NOTICE: Under Supreme Court Rule 367 a party has 21 days after the
filing of the opinion to request a rehearing. Also, opinions are
subject to modification, correction or withdrawal at anytime prior
to issuance of the mandate by the Clerk of the Court. Therefore,
because the following slip opinion is being made available prior to
the Court's final action in this matter, it cannot be considered
the final decision of the Court. The official copy of the following
opinion will be published by the Supreme Court's Reporter of
Decisions in the Official Reports advance sheets following final
action by the Court.
Docket No. 79592--Agenda 11--May 1996.
JAMES McNAMEE et al., Appellees, v. THE STATE OF ILLINOIS et al.,
Appellants.
Opinion filed October 18, 1996.
JUSTICE NICKELS delivered the opinion of the court:
In this appeal, we decide whether an amendment to section 3--
127 of the Illinois Pension Code (Pub. Act 87--1265, eff. January
25, 1993 (amending 40 ILCS 5/3--127 (West 1992))) violates section
5 of article XIII of the Illinois Constitution of 1970 (Ill. Const.
1970, art. XIII, §5). Plaintiffs include the Illinois Police
Pension Fund Association, the Palos Heights and Streamwood police
pension funds and several current and retired police officers from
various municipalities throughout Illinois. Plaintiffs filed a
complaint in the circuit court of Cook County seeking declaratory
and injunctive relief against the defendants, the State of
Illinois, Governor Jim Edgar, and the Director of Insurance,
Stephen Selcke. The circuit court granted plaintiffs' motion for
summary judgment, finding that the amendment to section 3--127
diminished and impaired the contractual rights of the pension fund
participants in violation of the Illinois Constitution. Defendants
appealed directly to this court pursuant to Supreme Court Rule
302(a) (134 Ill. 2d R. 302(a)). We reverse.
BACKGROUND
The Illinois Pension Code (40 ILCS 5/1--101 et seq. (West
1994)) codifies laws relating to the creation and maintenance of
pension funds for the benefit of state and municipal employees and
their dependents. This appeal involves article 3 of the Pension
Code, which applies to the maintenance of police pension funds by
municipalities with populations of 500,000 and under. 40 ILCS 5/3--
101 et seq. (West 1994). These police pension funds are financed
through employee salary deductions and municipal tax levies. 40
ILCS 5/3--125 (West 1994). At issue is an amendment to section 3--
127, which involves the accumulation of a reserve to pay off a
fund's accrued liabilities. Prior to January 25, 1993, section 3--
127 provided:
"Reserves. The board shall establish and maintain a
reserve to insure the payment of all obligations incurred
under this Article. The reserve to be accumulated shall
be equal to the estimated total actuarial requirements of
the fund.
If a pension fund has a reserve of less than the
accrued liabilities of the fund, the board of the pension
fund, in making its annual report to the city council or
board of trustees of the municipality, shall designate
the amount needed annually to insure the accumulation of
the reserve to the level of the fund's accrued
liabilities over a period of 40 years subsequent to
January 1, 1980, for pension funds then in operation, or
subsequent to the date of establishment in the case of a
fund created thereafter, so that the necessary reserves
will be attained over such a period." 40 ILCS 5/3--127
(West 1992).
The General Assembly amended section 3--127 effective January
25, 1993 (Pub. Act 87--1265, eff. January 25, 1993). As a result of
that amendment, the second paragraph of section 3--127 was changed
to provide:
"If a pension fund has a reserve of less than the
the amount, CALCULATED AS A LEVEL PERCENTAGE OF PAYROLL,
NEEDED ANNUALLY TO INSURE THE ACCUMULATION OF THE RESERVE
TO THE LEVEL OF THE FUND'S ACCRUED LIABILITIES OVER A
PERIOD OF 40 YEARS FROM JULY 1, 1993 FOR PENSION FUNDS
THEN IN OPERATION, or from the date of establishment in
the case of a fund created thereafter, so that the
necessary reserves will be attained over such a period."
(Emphasis added.) 40 ILCS 5/3--127 (West 1994).
This amendment changed the funding of police pensions in two ways.
First, the amendment changed the beginning date of the 40-year
amortization period from January 1, 1980, to July 1, 1993. Second,
the amendment changed the method of computing the annual amount
required to amortize the unfunded accrued liability from a level
dollar amount to a percentage of payroll.
Plaintiffs filed a complaint in the circuit court seeking
declaratory and injunctive relief and alleging that the amendment
violated the Illinois Constitution. Specifically, plaintiffs
alleged that the amendment violated section 5 of article XIII,
which 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." Ill.
Const. 1970, art. XIII, §5.
Plaintiffs' complaint alleges that the refinancing allowed by the
amendment to section 3--127 diminishes and impairs the pension
benefits of participants because it will allow municipalities to
contribute lower initial annual contributions to the police pension
funds, thereby making the funds less secure.
Plaintiffs subsequently filed a motion for summary judgment.
In support of the motion, plaintiffs submitted the affidavit of
Arthur Tepfer, who is a professional actuary. In his affidavit,
Tepfer states that the amendment to section 3--127 will allow
municipalities to defer contributions until later years. Under this
new funding method, Tepfer opines that police pension funds will be
detrimentally affected because municipal contributions will be
initially insufficient to pay the interest on a particular fund's
unfunded liability. Thus, under the new funding provision, pension
liabilities will increase dramatically in the early years and a
fund will have fewer assets, thereby producing a less secure fund.
In his affidavit, Tepfer concludes that the funding changes
diminish and impair the pension benefits of the funds'
participants.
Plaintiffs further argued that the circuit court should follow
the reasoning in McDermott v. Regan, 82 N.Y.2d 354, 624 N.E.2d 985,
604 N.Y.S.2d 890 (1993), in which the highest court of New York
construed the protection afforded by a similar provision in the New
York Constitution (see N.Y. Const. of 1938, art. V, §7). At issue
was whether the legislature may force the comptroller, who is the
administrative head of New York's pension funds, to use a
controversial method of computing employer contributions.
McDermott, 82 N.Y.2d at 360, 624 N.E.2d at 988, 604 N.Y.S.2d at
893. The court held that the statute was unconstitutional because
it impaired pension benefits by divesting the state comptroller of
the autonomy necessary to act as an independent trustee of the
funds. McDermott, 82 N.Y.2d at 360, 624 N.E.2d at 988, 604 N.Y.S.2d
at 893. The court further held that the legislature violated its
fiduciary duty as a secondary trustee in changing the funding
method solely to alleviate the fiscal crisis in the state.
McDermott, 82 N.Y.2d at 361-63, 624 N.E.2d at 988-90, 604 N.Y.S.2d
at 893-95.
In their reply to the motion for summary judgment, defendants
did not contest the nature of funding changes made by the
amendment. Instead, relying on the transcripts from the
constitutional convention, the defendants argued that section 5 of
article XIII only protects pension benefits and does not require
any particular method of funding. Defendants noted that in People
ex rel. Illinois Federation of Teachers v. Lindberg, 60 Ill. 2d
266, 271 (1975), this court reviewed the record of proceedings from
the constitutional convention and determined that the tenor of the
debates was concerned with protecting employee benefits, not
funding. As the amendment to section 3--127 did not serve to reduce
the benefits due any beneficiary, defendants argued there was no
violation of the constitution.
The trial court granted plaintiffs' motion for summary
judgment. In so ruling, the trial court relied heavily on the
McDermott case and the opinion of plaintiffs' expert that the
funding changes diminish and impair the pension benefits of the
funds' participants. Defendants appealed directly to this court
pursuant to Supreme Court Rule 302(a) (134 Ill. 2d R. 302(a)). We
allowed the Illinois Municipal League to file a brief as amicus
curiae in support of defendants.
ANALYSIS
Defendants argue that the trial court erred in granting
plaintiffs' motion for summary judgment. Summary judgment is
appropriate where the pleadings, depositions, and admissions on
file, together with the affidavits, demonstrate that there is no
genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law. 735 ILCS 5/2--1005(c)
(West 1994). As defendants raise no factual issues, the sole issue
on appeal is whether the trial court properly determined as a
matter of law that the amendment to section 3--127 violated the
Illinois Constitution. The review of a summary judgment ruling is
an issue of law and our review is therefore de novo. Busch v.
Graphic Color Corp., 169 Ill. 2d 325, 333 (1996); Crum & Forster
Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384, 390
(1993).
Our inquiry into the protection afforded to state and
municipal employees by our constitution appropriately begins with
the language of the provision itself. The plain language of section
5 of article XIII makes participation in a public pension plan an
enforceable contractual relationship and also demands that the
"benefits" of that relationship "shall not be diminished or
impaired." Ill. Const. 1970, art. XIII, §5. This court has held
that the contractual relationship is governed by the actual terms
of the Pension Code at the time the employee becomes a member of
the pension system. Di Falco v. Board of Trustees of the Fireman's
Pension Fund of the Wood Dale Fire Protection District No. One, 122
Ill. 2d 22, 26 (1988); Kerner v. State Employees' Retirement
System, 72 Ill. 2d 507, 514 (1978).
Defendants do not dispute that section 5 of article XIII of
the Illinois Constitution creates contractual rights. Defendants
contend, however, that the provision creates a contractual right to
pension benefits, but does not encompass how those benefits are
funded. The defendants note that the language of the provision
specifically protects "benefits" and does not mention a particular
funding method. Plaintiffs, in contrast, argue that the "benefits"
that are protected by the constitution include the full benefits of
a contractual relationship under the Pension Code. Plaintiffs argue
that the amendment to section 3--127 violated their
constitutionally protected contractual right to the "benefit" of
the more secure fund created by the prior funding method.
Any uncertainty in the protection afforded by section 5 of
article XIII is easily dispelled by an examination of the history
of the provision and the evils it was intended to address. Prior to
the adoption of the Constitution of 1970, Illinois adhered to the
traditional classification of pension plans as either mandatory or
optional. Where an employee's participation in a pension plan was
mandatory, the rights created in the relationship were considered
in the nature of a gratuity that could be revoked at will. See,
e.g., Bergin v. Board of Trustees of the Teachers' Retirement
System, 31 Ill. 2d 566, 574 (1964); Jordan v. Metropolitan Sanitary
District of Greater Chicago, 15 Ill. 2d 369, 382 (1958); Blough v.
Ekstrom, 14 Ill. App. 2d 153, 160 (1957). However, where the
employee's participation in a pension plan was optional, the
pension was considered enforceable under contract principles.
Bardens v. Board of Trustees of the Judges Retirement System, 22
Ill. 2d 56, 60 (1961); People ex rel. Judges Retirement System v.
Wright, 379 Ill. 328, 333 (1942). The primary purpose behind the
inclusion of section 5 of article XIII was to eliminate the
uncertainty surrounding public pension benefits created by the
distinction between mandatory and optional pension plans. 4 Record
of Proceedings, Sixth Illinois Constitutional Convention 2925
(comments of Delegate Green) (hereinafter cited as Proceedings).
This concern was exacerbated by the proposed creation of broad home
rule powers for municipalities, which some delegates feared could
lead municipalities into debt and result in their abandoning their
pension obligations to police officers and fire fighters. 4
Proceedings 2926.
The transcripts from the convention make clear that the
purpose of the amendment was to clarify and strengthen the right of
state and municipal employees to receive their pension benefits,
but not to control funding. In the debates surrounding the
amendment, Delegate Parkhurst expressed his concern that the
provision may be construed as constitutionalizing the politically
sensitive area of pension funding:
"Now here's--it seems to me--the fallacy of trying
to constitutionalize this sort of a thing. First of all,
the background in the legislature has been that many
people who are entitled to a pension which is
administered or given at the state level have come to
Springfield and said, `Our pension is not fully funded.
Our actuary tells us that you will have to have
$2,200,000,000 in state money to put into a special fund
to pay off the potential claims that may now be filed to
get this particular pension or that particular pension
when the benefits become due and payable to the
retirees.'
And the legislature has said, `For Heaven's sake, we
don't have $2,200,000,000. Why can't you let us run it
like the federal government runs the Social Security
program, which is to pay the benefits out of the income
as they become due.' And the proponents of 100 percent
funding have said, `Nope, that's not good enough. We want
you to put all the money there right now, and not wait
until the payment comes due before you wrestle up the
money to make the payment.'
***
Now, the trouble with this amendment is, as I read
it, that you would eliminate the argument
constitutionally. You would mandate the General Assembly
to put in 100 percent of the money to pay anybody's
pension on anybody's actuarial projection right now,
because it says, `the benefits of which shall not be
diminished or impaired.' " 4 Proceedings 2926-27.
In response to the concerns raised by Delegate Parkhurst, Vice
President Lyons asked for a clarification of the nature of the
protection afforded:
"I would like to ask one of the sponsors of the
amendment--I am a cosponsor of it myself--I THOUGHT that
the purpose of this amendment was to give protection to
those people who felt that they needed protection for
their pension rights in the event that sweeping home rule
powers were given to local governments. I recall
receiving a flurry of letters and telephone calls early
in the session when the local government articles began
to be introduced from police and fire associations who
were very fearful that a general grant of home rule
powers to local governments might in some way impair
their pension rights. I thought that all that this
amendment was designed to do was to cure that. Now, if it
does something else, or if the language needs to be
cleaned up, that's one thing. But the genesis of the
amendment, I thought, was simply to protect people who up
until now have felt protected. I am aware of no movement
to upfund all the funds--nobody's got that kind of money.
I would just appreciate an answer from somebody who
feels that he knows." (Emphasis in original.) 4
Proceedings 2928.
Delegate Kinney, who initiated the amendment, was allowed to
clarify:
"Yes, you are right, Mr. Lyons. That is what it is
designed to do. Benefits not being diminished really
refers to this situation: If a police officer accepted
employment under a provision where he was entitled to
retire at two-thirds of his salary after twenty years of
service, that could not subsequently be changed to say he
was entitled to only one-third of his salary after thirty
years of service, or perhaps entitled to nothing. THAT IS
THE THRUST OF THE WORD `DIMINISHED.' IT WAS NOT INTENDED
TO REQUIRE 100 PERCENT FUNDING OR 50 PERCENT OR 30
PERCENT FUNDING OR GET INTO ANY OF THOSE PROBLEMS, ASIDE
FROM THE VERY SLIM AREA WHERE A COURT MIGHT JUDICIALLY
DETERMINE THAT IMMINENT BANKRUPTCY WOULD REALLY BE
IMPAIRMENT.
*** It is simply to give them a basic protection
against abolishing their rights completely or changing
the terms of their rights after they have embarked upon
the employment--to lessen them." (Emphasis added.) 4
Proceedings 2629.
Later, Delegate Kinney stated:
"All we are seeking to do is to guarantee that people
will have the rights that were in force at the time they
entered into the agreement to become an employee, and as
Mr. Green has said, if the benefits are $100 a month in
1971, they should be not less than $100 a month in 1990."
4 Proceedings 2931-32.
Delegate Green, also a sponsor of the amendment, discussed the
similarity of the proposed amendment to the New York provision.
Delegate Green noted, however, that unlike the New York provision,
the amendment was not intended to require funding directly.
Instead, the amendment was intended to force the funding of the
pensions indirectly, by putting the state and municipal governments
on notice that they are responsible for those benefits:
"Our language is that language that is in the New York
Constitution which was adopted in 1938, really under a
similar circumstance. In 1938 you were about at the end
of the Depression, but there was a great consideration on
the part of the New York General Assembly to really cut
out some of the money that they were giving to the
pension programs in New York; and it was for this reason
that the New York Constitution adopted the language that
we are suggesting. Since that time, the state of New
York--the pension funds for public employees have been
fully funded, and so I think we have good reason to
believe that this type of language will be a mandate to
the General Assembly to do something which they have not
previously done in some twenty-two years.
NOW, WE ARE NOT IN ANY WAY SUGGESTING THAT THIS
$2,500,000,000 THAT THEY ARE IN ARREARS BE BROUGHT UP TO
DATE AT ANY ONE TIME. THE NEW YORK CONSTITUTION MANDATED
THAT STATE TO FULLY FUND THE PROGRAM IN TWO YEARS. THIS
WOULD BE A PHYSICAL IMPOSSIBILITY IN ILLINOIS.
I do believe that if we could contact the actuary of
the programs, it may well be in the scheduling, we could
come up with a scheduling to do it. BUT IN LIEU OF A
SCHEDULING PROVISION, I BELIEVE WE HAVE AT LEAST PUT THE
GENERAL ASSEMBLY ON NOTICE THAT THESE MEMBERSHIPS ARE
ENFORCEABLE CONTRACTS AND THAT THEY SHALL NOT BE
DIMINISHED OR IMPAIRED." (Emphasis added.) 4 Proceedings
2925.
Vice President Lyons' fears were allayed by the comments of
Delegates Green and Kinney:
"We now have heard from the proponents who have
represented that that is the limit of the scope of this
amendment. IT DOES NOT REFER TO UPFUNDING, NOR DOES IT
SEEK TO ESTABLISH SOME SORT OF AN ADMINISTRATIVE ELITE TO
ADMINISTER THESE VARIOUS FUNDS." (Emphasis added.) 4
Proceedings 2929.
Echoing Vice President Lyons, Delegate Whalen also reiterated
that the funding of the pension systems was outside the scope of
the amendment:
"Mr. President and fellow delegates, I agree with
Delegate Kinney, that as I read section 16, IT DOESN'T
REQUIRE THE FUNDING OF ANY PENSIONS, AND THEREFORE THE
WHOLE QUESTION OF FUNDING IS IRRELEVANT TO THE ISSUE OF
WHETHER WE SHOULD ADOPT THE PROVISION." (Emphasis added.)
4 Proceedings 2929.
President Witwer expressly conditioned his vote on the
understanding that the amendment was not intended to control
funding:
"I am voting yes in the hope that the points which
Mr. Whalen has raised will be properly protected in the
work of the Style and Drafting Committee and that there
will be an affirmation that THIS DOES NOT DIRECT OR
CONTROL FUNDING. I VOTE YES." (Emphasis added.) 4
Proceedings 2932.
Thus, the framers of the Illinois Constitution set out only to put
state and municipal governments on notice that they may not abandon
their pension obligations on the belief that such payments were
gratuities. The clearly expressed intention of the framers was to
protect public pension benefits, but not to control funding.
In People ex rel. Illinois Federation of Teachers v. Lindberg,
60 Ill. 2d 266 (1975), this court relied on these debates and
similarly concluded that section 5 of article XIII of the Illinois
Constitution of 1970 does not require any particular level of
funding. In Lindberg, participants in several teachers' pension
funds challenged then Governor Walker's item reduction of fiscal
appropriations made to their respective funds. The pension fund
participants argued that the Pension Code establishes and defines
a contractual relationship between themselves and the state which
obligates the state to fulfill its funding commitments. Lindberg,
60 Ill. 2d at 271-72. This court rejected that view, noting that
"the convention debates do not establish the intent to
constitutionally require a specific level of pension appropriations
during a fiscal period." Lindberg, 60 Ill. 2d at 272. This court
concluded that section 5 of article XIII does not create a
contractual basis for participants to expect a particular level of
funding, but only a contractual right "that they would receive the
money due them at the time of their retirement." Lindberg, 60 Ill.
2d at 271.
It is with this understanding of the protection afforded by
section 5 of article XIII that this court has consistently
invalidated amendments to the Pension Code where the result is to
diminish benefits. See, e.g., Felt v. Board of Trustees of the
Judges Retirement System, 107 Ill. 2d 158 (1985) (finding
unconstitutional an amendment to Pension Code that changed the
salary base for determining pension benefits); Buddell v. Board of
Trustees, State University Retirement System, 118 Ill. 2d 99 (1987)
(finding unconstitutional an amendment to Pension Code that
eliminated a participant's right to purchase military service
credits to increase benefits at retirement). Similarly, the
appellate court has also invalidated amendments to the Pension Code
only where the result was to diminish benefits. See, e.g., Kraus v.
Board of Trustees of the Police Pension Fund, 72 Ill. App. 3d 833
(1979) (finding unconstitutional an amendment to Pension Code
reducing the benefits paid to a beneficiary who changes from
disability retirement to regular retirement); Schroeder v. Morton
Grove Police Pension Board, 219 Ill. App. 3d 697 (1991) (finding
unconstitutional an amendment to Pension Code that reduced pension
benefits based upon receipt of worker's compensation benefits).
In finding that the amendment to section 3--127 violated
section 5 of article XIII, the trial court relied on the McDermott
case from New York and the opinion contained in the affidavit of
Arthur Tepfer, the professional actuary. We recognize that in the
past this court has relied upon the interpretations given by the
New York courts concerning their provision. Buddell, 118 Ill. 2d at
106-07; Felt, 107 Ill. 2d at 163. In those cases, this court was
faced with the issue of whether a particular change in the Pension
Code diminished the benefits owed a beneficiary, a matter treated
similarly by both constitutions. However, the framers of our
constitution acknowledged that the New York provision was broader
than the provision proposed in Illinois, expressly requiring full
funding in two years. 4 Proceedings 2925. The framers did not
include the funding provision that is contained in the New York
Constitution, but adopted the rest of the language with the
understanding that it protected only benefits. Delegate Kinney
stated:
"But I would say that the New York Constitution
adopted such a provision in 1938, and this amendment is
substantially the same language as the New York
Constitution presently has. THE THRUST OF IT IS THAT
PEOPLE WHO DO ACCEPT EMPLOYMENT WILL NOT FIND AT A FUTURE
TIME THAT THEY ARE NOT ENTITLED TO THE BENEFITS THEY
THOUGHT THEY WERE WHEN THEY ACCEPTED THE EMPLOYMENT.
(Emphasis added.) 4 Proceedings 2931.
The clearly expressed intentions of the framers of the Illinois
Constitution must control over any discordant interpretation from
a sister state. The framers of our constitution simply did not
intend that section 5 of article XIII control the manner in which
state and local governments fund their pension obligations. In
addition, although plaintiffs' expert may express his professional
opinion concerning the propriety of the changes in funding, he may
not interpret the Illinois Constitution.
We therefore hold that the amendment to section 3--127 does
not violate section 5 of article XIII of the Illinois Constitution.
Section 5 of article XIII creates an enforceable contractual
relationship that protects only the right to receive benefits.
Plaintiffs do not contend that the amendment to section 3--127
diminished their right to receive pension benefits. In addition,
plaintiffs' complaint does not allege that the new funding method
will impair benefits by placing a fund on the verge of default or
imminent bankruptcy. See 4 Proceedings 2926 (comments of Delegate
Kinney) ("The word `impaired' is meant to imply and to intend that
if a pension fund would be on the verge of default or imminent
bankruptcy, a group action could be taken to show that these rights
should be preserved"). Accordingly, the circuit court erred as a
matter of law in granting plaintiffs' motion for summary judgment.
CONCLUSION
For the reasons stated, we hold that the amendment to section
3--127 does not violate section 5 of article XIII of the Illinois
Constitution. Accordingly, the judgment of the circuit court of
Cook County is reversed and the cause is remanded to the circuit
court for further proceedings.
Reversed and remanded.