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10/18/96 JAMES MCNAMEE ET AL. v. STATE ILLINOIS ET

October 18, 1996

JAMES MCNAMEE ET AL., APPELLEES,
v.
THE STATE OF ILLINOIS ET AL., APPELLANTS.



The Honorable Justice Nickels delivered the opinion of the court.

The opinion of the court was delivered by: Nickels

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 andmaintenance 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 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, 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 particularfund'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, 326 N.E.2d 749 (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 ...


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