 454

Mary J. JONES et al., Appellees

v.MUNICIPAL EMPLOYEES' ANNUITY AND BENEFIT FUND OF CHICAGO et al., Appellants.

No. 119618

No. 119620

No. 119638

No. 119639

No. 119644.

Supreme Court of Illinois.

March 24, 2016.

Mary Patricia Burns, Vincent D. Pinelli, Matthew M. Showel and Sarah A. Boeckman, of Burke Burns & Pinelli, Ltd., and J. Timothy Eaton, John F. Kennedy, Cary E. Donham, Graham C. Grady, and Jonathan B. Amarilio, of Taft Stettinius & Hollister LLP, all of Chicago, for appellants.

Stephen R. Patton, Corporation Counsel, Jane Elinor Notz, First Assistant Corporation Counsel, Benna Ruth Solomon, Deputy Corporation Counsel, and Myriam Zreczny Kasper, Chief Assistant Corporation Counsel, and Michael B. Slade, Douglas G. Smith, P.C., and R. Chris Heck, of Kirkland & Ellis LLP, and

Richard J. Prendergast and Michael T. Layden, all of Chicago, for intervenor appellant City of Chicago.

Michael D. Freeborn, John T. Shapiro, Dylan Smith and Terrence J. Sheahan, of Freeborn & Peters LLP, and Clinton A. Krislov, all of Chicago, for appellees.

OPINION

Justice THEIS delivered the judgment of the court, with 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 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, 392 Ill.Dec. 1, 32 N.E.3d 1 (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.” Heaton, 2015 IL 118585, ¶ 15, 392 Ill.Dec. 1, 32 N.E.3d 1. 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. 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...