Of public pensions, state constitutional contract protection, and fiscal constraint

Temple Law Review

Volumn 69, Issue 3, 1996, Pages 1059-1079

  Simko, Darryl B ^a,b,c,d  

^a Off Attorney Gen State of Illinois

^b UNIVERSITY OF NOTRE DAME   (United States)

^c LOYOLA UNIVERSITY CHICAGO   (United States)

^d Supreme Court of Illinois ^*

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EID: 10044236902     PISSN: 08998086     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (212)

1. Complaint at 6, New Jersey Educ. Ass'n v. New Jersey, (D.N.J. 1994) (No. 94-5129) [hereinafter "NJEA complaint"]; see Bob Herbert, Whitman Steals the Future, N.Y. TIMES, Feb. 22, 1995, at A19 (stating that Governor Whitman decided to withhold money from public employee pension funds to balance state budget).
2. NJEA complaint, supra note 1, at 5.
3. Id. at 5, 10.
4. Id.; see Herbert, supra note 1 (stating that NJEA filed suit against state).
5. People ex rel. Sklodowski v. Illinois, 642 N.E.2d 1180, 1181 (111. 1994). The five state-funded pension systems were the General Assembly Retirement System, the State Employees' Retirement System of Illinois, the State Universities Retirement System, the Teachers' Retirement System of the State of Illinois, and the Judges' Retirement System of Illinois. Id.
6. Id. at 1181-82.
7. Id. at 1182. See U.S. CONST, art. I, § 10, cl. 1 (prohibiting laws impairing contractual obligations); ILL, CONST, art. I, § 16 (prohibiting ex post facto laws impairing contractual obligations); ILL, CONST, art. XIII, § 5 (stating that membership in state pension or retirement system was an enforceable contractual relationship that may not be impaired).
8. ILL. CONST, art. XIII, § 5.
9. Sklodowski, 642 N.E.2d at 1185-86. The court in Sklodowski held that the transfer of funds was made moot by the fact of the transfer. Id. at 1185. Because the parties in Sklodowski were engaged in a related action, the court did not decide on the constitutionality of the transfer. Id. at 1186.
10. Note, Public Employee Pensions in Times of Fiscal Distress, 90 HARV. L. REV. 992, 993 (1977) [hereinafter "Fiscal Distress"] (citing Louis M. KOHLMEIER, CONFLICTS OF INTEREST: STATE AND LOCAL PENSION FUND ASSET MANAGEMENT (1976)).
11. Note, Public Employee Pensions in Times of Fiscal Distress, 90 HARV. L. REV. 992, 993 (1977) [hereinafter "Fiscal Distress"] (citing Louis M. KOHLMEIER, CONFLICTS OF INTEREST: STATE AND LOCAL PENSION FUND ASSET MANAGEMENT (1976)).
12. The term "borrowing" is used to encompass the reapportionment or redistribution of monies originally apportioned or otherwise dedicated for public pension purposes.
13. A distinction is meant to be drawn between these abuses and legislative tampering, the effect of which is to reduce or modify public pension benefits. See id. (stating that legislatures have altered benefit and eligibility structure of pension programs or have influenced pension fund's investment to find fiscal relief).
14. The Alaska Constitution provides that "[membership in employee retirement systems of the State or its political subdivisions shall constitute a contractual relationship. Accrued benefits of these systems shall not be diminished or impaired." ALASKA CONST, art. XII, § 7. The Hawaii Constitution provides that "[m]embership in any employees' retirement system of the State or any political subdivision thereof shall be a contractual relationship, the accrued benefits of which shall not be diminished or impaired." HAW. CONST, art. XVI, § 2. The Illinois Constitution states that "[m]embership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumental thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." ILL. CONST, art. XIII, § 5. The Michigan Constitution provides: The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities. MICH. CONST, art. IX, § 24. Lastly, the New York Constitution states that "[a]fter July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired." N. Y. CONST, art. V, § 7. Massachusetts, by statute, affords similar protections. MASS. GEN. LAWS ANN. ch. 32, § 25(5) (West 1966) (entitling members in retirement system to contractual rights and benefits that cannot be amended or altered).
15. The problem is maintaining, at all times, an appropriate level of fluctuating reserves. A system is said to be actuarially sound when it has sufficient reserves such that, at some reasonable future time, benefits due can be paid without new revenues. Weaver v. Evans, 495 P.2d 639, 650 n.1 (Wash. 1972) (Neill, J., dissenting). The concept entails contributions sufficient to cover normal pension cost plus the interest on unfunded accrued liability. Dombrowski v. City of Phila., 245 A.2d 238, 240 n.1 (Pa. 1968). Normal cost represents the annual contribution that must be made to pay benefits for employees' current and future service. Id, Included in this is unfunded liability, an amount needed to provide benefits for service prior to a current year. Id.
16. See Herbert, supra note 1 (quoting former New Jersey State Treasurer).
17. Id. (concluding that pension obligations will be met by future generations).
18. Id. (stating that budget plan will deprive taxpayers of income that money would have generated if invested). Diverting monies appropriated for public pensions to other uses has been recognized by courts to affect the "potential long term investment yield" that the moneys would otherwise generate for the funds. See, e.g., Valdes v. Cory, 189 Cal. Rptr. 212, 225 (Cal. Ct. App. 1983) (characterizing loss of appropriation to retirement fund together with loss of potential investment yield as not inconsequential).
19. Kosa v. Treasurer of Michigan, 292 N.W.2d 452, 454 (Mich. 1980).
20. For a discussion of the nature of pensions see Rubin G. Cohn, Public Employee Retirement Plans - The Nature of the Employees' Rights, 1968 U. ILL. L.F. 32; Fiscal Distress, supra note 10; Note, Contractual Aspects of Pension Plan Modification, 56 COLUM. L. REV. 251 (1956).
21. For a discussion of the nature of pensions see Rubin G. Cohn, Public Employee Retirement Plans - The Nature of the Employees' Rights, 1968 U. ILL. L.F. 32; Fiscal Distress, supra note 10; Note, Contractual Aspects of Pension Plan Modification, 56 COLUM. L. REV. 251 (1956).
22. For a discussion of the nature of pensions see Rubin G. Cohn, Public Employee Retirement Plans - The Nature of the Employees' Rights, 1968 U. ILL. L.F. 32; Fiscal Distress, supra note 10; Note, Contractual Aspects of Pension Plan Modification, 56 COLUM. L. REV. 251 (1956).
23. Fiscal Distress, supra note 10, at 997.
24. Id.
25. See id. (stating that many public employees enter government service with expectation of pension sufficient to provide most retirement income).
26. Cohn, supra note 19, at 33-34.
27. See Birnbaum v. New York State Teachers Retirement Sys., 152 N.E.2d 241, 245 (N.Y. 1958) (stating that pension portion of compensation was received in lieu of greater rewards in private employment); Hammond v. Hoffbeck, 627 P.2d 1052, 1056 (Alaska 1981) (stating that Alaska's constitution regards pension benefits as part of consideration for performance of employment).
28. Birnbaum, 152 N.E.2d at 245; Cohn, supra note 19, at 40-41 (finding that because government cannot compete with private industry salaries, it must provide equalizing factor of at-tractive retirement plan); Fiscal Distress, supra note 10, at 997 (stating that public employees may work for lower wages as result of pension expectation).
29. Birnbaum, 152 N.E.2d at 245.
30. Hammond, 627 P.2d at 1056.
31. Not every impairment runs afoul of the Contract Clause. The determination that a technical impairment has taken place is the preliminary step to determining whether the impair-ment is unconstitutional. United States Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 21 (1977). The constitutionality of the impairment is determined by reconciling the requirements of the Contract Clause with the power of the states to protect the welfare of their citizens. Id.
32. Id. at 17.
33. U.S. CONST, art. I, § 10.
34. GEORGE D. BRADEN & RUBIN G. COHN, THE ILLINOIS CONSTITUTION: AN ANNOTATED AND COMPARATIVE ANALYSIS 75 (1969).
35. United States Trust Co., 431 U.S. at 21.
36. Id. at 17.
37. MASS. GEN. LAWS ANN., ch. 32, § 25(5) (West 1966).
38. United States Trust Co., 431 U.S. at 17.
39. Id. at 21.
40. Id.
41. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978).
42. Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 444-45 (1934).
43. United States Trust Co., 431 U.S. at 23.
44. Id.
45. Id.
46. See id. at 24 (noting states' unquestionable power to enter into financial contracts).
47. Id. at 25.
48. Id. at 31.
49. Id. at 29-30. In Valdes v. Cory, 189 Cal. Rptr. 212 (Cal. Ct. App. 1983), the California Court of Appeals stated that four considerations were relevant to the analysis: (1) [whether] the enactment serves to protect basic interests of society, (2) [whether] there is an emergency justification for the enactment, (3) [whether] the enactment is appropriate for the emergency, and (4) [whether] the enactment is designed as a temporary measure during which time the vested contract rights are not lost but merely deferred for a brief period with interest running during the temporary deferment. Id. at 226. Those factors were formulated in Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398 (1934), a case involving a private contract impairment. See infra note 195 for a discussion of these factors.
50. United States Trust Co., 431 U.S. at 25-26.
51. Id. at 26.
52. Id.
53. N.Y. CONST, art. V, § 7.
54. 197 N.E. 260 (N.Y. 1935). See McDermott v. McDermott, 507 N.Y.S.2d 390, 398 (N.Y. App. Div. 1986) (identifying public policy apart from contractual obligation as protection to pension plan members), appeal dismissed, 511 N.E.2d 81 (1987).
55. Roddy, 197 N.E. at 262. See also PETER J. GALIE, THE NEW YORK STATE CONSTTTUTION, A REFERENCE GUIDE 115 (G. Alan Tarr ed., 1991). Even after the provision's adoption, the argument had been advanced that "[p]rior to retirement for superannuation the member's rights are inchoate." Birnbaum v. New York State Teachers Retirement Sys., 152 N.E.2d 241, 244 (N.Y. 1958).
56. Roddy, 197 N.E. at 262.
57. Id.
58. GALIE, supra note 52; see also Civil Serv. Employees Ass'n, Inc. v. Regan, 525 N.E.2d 1, 3 (N.Y. 1988) (noting that employees' pension rights fix at the time they become system members); McDermott, 507 N.Y.S,2d at 398 (noting possible alteration or revocation of pension bene-fits as result of Roddy v. Valentine).
59. Birnbaum, 152 N.E.2d at 245.
60. McDermott, 507 N.Y.S.2d at 398.
61. Id. Although article five, section seven, was included in the New York Constitution of 1938, the provision stated that it would become effective July 1, 1940. N.Y. CONST, art. V, § 7. The postponement was presumably to enable the State and its civil divisions to review their pension systems and to adjust, amend, modify or supplement the provisions of existing systems in the light of the fact that after such effective date such systems were no longer gratuitous, but by virtue of the new amendment became contracts .... Day v. Mruk, 121 N.E.2d 362, 363 (N.Y. 1954).
62. McDermott, 507 N.Y.S.2d at 398.
63. Id.
64. See GALIE, supra note 52.
65. See, e.g., Kleinfeldt v. New York City Employees' Retirement Sys., 324 N.E.2d 865, 867 (N.Y. 1975) (involving computation of amount of benefits); McCaffrey v. Board of Educ., 368 N.Y.S.2d 863, 865 (N.Y. App. Div. 1975) (involving computation period).
66. See, e.g., Cook v. City of Binghamton, 398 N.E.2d 525, 526 (N.Y. 1979) (involving diminishment of disability benefits); Hoar v. City of Yonkers, 67 N.E.2d 157, 158 (N.Y. 1946) (involving diminishment of salary).
67. See, e.g., Gorman v. City of New York, 110 N.Y.S.2d 711, 717 (N.Y. App. Div. 1952) (holding that requirement of notice does not impair pension members' benefits of membership), affd, 109 N.E.2d 881 (N.Y. 1952), remittiur amended, 110 N.E.2d 895 (N.Y.), appeal dismissed, 345 U.S. 962 (1953).
68. 337 N.E.2d 592 (N.Y. 1975).
69. Id. at 594.
70. Id.
71. Id.
72. Id.
73. Id.
74. Id.
75. Id.
76. Id.
77. Id.
78. Id.
79. Id. at 595.
80. Id.
81. Id.
82. Id.
83. Id.
84. Id.
85. ILL. CONST, art. XIII, § 5. The Illinois Constitution also contains a provision echoing the federal Contract Clause. ILL. CONST, art. I, § 16. With regard to impairment of benefits, the protections the two provisions provide would seem co-extensive. To that extent, the protection afforded against contract impairment could not also include the notion of pensions as contracts. Otherwise, the effect would be to render the pension protection surplusage. People ex rel. Sklodowski v. Illinois, 642 N.E.2d 1180, 1192 (III. 1994) (Freeman, J., concurring in part and dissenting in part) (citing ILL. ANN. STAT. art. XIII, § 5, Constitutional Commentary, at 840 (West 1993)).
86. Kraus v. Board of Trustees, 390 N.E.2d 1281, 1290 (III. App. Ct. 1979).
87. Id. at 1288.
88. Id.
89. N.Y. CONST, art. V, § 7; ILL. CONST, art. XIII, § 5.
90. Kraus, 390 N.E.2d at 1289-91.
91. See, e.g., Felt v. Board of Trustees of Judges Retirement Sys., 481 N.E.2d 698, 702 (III. 1985) (holding that amendment to pension plan affecting reductions in benefits was unconstitutional as an impairment of contract).
92. See, e.g., Schroeder v. Morton Grove Police Pension Bd., 579 N.E.2d 997, 1000 (III. App. Ct.) (stating police officer's pension should not be offset by disability settlement), appeal denied.
93. N.E.2d 140 (1991); Greves v. Firemen's Pension Fund of City of Blue Island, 498 N.E.2d 618, 620 (III. App. Ct. 1986) (finding fireman's pension unconstitutionally reduced because of workers' compensation payments).
94. ILL. ANN. STAT. art. XIII, § 5, Constitutional Commentary, at 840 (West 1993).
95. Kraus, 390 N.E.2d at 1293.
96. 326 N.E.2d 749 (III.), cert, denied, 423 U.S. 839 (1975).
97. Id. at 753.
98. Id. at 751.
99. Id.
100. Id. at 752.
101. Id. at 751-52.
102. Id. at 753.
103. Id. at 753-54.
104. 642 N.E.2d 1180 (III. 1994).
105. Id. at 1180.
106. Id. at 1181.
107. Id. at 1186.
108. Id. at 1187 (Freeman, J., concurring in part and dissenting in part).
109. Id. at 1188 (Freeman, J., concurring in part and dissenting in part).
110. Id. at 1192 (Freeman, J., concurring in part and dissenting in part).
111. Id.
112. Id. at 1193 (Freeman, J., concurring in part and dissenting in part).
113. Id. at 1194 (Freeman, J., concurring in part and dissenting in part); Dombrowski v. City of Phila., 245 A.2d 238 (Pa. 1968). But see Kosa v. Treasurer of Michigan, 292 N.W.2d 452, 460 (Mich. 1980) (drawing distinction between the right to receive pension benefits and the funding method adopted to assure the availability of monies to pay benefits).
114. Sklodowski, 642 N.E.2d at 1194 (Freeman, J., concurring in part and dissenting in part).
115. Id.
116. MICH. CONST, art. 9, § 24.
117. MICH. COMP. LAWS ANN. art. IX, § 24 (West 1985), Convention Comment, at 508; Annotations: MICH. CONST, art. 9, § 24 (Convention Comment).
118. MICH. CONST, art. 9, § 24.
119. Kosa v. Treasurer of Michigan, 292 N.W.2d 452, 459 n.21 (Mich. 1980).
120. Id.
121. Id.
122. 292 N.W.2d 452 (Mich. 1980).
123. Id. at 462.
124. Id. at 457.
125. Id.
126. Id. at 457-58.
127. Id.
128. Both the federal and Michigan contract clauses were mentioned as bases for the challenge instituted in the suit. However, there was no attempt to differentiate the protections each afforded. Id. at 459.
129. Id.
130. Id. at 460.
131. Id.
132. Id.
133. Id.
134. Id. at 461. The court did note "[a]rguendo" that, if the method of funding could be subject to challenge under article nine, section twenty four, the particular funding method upon which the borrowing scheme had been based (an "entry age normal" rather than an "attained age" funding system) supported the benefit structure. Id.
135. Id.
136. Id. See also supra note 124.
137. 245 A.2d 238 (Pa. 1968).
138. Id. at 246.
139. 231 A.2d 743 (Pa. 1967).
140. Id. at 746.
141. Dombrowski, 245 A.2d at 247.
142. Id.
143. Id. at 248.
144. Id.
145. 495 P.2d 639 (Wash. 1972) (en banc).
146. Id. at 649.
147. Id. at 640.
148. Id.
149. Id. at 641.
150. Id.
151. Id.
152. Id. at 642.
153. Id.
154. Id. at 649.
155. Id.
156. Id.
157. 384 S.E.2d 816 (W. Va. 1989).
158. Id. at 827-28; W. VA. CONST, art. III, § 4.
159. Dadisman, 384 S.E.2d at 825-26.
160. Id. at 822.
161. Id.
162. Id. at 822-23.
163. Id. at 823.
164. Id.
165. Id. at 826.
166. Id. at 821.
167. Id.
168. Id. at 827.
169. Id.
170. Id.
171. Id. (quoting Kosa v. Treasurer of Michigan, 292 N.W.2d 452, 460 (Mich. 1980)).
172. See Valdes v. Cory, 189 Cal. Rptr. 212, 223 (Cal. Ct. App. 1983) (holding that statute created contractual obligation for state to make monthly payments into pension fund); Dombrowski v. City of Phila., 245 A.2d 238, 246-47 (Pa. 1968) (involving charter requiring adequate appropriations be made to city employees' pension fund); Weaver v. Evans, 495 P.2d 639, 649 (Wash. 1972) (involving statute requiring governor to keep teachers' retirement system in financially sound condition).
173. Dadisman, 384 S.E.2d at 828.
174. Id.
175. Id.
176. Id.
177. Id.
178. Id. at 829.
179. Id.
180. Id. (citation omitted).
181. 189 Cal. Rptr. 212 (Cal. Ct. App. 1983).
182. Id. at 216 (citation omitted).
183. Id.
184. Id.
185. Id.
186. Id. at 217.
187. Id.
188. Id. at 222.
189. Id.
190. Id. at 218 (quoting Report of the Comm. on Pensions of State Employees, 1929).
191. Id. (quoting Report of the Comm. on Pensions of State Employees, 1929).
192. Id. at 222.
193. Id. at 223.
194. Id.
195. Id.
196. Id.
197. Id. at 224.
198. Id. at 225.
199. The factors were identified by the Supreme Court in Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 444-45 (1934) (articulating factors as being: whether emergency existed which necessitated legislative and judicial protection of community's interest; whether legislation was in whole society's best interest; whether relief was appropriate and reasonable; and whether length of time for redemption was reasonable). 196. Valdes, 189 Cal. Rptr. at 226.
200. Id.
201. Id.
202. Id.
203. Id.
204. Id.
205. Id.
206. CAL. CONST, art. I, § 9.
207. 337 N.E.2d 592 (N.Y. 1975) (stating that size of mandate which allowed money to be taken from state retirement funds was immaterial, for even small mandate is first step of slippery slope).
208. Valdes, 189 Cal. Rptr. at 225.
209. GEORGE D. BRADEN & RUBIN C. COHN, THE ILLINOIS CONSTITUTION; AN ANNOTATED AND COMPARATIVE ANALYSIS 75 (1969).
210. See Valdes, 189 Cal. Rptr. 212, 223 (holding that state was contractually bound to contribute to pension fund and that legislation at issue was an impairment of contractual relationship); Dadisman v. Moore, 384 S.E.2d 816, 831 (W. Va. 1989) (holding that state had fiduciary duty to manage its pension fund with actuarial soundness and that legislation to "transfer and expire" pension trust was unconstitutional).
211. ILL. CONST, art. XIII, § 5; N.Y. CONST, art. V, § 7. The structure and language of those constitutional provisions would accommodate even the view that present pension system participation, or membership, is a component of bargained-for-consideration to support the notion of public pensions as contracts. In contrast, the constitutions of Alaska and Hawaii, while similarly protecting membership in public pension systems, extend the protection only to "accrued" benefits. ALASKA CONST, art. XII, § 7; HAW. CONST, art. XVI, § 2.
212. Interestingly, the dictionary definition of "impair" actually includes the notion of "diminishraent." WEBSTER'S DICTIONARY (Unabridged) 1131 (1961).