In some ways, the City of Detroit and the State of Illinois are merely the latest battlegrounds in the legal fight to determine whether state lawmakers can cut public pension benefits to ease fiscal shortfalls. But there is a reason to watch the outcomes especially closely: Michigan and Illinois are among only seven states in the nation where public pension benefits are explicitly protected under the state constitution.
Such constitutional protection offers legal advantages to public retirees fighting the cuts because it creates a constitutionally established and protected contractual relationship with the state – passing the first of three tests typically applied by courts in such cases.
Courts weighing the constitutionality of laws that change public pension benefits begin by establishing whether a contract exists and what it covers. Only then do judges ask whether the law impairs that contract and, if so, was it a necessary and reasonable response to circumstances.
The Battle in Illinois
The 1970 Illinois Constitution says that membership in the state’s public retirement system is “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” Because it establishes the contract at “membership,” the constitution appears to prohibit cuts to public employees’ retirement benefits – both earned and promised – from their date of employment.
A 2013 pension law passed by the Illinois legislature and signed by the governor does exactly that, according to a January 28 lawsuit asking a state circuit court to delay implementation until courts decide whether it is constitutional. The 2013 law, due to take effect in June, cuts cost-of-living increases, delays full retirement age and caps the salary amount that can be used to calculate pensions, among other things.
The lawsuit by a coalition of public employees and union groups claims that a succession of state officials knowingly failed to properly fund three state retirement systems – the Teachers’ Retirement Fund of Illinois, the State Employees’ Retirement System of Illinois and the State Universities Retirement System of Illinois.
“The State chose to forgo funding its pension systems in amounts the State now claims were needed to fully meet the State’s annuity obligations,” the lawsuit states. “Now, the State expects the members of those systems to carry on their backs the burden of curing the State’s longstanding misconduct.”
The lawsuit also seeks to undercut an important notion contained in the law: that a 1% reduction in members’ annual contribution to the retirement systems somehow offsets the decreased benefits. A court could determine that the pension law is constitutional if benefits, on balance, are neither significantly diminished nor impaired.
To illustrate the cost to employees of the plans, the lawsuit compared current benefits to those calculated under the new law. All 25 of the current employees and retirees acting as representative plaintiffs in the suit would lose money under the new rules, some of them potentially hundreds of thousands of dollars over a 25-year retirement period.
The lawsuit accuses Governor Patrick Quinn, the state legislature and certain state officials of abdicating “their most fundamental duty – to uphold the Illinois Constitution.”
The Detroit Bankruptcy and Michigan’s Constitution
In Michigan, the duty to uphold the state constitution motivated Attorney General Bill Schuette to seek a federal court’s opinion on the constitutionality of Detroit’s plan to restructure pension benefits as part of its controversial bankruptcy.
In contrast to Illinois, the Michigan Constitution provides for the protection of “accrued financial benefits” for public employees. The bankruptcy court had found that such constitutional protections were a mere contract right, and that City could diminish pensions in bankruptcy. But in a Statement of Interest filed in the Sixth U.S. Circuit Court of Appeals January 27, Attorney General Schuette argues that those obligations are inviolable.
“Michigan’s Pension Clause creates more than mere contract rights: their inviolability is a part of fundamental Michigan law, and the City cannot discharge these obligations in bankruptcy,” the Statement says.
A few sentences later, he continues: “The City can no more discharge these debts than it can suspend civil liberties, seize the property of former employees, or cancel elections – all fundamental violations of Michigan law.”
Attorney General Schuette is careful to point out that he was intervening on behalf of the people of Michigan and not in his capacity as counsel to Governor Rick Snyder, who like Schuette is a Republican. The attorney general also states that he does not challenge the governor’s decision to file bankruptcy for Detroit and agrees with the bankruptcy court that the city is eligible to do so.
In urging the court to review the city’s obligations to pensioners, the attorney general, like the plaintiffs in Illinois, says that lawmakers’ decision to reduce benefits is exactly the type of action the constitutional pension clause was designed to prevent.
“Is the City of Detroit duty-bound to honor and comply with Michigan’s constitutional protection of vested governmental pensions while in federal bankruptcy? Or can the City cast aside its constitutional obligations?” he asks. “These are compelling questions of national importance – and they cannot be deferred until later.”
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With courts now considering the permissibility of legislative pension cuts in Colorado, Rhode Island, Washington, Oregon and elsewhere, the disputes in Illinois and Michigan could offer insight into the ultimate vulnerability of even the most fundamentally protected of our nation’s retirees.