In Re: Pension Reform Litigation, Order Granting Motion for Temporary Restraining Order and Prelimin

Pension Reform Litigation

Administrator Contracts
Case: In Re: Pension Reform Litigation, Order Granting Motion for Temporary Restraining Order and Preliminary Injunction.
Date: Thursday, May 15, 2014

P.A. 98-599 (Pension Reform) has temporarily been stayed in its entirety. That means that for now the State of Illinois cannot implement P.A. 98-599 until Illinois courts make a decision about whether the new Pension Reform law is unconstitutional.

For readers who want more analysis, the following excerpt is from a recent article by by David T. Zafiratos and Ashley Folk, Ottosen Britz Kelly Cooper Gilbert & DiNolfo, Ltd. It discusses how some states in the nation are coming to opposite conclusions on the pension reform issue.

Constitutional challenges to pension benefit cuts met with mixed results

Legal Insights for Pension Boards (Spring 2014)

Although, it had traditionally been assumed that public pensions enjoyed a heightened protection from reduction, suspension or elimination for current public employees and retirees, recent cuts by many state legislatures have tested that assumption. Two recent cases from the New Mexico and Arizona Supreme Courts have rendered opposite conclusions.

In Bartlett v. Cameron, 316 P.3d 889 (2013), the Supreme Court of New Mexico held that the cost-of-living adjustment (COLA) paid out to retirees is not a vested property right. The New Mexico Constitution provides that public employees acquire vested property rights with due process protections in their retirement plans. The court labeled COLA as a legislative tool used to implement current public policy, as opposed to a vested property right. COLA is provided independently from the obligation to pay retirement benefits. Thus, reducing the COLA does not also reduce the retirees’ underlying substantive retirement benefits.

Conversely, in the case of Fields v. The Elected Officials’ Retirement Plan, 680 Ariz. Adv. Rep. 15 (2014), the Arizona Supreme Court held that modification of a statutory formula for calculating pension benefit increases violated the Pension Clause of the Arizona Constitution. The Arizona Constitution states that pension benefits shall not be diminished or impaired. The Supreme Court of Arizona came out opposite on this issue than the Supreme Court of New Mexico had in Bartlett. In Fields the court held that the term “benefit” encompasses benefit increases under the Pension Clause. The court relied on the history of the statute and Arizona precedent to reach this conclusion. Second, the court determined that changing the benefit increase formula diminished and impaired the benefits.

Illinois courts are not bound by or required to find either the Arizona or New Mexico decisions persuasive when deciding whether P.A. 98-599 is unconstitutional. However, in Fields, the Arizona Supreme Court specifically stated that Illinois had previously determined that benefit calculation formulas are entitled to constitutional protection. This could indicate that Illinois may hold itself in the minority with Arizona when the recent challenges are decided, and strike down the reform.

Of the seventeen states that have changed their COLAs, twelve have been challenged in court. In the nine states where the courts have ruled, eight have upheld the cut to COLAs. As the Bartlett court pointed out, the recent wave of COLA legislation can be attributed to the economic downturn that is affecting the fiscal viability of public funds. Illinois courts are being faced with identical arguments relating to the current reform —specifically that there is a constitutionally protected contractual right to the COLA calculation. Illinois has traditionally been considered one of the states with the greatest constitutional protection of public pension benefits. If Illinois courts decide to consider the current judicial thinking on the matter, it will be interesting to see if the reform is upheld in light of this strong constitutional protection.

Reprinted and Adapted with permission from Legal Insights for Pension Boards

© 2014 Ottosen Britz Kelly Cooper Gilber & DiNolfo, Ltd.