by Michael B. Weinstein (Fall 2017)

What are the outer limits of the Illinois Constitution’s “Pension Protection Clause”? Can a city eliminate an opportunity for pension-spiking without violating the Constitution? The Illinois Appellate Court recently provided answers to these questions in the case of Pisani v. City of Springfield, 2017 IL App (4th) 160417 (2017).

Joy Pisani and her union, the International Brotherhood of Electrical Workers (IBEW) Local 193, sued the City of Springfield on behalf of herself and a class of City employees who are participants in the Illinois Municipal Retirement Fund (IMRF). The lawsuit commenced after the City passed an ordinance repealing a vacation buyback policy that had been adopted in 2003. The plaintiffs argued that eliminating the buyback policy violated the Pension Protection Clause (Article 13, Section 5), as well as the Contracts Clause (Article 1, Section 16) of the 1970 Illinois Constitution. The trial court ruled against the plaintiffs, and they appealed that decision to the Illinois Appellate Court, Fourth District. That court, in a unanimous decision authored by Justice Thomas Appleton, upheld the trial court’s ruling and, in so doing, provided further definition to the Pension Protection Clause.

By way of background, Article 7 of the Illinois Pension Code created IMRF and delineates its structure. “Earnings” and “final rate of earnings” are defined within Article 7. IMRF has adopted an administrative rule that provides that money paid in return for unused vacation days meets the statutory definition of “earnings.” Typically, an individual’s earnings during the final four years of employment (48 months) provides the basis for determining the “final rate of earnings” which, in turn, is one of the two factors used in the formula that governs the amount of an         individual’s retirement benefit. Thus, a lump-sum payment — in excess of an individual’s normal salary progression — made during the “final rate of earnings” period artificially inflates the retirement benefit. This type of lump-sum payment, which could include money paid in return for unused vacation days, creates a form of “pension-spiking.”

The Illinois General Assembly has recognized that “pension spiking” is inappropriate since it is one of the causes for the chronic underfunding of pension systems. As a result, the Illinois General Assembly passed legislation in 1964, commonly referred to as the “125% rule.” Under that legislation, any earnings that are received within the final three months of an individual’s final earnings period cannot exceed 125% of the highest earnings in any other month in the period. 40 ILCS 5/7-116(d)(5). Note that Public Act 97-0609 increased the 125% period to the final twenty-four months for individuals who first become IMRF participants on or after January 1, 2012.

Normally, an individual who is about to retire will receive payment for any unused vacation days as part of that person’s final payroll check. Such a payment will invariably trigger the 125% rule. However, in 2003, Springfield adopted an ordinance that, in the words of Justice Appleton, “made possible an end run around the 125% rule.” The ordinance allowed employees to collect a lump-sum payment for unused vacation days “before the final three months of the final earnings period.” Thus, the entire lump-sum payment would be included in determining an individual’s “final rate of earnings” for pension purposes.

Subsequently, in late 2011, the Illinois General Assembly — in a further attempt to deter “pension spiking” — adopted additional legislation, modeled after earlier legislation concerning the Teachers’ Retirement System. Public Act 97-609 mandated that any “reported earnings for any 12-month periods used to determine the final rate of earnings [that] exceeds the employee’s 12 month reported earnings with the same employer for the previous year by the greater of 6% or 1.5 times the annual increase in the Consumer Price Index-U” would require the employer pay IMRF an up-front, actuarially determined, payment equal to the “present value of the increase in the pension resulting from the portion of the increase in salary that is in excess of 6% or 1.5 times the annual increase in the Consumer Price Index-U….” (40 ILCS 5/7-172(k)) In effect, this “accelerated payment”, as computed by IMRF, makes the employer responsible for the increase in an employee’s pension resulting from the type of “pension spiking” encompassed by the 2003 Springfield ordinance.

Very quickly, the City of Springfield began to feel the economic impact of the accelerated payment legislation. On May 12, 2015, the Director of the City’s Office of Human Relations warned the City’s aldermen that over the past three years, the city had paid IMRF over $3.5 million in accelerated payments. Moreover, the director projected that the legislation could cost the City a total of $44 million in payments to IMRF as a result of the “current policy of allowing employees to liquidate their unused vacation time up to a year in advance of their retirement date.”

Shortly thereafter, the City passed a new ordinance repealing the lump-sum vacation payout provision of the 2003 ordinance as of June 1, 2016. The Director of Human Relations notified all future retirees of the change in City policy but pointed out that any individual who provided notice of intent to retire on or before May 31, 2017 would not be affected by the new policy, so long as the notice of intent was submitted prior to June 1, 2016.

Pisani and her union’s complaint alleged that she faced a dilemma. She did not want to retire before May 31, 2017 and yet she also did not want to lose the pension spiking opportunity provided by the 2003 City ordinance. The complaint went on to argue that the 2015 ordinance violated Article 13, Section 5 of the Illinois Constitution of 1970, the Pension Protection Clause, as well as Article I, Section 16 of the Constitution, the Contracts Clause. After briefing by both sides, the trial court ruled in favor of the City, finding that the 2015 ordinance only incidentally impacted a retiring person’s pension annuity and was therefore permissible under the Constitution. The plaintiffs appealed the trial court’s decision to the Illinois Appellate Court.

The appellate court summarized the plaintiff’s argument as follows:

Because the vacation buyback provision is a pension-spiking benefit “limited to, conditioned on, and flow[ing] directly from membership” in the Fund, the 2015 ordinance, which purports to take this benefit away from Pisani and similarly situated employees, is unconstitutional under the pension protection clause as plaintiffs interpret it. [citation omitted] In their view, the right of defendant’s employees, under the 2003 ordinance, to convert unused vacation days to additional, lump-sum compensation, specifically for the purpose of increasing the amount of their retirement annuity, “qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems,” and by taking this valuable pension benefit away, the 2015 ordinance violates the pension protection clause.

While acknowledging that an enforceable contractual relationship results from membership in a pension fund, the court nevertheless noted that the relationship is actually between the participating employee and the State of Illinois. Thus, Pisani has a pension contract, not with the City of Springfield but with IMRF’s Board of Trustees, which according to the court, is an “agency or instrumentality” of the State of Illinois. Pisani has an employment contract with the city but the city “never promised to pay her a pension.” In short, the contractual duty to pay Pisani a pension lies with IMRF and not with the City of Springfield. “The terms and conditions of her pension contract are in legislation passed by the General Assembly, not in the [city’s] ordinances…. Because the vacation buyback provision was in defendant’s ordinance instead of in Illinois statutory law, it was not a benefit of the ‘contractual relationship’ to which the pension protection clause refers.”

The court further noted that if the vacation buyback provision were actually a benefit of membership in IMRF, then all members of IMRF would have had the option, simply by virtue of being members of the IMRF, which, of course, is not the case.

Finally, the appellate court, like the trial court, noted that an earlier Illinois Supreme Court decision, also involving the City of Springfield (Peters v. City of Springfield, 57 Ill.2d 142 (1974)), was relevant to the issue at hand. In the Peters case, the Illinois Supreme Court held that a mandatory retirement age for police officers and firefighters did not constitute a “diminishment or impairment” of one’s pension benefits under the pension protection clause even though a reduction in an employee’s length of service resulting from a mandatory retirement would affect the amount of the individual’s pension.

The appellate court concluded that the logic behind the Peters decision also applied to the Pisani plaintiffs. In Peters, the contractual relationship between the employees and the pension fund was a relationship in which the length of service was a variable. Similarly, in Pisani, in the contractual relationship between the employees and the IMRF Board, the final rate of earnings was a variable. Neither variable contained a fixed numerical value. The pension contract in both cases was the formula, with its variables, and no matter what numbers were plugged into the formula, the formula itself remained the same. In short, “[t]he point of Peters is that the pension protection clause protects the statutory formula, not the inputs from the employment relationship.”