A Looming Crisis: Illinois Supreme Court Strikes Down Statute Reducing Benefits

Author:Ms Ingrid Bagby, Thomas Curtin, Mark C. Ellenberg, Daniel Gwen, Ellen Halstead, Howard R. Hawkins, Jr., Ivan Loncar, Michele C. Maman, Casey J. Servais and Lary Stromfeld
Profession:Cadwalader, Wickersham & Taft LLP

On May 8, 2015, the Supreme Court of the State of Illinois struck down recently enacted state public pension reform legislation on the grounds that the legislation violated the “pension protection clause” of the Illinois constitution. The legislation had sought to reduce Illinois's pension liabilities by reducing annuity benefits to some members of the State's public pension systems. The Illinois Supreme Court's ruling limits the options that Illinois now has for dealing with its deepening fiscal crisis and, in turn, may force Illinois to propose additional legislative measures, possibly including legislation authorizing its municipalities to file for protection under chapter 9 of the United States Bankruptcy Code. In re Pension Reform Litig., 2015 IL 118585 (May 8, 2015).

The Challenge to the Pension Reform Act

Illinois has five State-funded retirement systems, which have been chronically underfunded almost since their inception. Following downgrades in Illinois's credit rating, the State General Assembly passed Public Act 98-599 (“the Act”) in the fall of 2013, and then-Governor Pat Quinn signed the Act into law on December 5, 2013. The Act primarily affected four of the five State-funded retirement systems and contained provisions designed to reduce annuity benefits for the members of those systems who had previously been entitled to the highest level of benefits. Among other things, the Act provided for decreased annual annuity adjustments and increased retirement ages for the affected members.

Almost immediately after the Act was signed into law, members of the Illinois retirement systems brought five separate actions challenging the Act's validity, among other things on the grounds that the Act violated the Illinois constitution's “pension protection clause.” The pension protection clause 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.” Illinois Const. art. XIII, sect. 5. The five actions were ultimately consolidated in the circuit court of Sangamon County, which found the Act to be unconstitutional in its entirety as a violation of the pension protection clause. Because the circuit court's judgment invalidated a State statute, appeal lay directly to the Illinois Supreme Court.

Illinois Supreme Court Strikes Down...

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