Power Shift Upheld: Appellate Court Says State Can Consolidate Pension Investments

PENSION PROTECTION CLAUSE

This month’s column discusses the recent Second District Appellate Court decision in Arlington Heights Police Pension Fund et al. v. Pritzker et al., 2023 IL App (2d) 220198 in which a group of pension funds, retirees, and active members sued Governor J.B. Pritzker and various other state agencies in an attempt to challenge the consolidation of investment assets. The circuit court entered judgment in favor of the state defendants and held, among other things, that local control of investments is not protected by the Illinois Constitution’s pension protection clause.

Amendments to the Illinois Pension Code

On January 1, 2020, Public Act 101-610 amended portions of the Illinois Pension Code (40 ILCS 5/1-101 et seq. (West 2018), consolidating all existing police and firefighter pension fund assets into two statewide police and firefighter pension investment funds. Id. Prior to Public Act 101-610, there were over 650 local police and firefighter pension funds governed by five-member boards consisting of two appointed members, two members elected by active members, and one member elected by other beneficiaries of the fund, such as retirees. Id. § 3-128, § 4-121. These local boards determine the disability, retirement and death benefits payable to members and beneficiaries. Id.

Under the Act, the local funds were to transfer custody and investment responsibility for their assets to the appropriate the statewide fund, which would administer and invest the pooled assets collectively. Arlington Heights, 2023 IL App (2d) 220198. The local funds would each retain a separate account in order not to impact the balance of the other participating pension funds. 40 ILCS 5/22B-118(c), 22C-118(c) (West 2020). Investment returns were to be distributed pro rata to the individual pensions based upon the amount of contributions by each fund. Id. Nine members would sit on the statewide board including three executives from the participating municipalities, three active members of the local funds (elected by active participants), two beneficiaries of the local funds and one member recommended by the Illinois Municipal League to be appointed by the governor. Id. § 22B-115(b)(1)-(4), § 22C-115(b)(1)-(4).

The Act does provide that local funds shall maintain the “exclusive authority to adjudicate and award” benefits. Id. § 3-124.3, § 4-117.2. The statewide funds shall not have the authority to “control, alter, or modify, or the ability to review or intervene in, the proceedings or decisions of the local funds”. Id.

Plaintiffs’ Three-Count Complaint

Plaintiffs filed a three-count complaint for declaratory, injunctive and other relief as follows:

Count I - Violation of the Pension Protection Clause (Article XIII, Section 5, of the Illinois Constitution (Ill. Const. 1970, art. XIII, § 5);

Count II - Violation of the Contracts Clause (Article I, Section 16 of the Illinois Constitution (Ill. Const. 1970, art. I, § 16);

Count III - Violation of the Takings Clause (Article I, Section 15 of the Illinois Constitution (Ill. Const. 1970, art. I, § 15).

Count II was dismissed for failure to state a cause of action under the contracts clause. The trial court granted summary judgment in favor of defendants on Count I and Count III, which was the basis of Plaintiffs’ appeal.

Arguments on Appeal

Plaintiffs’ primary argument was that that the Act violated the pension protection clause “because it impairs the members’ rights to vote in the election of local pension board members and to have that local board control and invest local pension funds.” Arlington Heights, 2023 IL App (2d) 220198. The Appellate Court looked to the Illinois Supreme Court case of Williamson Cty. Bd. of Comm'rs v. Bd. of Trs. of the Ill. Mun. Ret. Fund, which affirmed that the pension clause’s protections extend beyond the pension payment itself. Williamson Cty. Bd. of Comm'rs v. Bd. of Trs. of the Ill. Mun. Ret. Fund, 2020 IL 125330.

In Williamson, the Board Commissioners satisfied the requirements to participate in the Illinois Municipal Retirement Fund (IMRF). However, the Pension Code was amended to change the eligibility requirements for elected board members, requiring county board adoption of an IMRF participation resolution within a set timer period when a member is elected or reelected. Id. Participation in IMRF was terminated when Williamson County neglected to adopt the resolution in a timely manner. Id.

The Illinois Supreme Court found the amendment to the Pension Code unconstitutional, noting that the protection of Article XIII, Section 5 of the Illinois Constitution “prohibits the legislature from unilaterally imposing new limitations or requirements on public pension benefits that did not exist when the public employee was hired”. Id. In so finding, the Supreme Court looked to two cases in which improper requirements were placed on pension funds:

(1) Buddell v. Board of Trustees, 118 Ill. 2d 99 (1987) (involving changes to employees’ right to purchase service credit for time spent in military service, without limitations), and

(2) Carmichael v. Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund, 2018 IL 122793 (involving amendments to the Pension Code that eliminated the ability of the plaintiffs to purchase service credit during a leave of absence to work for a local union). Id.

The amendment created a new requirement for IMRF participation which “diminished or impaired” Plaintiffs’ “protected public pension benefits”. Id. The benefits at issue in Williamson, Buddell and Carmichael negatively impacted Plaintiffs’ eventual benefit payments by reducing their ability to increase their service credits. Id. Such benefits “flow from the contractual relationship arising from membership in a public retirement system” and directly impact Plaintiffs’ eventual pension benefits. Id.

The Illinois Supreme Court has stated that:

“The benefits protected by the pension protection clause include those benefits attendant to membership in the State’s retirement system, such as subsidized health care, disability and life insurance coverage, and eligibility to receive a retirement annuity and survivor benefits (see Jones v. Municipal Employees’ Annuity & Benefit Fund, 2016 IL 119618, ¶ 36; Kanerva, 2014 IL 115811, ¶¶ 39, 41), along with the right to purchase optional service credit in the state pension system for past military service (see Buddell v. Board of Trustees, 118 Ill. 2d 99, 105-06 (1987)).” Carmichael, 2018 IL 122793, ¶ 25.

The Appellate Court in Arlington Heights found voting to be ancillary to the receipt of pension payments. Arlington Heights, 2023 IL App (2d) 220198. Choosing who invests funds, whether it is done by local boards or state boards does not guarantee a certain outcome for benefits. Id. The ability to participate in a fund, accumulate credited time or receive insurance coverage is distinct from the right to vote in the board election or any right to have the local board invest funds. Id. Additionally, contribution requirements are set by the Pension Code, not by local boards. 40 ILCS 5/3-125, 3-125.1, 4-118, 4-118.1 (West 2018). When the methods of funding are not governed by the pension protection clause, choosing who invests the funds is not a protected right.

Next, Plaintiffs argued that requiring the local funds to pay for startup costs, administration and operation of the funds would impair the local pension benefits. Arlington Heights, 2023 IL App (2d) 220198. However, local funds already pay administrative expenses. Id. However, the local funds are already responsible for administrative costs and cited no evidence that the new funds or even the startup costs would be in excess of what they were already paying. Id.

Additionally, Plaintiffs argued that the Act violated the takings clause of Article I, Section 15 of the Illinois Constitution which states: “Private property shall not be taken or damaged for public use without just compensation as provided by law. Such compensation shall be determined by a jury as provided by law.” Ill. Const. 1970, art. I, § 15. However, the Appellate Court clarified that a taking required the existence of a “private property” right. Arlington Heights, 2023 IL App (2d) 220198. While Plaintiffs have a constitutional right to receive their pension benefits, they do not have a right to any particular assets or the level of funding. Id. As individual active and retiree beneficiaries of the funds, they do not have a right to the investments held by the funds, only the present or future payments from the funds. Id. Plaintiffs do not have a private property right to the funds as they do not own the funds. Id. The Act simply requires one type of government pension fund to transfer assets to another type of government pension fund, rendering the takings clause inapplicable.

Conclusion

The Second District Appellate Court affirmed the circuit court decision which held that the consolidation law did not violate the Illinois Constitution’s pension protection clause, contracts clause or takings clause. The Plaintiffs now have the opportunity to petition the Illinois Supreme Court to review the case.