by Brian J. O’Connor (Winter 2017)

When may a municipality not make required employer contributions to police and fire pensions and not run afoul of the Illinois Pension Code? In Village of North Riverside v. Boron, 2016 IL App (1st) 152687, the Illinois Appellate Court for the First District provided an answer to that question.

The Illinois Pension Code requires municipalities to levy property taxes which, when added to the deductions from police officers’ and firefighters’ salaries and revenues from other sources, will produce an amount sufficient to meet the annual actuarial requirements of the pension fund. (40 ILCS 5/3-125(a) and 4-118(a)) These Code provisions continue to define a required minimum municipal contribution.

In the North Riverside case, the Village failed to make required contributions to its police pension fund from 2008 to 2012 and to its firefighters’ pension fund from 2009 to 2012. The Public Pension Division of the Illinois Department of Insurance (DOI) administers and enforces provisions of the Illinois Pension Code, including those applicable to police and firefighters’ pension funds (40 ILCS 5/1A-101). The DOI determined that the Village failed to make the required contributions to its police and firefighters’ pension funds (40 ILCS 5/1A-113(d)), and subsequently held a hearing on the Village’s noncompliance, seeking to determine whether the Village had “good and sufficient cause” for its noncompliance. (40 ILCS 5/1A-113(d)(1) and (4))

At the hearing, the Village advised that, like many other local governments, it had experienced challenging financial times in the aftermath of the real estate crash and resulting recession in 2008-2009. Village sales tax revenue declined. The Village received less shared revenue from State resources. Decreasing property values resulted in lower property tax revenue. Village property tax revenue was further constrained by the Property Tax Extension Limitation Law (35 ILCS 200/18-185). Village issuance of debt certificates to secure revenues in hopes of improving matters were not successful.

However, the hearing also revealed that while the Village had not made required contributions to police and firefighters’ pension funds, it had made the required contributions to the Illinois Municipal Retirement Fund (IMRF) covering other Village employees because IMRF had enforcement provisions. Further, sales tax receipts increased from $4.8M in 2000 to $8.5M in 2012, and unlike neighboring communities, the Village continued to subsidize garbage collection and water services to residents.

The hearing officer found the Village had not shown good and sufficient cause for failing to meet its required contributions. The DOI Director adopted the hearing officer’s findings of fact and conclusions of law, and ordered the Village to comply with the contribution requirements. The Village sought administrative review, but the circuit court affirmed the DOI’s decision. The Village then appealed to the appellate court who affirmed the circuit court’s and DOI’s decisions.

The appellate court declined to accept the Village’s argument that the “good and sufficient cause” standard in the Illinois Pension Code was unconstitutionally vague. The court noted rules promulgated by the DOI (50 Ill.Admin.Code §4435.10) provided sufficient standards for determining whether a unit of government like the Village met its burden of showing good and sufficient cause for noncompliance.

The court noted that there might be any number of reasons why a municipality might not be able to meet the contribution requirement, including its inability to pay due to declining sales tax, property tax and shared revenue, and lowered credit and financial positions. However, the court acknowledged the DOI’s determination that “the Village had simply made choices to allocate funds elsewhere,” i.e., subsidizing residents garbage collection and water services.

The court further emphasized the revelation at hearing that the Village had made no contributions to the police and firefighters’ pension funds in six separate years between 2000 and 2011, and made less than the full contribution in three other years. The court also noted the Village made IMRF contributions because of the IMRF’s contribution enforcement authority. The court concluded that the Village had to make choices on how to spend its money, and the evidence suggested the Village spent money on discretionary matters (subsidizing residents’ garbage collection and water services) rather than making the required contributions to the police and firefighters’ pension funds, contrary to the Illinois Pension Code.

How does this ruling compare with prior court cases on funding? In Riverdale Police Pension Fund v. Village of Riverdale, 2014 IL App (1st) 130416, decided just two and a half years earlier, a different panel of justices of the First District Appellate Court determined that the Illinois Pension Code did not create a constitutional or contractual obligation to a certain level of funding but that property taxes levied and collected by the Village were required by the Code to be forwarded to the pension fund.

Reconciling the North Riverside and Riverdale rulings suggests that pension funds can and should expect the minimum actuarially determined statutory contribution from the municipality (North Riverside), including the timely transfer of property taxes levied and collected by the municipality (Riverdale). However, pension funds cannot or should not expect funds in excess of these amounts (i.e., expect at least the “minimum actuarially determined contribution” but not necessarily the “recommended actuarially determined contribution”). With the new intercept rules, which are in the process of promulgated by the DOI and implemented in 2017, there is no doubt that another appellate court will have the opportunity to officially reconcile the future of the case law on the expectations and obligations of funding firefighter and police pension funds in Illinois.