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Mitchell I. Serota, Ph.D., Fellow, Society of Actuaries

 

The Attorney General, though her Solicitor General, needs a more potent argument to convince the Illinois Supreme Court that pension legislation enacted in December 2013, which prospectively reduces defined benefit plan accrual rates for State employees, is constitutional. After last year’s judgment that even post-retirement medical benefits cannot be reduced once promised, the Supreme Court has indicated that the attempt at pension reform is not likely to pass Illinois Constitutional muster. Even though the pension legislation appears to be on the verge of being struck down, the Solicitor General is not compelling in her arguments on behalf of the citizens and finances of the State because she has failed to distinguish between accrued benefits and future benefits.

 

The primary thrust of the Solicitor General’s argument last week is that the Great Recession turned the stock market sour in 2008-9 and therefore, we can no longer pay the bills for funding the five State-sponsored pension plans while keeping the State’s services intact. Instead, the State will declare an emergency and use its inherent police powers to trump the Constitution. Counsel for the pension recipients rightfully pummeled that argument into the ground as beneath pathetic. His counter-argument was taken directly from the Yiddish explanation-by-example of “chutzpah” (meaning, “unmitigated gall”): it is akin to a child murdering his parents and then pleading with the judge for mercy on account of his being an orphan. Gov. Edgar instituted a non-funding plan in 1994 and Gov. Blagojevich followed through with a few pension holidays. After playing those games for 25 years, the Great Recession had little to no impact on the Trust– there wasn’t any money there to begin with! OK, a snarky exaggeration, but the point is that the State systematically underfunded the system and caused the problem itself. It continually made promises that it could not keep and the next generation would have to foot the bill.

 

An argument that better serves the interest of the people of Illinois is to return to what was being debated at the Constitutional Convention, but with attention to the distinction between accrued and prospective benefits. Here is what the authors penned for us to deal with:

 

Article XIII, Section 5 (i.e., the “Pension Clause”) of the Illinois Constitution, 1970

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 [emphasis mine].”

 

The question is, what is a “benefit?” Concurrent with the Constitutional Convention, the American Congress was wrestling with language to guarantee benefits for participants in defined benefit plans. They came up with the following:

 

ERISA: IRS Code Section 411(d)(6), September 1974

“A plan shall be treated as not satisfying the requirements of this section if the accrued benefit of a participant is decreased by an amendment of the plan [emphasis mine]. . . .”

 

The concept of “accrued benefit” is very specific. It means the benefit that has been earned to date. In effect, one measures benefits attributable to past service, but definitely not future service. Relying on this interpretation of Section 411(d)(6), numerous plan sponsors have successfully frozen benefits prospectively and terminated defined benefit plans in the ensuing forty years.

 

We can speculate as to the intended difference of meaning between the Illinois language and the ERISA language. Did the authors of Section 5 reject the word “accrued” as too narrow for their purposes: that they wanted to include benefits that were already earned AND benefits that would be earned prospectively? Or were they not really aware of the precision that using the adjective brought? After looking at transcripts of the debates at the time, I am convinced the Illinois authors were simply not aware of the power and specificity of the word, “accrued.”

 

The speeches were all gloriously telling the listeners about the protections that Section 5 would bring, but there was not a glimmer of clarity that the authors were considering future benefits as well as past benefits. They were totally ambiguous because a distinction between past and future benefits was never addressed. No one spoke out against Section 5. Could it remotely be the case that no one drafting the Constitution was willing to protest the protection of benefits to be earned in the future? I am not proposing that the drafters were ignorant, just that they were unsophisticated in how defined benefit pension plans work. These were pre-ERISA days and precious few people had a clue about how they functioned. So what did the drafters intend to mean by “benefits?” It’s worth asking the Supreme Court justices, but no one is asking them that question.

 

The sorrowful language that we are stuck with in Section 5 is paralleled by the sorrowful arguments of the Solicitor General. It doesn’t take a lot of chutzpah to call her out on it.

 

 

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