JOSEPH E. PRAZEN, Appellee,
MARVIN SHOOP, JR., as President of the Illinois Municipal Retirement Fund, et al., Appellants.
In prohibiting municipal employees from returning to work after retiring early under an incentive plan, and in imposing a forfeiture for doing so, the legislature did not intend to preclude a city from outsourcing supervision of its electrical department to a corporation controlled by an early retiree who had previously supervised that department—Pension Code.
Appeal from the Appellate Court for the Fourth District; heard in that court on appeal from the Circuit Court of Sangamon County, the Hon. John Schmidt, Judge, presiding.
Beth Janicki Clark, of Oak Brook, for appellants.
James G. Fahey, of Sorling Northrup, of Springfield (Jeffrey T. Baker, of counsel), for appellee. Justices JUSTICE THOMAS delivered the judgment of the court, with opinion.
JUSTICE THOMAS delivered the judgment of the court, with opinion. Chief Justice Kilbride and Justices Garman, Karmeier, and Theis concurred in the judgment and opinion. Justice Freeman dissented, with opinion, joined by Justice Burke.
¶ 1 The Illinois Municipal Retirement Fund (IMRF) Board of Trustees (Board) determined that plaintiff, Joseph E. Prazen, forfeited his early retirement incentives (ERI), which amounted to $307, 100.50, by returning to work for an IMRF employer in violation of section 7-141.1(g) of the Illinois Pension Code (Pension Code) (40 ILCS 5/7-141.1(g) (West 2010)). In reaching that determination, the Board found that the plaintiff's corporation was created as a "guise" to avoid the return-to-work prohibitions contained in the statute. On administrative review, the circuit court of Sangamon County confirmed. The appellate court reversed, however, finding that the Board did not have the authority to determine that plaintiff's actions were a guise for circumventing the forfeiture provisions found in section 7-141.1(g). 2012 IL App (4th) 120048, ¶ 37.
¶ 2 The Board filed a petition for leave to appeal with this court (Ill. S.Ct. R. 315 (eff. Feb. 26, 2010)), and we allowed the petition. For the reasons that follow, we affirm the appellate court's judgment.
¶ 3 BACKGROUND
¶ 4 On December 31, 1998, plaintiff retired from his position as superintendent of the electrical department of the City of Peru, Illinois (City), under the early retirement incentive plan (ERI plan) that had been adopted by the City pursuant to section 7-141.1 of the Pension Code. Prior to his retirement, plaintiff purchased five years of age enhancement credit that boosted his years of service to 32.833. At the time of retirement, his annual salary was $82, 284.20.
¶ 5 Three years earlier, in 1995, plaintiff formed a business known as Peru Development Land Trust (PDLT) with the then-mayor of Peru, Donald Baker. The purpose of PDLT was to renovate and convert real estate. In 1995, PDLT purchased a vacant building with the intention of turning it into condominiums. The renovation required extensive electrical upgrades and modifications. Plaintiff planned to perform this work through his business, Electrical Consultants, Ltd. (ECL), which at that time was not yet incorporated.
¶ 6 On December 18, 1998, approximately two weeks before his retirement from his job with the City, plaintiff incorporated ECL. At the time of incorporation, he was the secretary and president of the corporation. Plaintiff's wife later took over as secretary and president.
¶ 7 On December 21, 1998, three days after ECL's incorporation and 10 days prior to plaintiff's retirement, ECL and the City entered into a management and supervision agreement for operation of the electrical department (the Agreement) to begin on January 1, 1999, one day after plaintiff retired. According to the affidavit of Mayor Donald Baker, who signed the Agreement on behalf of the City, it was the City's intent in entering into the Agreement to buy itself more time to find a replacement for plaintiff. It was also the intent of the City to have the liability for performance of the Agreement to be placed with ECL and not plaintiff personally.
¶ 8 Under the Agreement, ECL was to provide a full-time person to perform the contractor's duties for the City for a term of three years, with the first year of compensation set at $89, 816.74 to be paid on a biweekly basis to ECL. The Agreement stated that "[a]ll work, services, and other functions furnished or to be performed by [ECL) for the City shall be in [ECL's] position as an independent contractor and to no extent and in no manner shall either [ECL] or any of its personnel be regarded as an employee, servant, or agent of the City." The Agreement gave the City the right to terminate it "upon reasonable cause determined within the City's sole discretion" following a 30-day written notice to ECL. There was no corresponding right on the part of ECL to terminate, and the initial term of the Agreement was for a three-year period. The Agreement between ECL and the City was extended eight times following its initial execution. It was not until the parties executed an eighth rider to the Agreement in August 2008 that ECL was also given the right to terminate the Agreement with a 30-day written notice.
¶ 9 Once prior to the execution of the Agreement between ECL and the City and twice afterwards, plaintiff's attorney, Douglas Schweickert, who was also outside legal counsel for the City, contacted IMRF on plaintiff's behalf to inquire about any impact the structure of the Agreement might have on plaintiff's IMRF pension. Schweickert documented these conversations with the IMRF in three letters that he wrote to plaintiff.
¶ 10 The first letter—dated September 15, 1998, which was over two months before ECL's incorporation and plaintiff's retirement from the City—stated that an IMRF representative had advised Schweickert that "a former employee who elected the Early Retirement Incentive may work for a non-IMRF employer." It was explained to Schweickert that the City could contract with a corporation for certain services even though the corporation employs a former City employee who elected the early retirement incentive. According to Schweickert, the IMRF representative also told him that "a former City employee may also contract with an IMRF employer as an independent contractor."
¶ 11 In the second letter dated March 21, 2002, Schweickert informed plaintiff that he had again contacted IMRF at plaintiff's request. This time an IMRF representative confirmed that everything in the September 1998 letter still applied and that there had been no changes in IMRF regulations.
¶ 12 In the last letter dated November 19, 2002, Schweickert explained to plaintiff as follows:
"[The IMRF representative] confirmed that a retired 'early out' IMRF employee may work for a separate corporation which is then contracted to do work for the City from which the IMRF employee retired. I specifically questioned whether that retired IMRF employee may be an owner of the corporation contracting with the City. She stated that was permiss[i]ble, but she added that the corporation cannot just be a guise to avoid the IMRF regulations. Specifically, if the corporation hires itself out to the general public in addition to the municipality for which it has contracted, that would be fine."
Schweickert suggested to plaintiff that he should advertise to expand ECL's visibility and hire other employees, even if only for brief assignments.
¶ 13 ECL employed three people during its existence—plaintiff, his wife Diane, and their daughter Natalie. The City paid ECL biweekly, as called for by the Agreement. ECL then paid its employees. Plaintiff, Diane and Natalie received W-2 forms from ECL for each year they worked for the corporation.
¶ 14 On February 17, 2009, ECL informed the City in writing that it would be terminating the Agreement effective March 18, 2009, as allowed by the eighth rider extending the Agreement. ECL was voluntarily dissolved on November 30, 2009. After the Agreement between the City and ECL was terminated, the City continued to rely upon independent contractors to perform the duties described in the Agreement.
¶ 15 On November 5, 2010, nearly one year after ECL was dissolved and almost 12 years after plaintiff retired, general counsel for IMRF notified plaintiff by letter that the IMRF made a staff determination that plaintiff's continued "relationship" with the City after his 1999 retirement violated the provisions of section 7-141.1(g) of the Pension Code. Subsection (g) of section 7-141.1 prohibits an annuitant who has received any age enhancement or creditable service under ERI from later either accepting "employment with" or entering into a "personal services contract with" an IMRF employer. 40 ILCS 5/7-141.1(g) (West 1998). Attached to the letter were new calculations based on plaintiff's retirement at 27.333 years and showing a $307, 100.50 overpayment as a result of plaintiff's ERI violation. The letter did not state how IMRF would collect the overpayment from plaintiff.
¶ 16 Plaintiff timely appealed the staff determination to the IMRF benefit review committee. The IMRF benefit review committee conducted hearings on June 23, 2011, and July 21, 2011. The findings and conclusions of the IMRF benefit review committee stated in part as follows:
"The ability of the Board to determine whether or not [plaintiff] is an employee is irrelevant to this proceeding because no such determination is being made.
* * * Under the facts of this appeal, [plaintiff] violated the provisions of Section 7-141[.1](g) because EC[L] was created as a guise to avoid the return to work prohibitions contained therein. More specifically, [plaintiff's] actions are contrary to the intent of the return to work prohibitions, which were enacted to offer an [sic] mechanism to allow individuals who are at least age 50 with 20 years of service to purchase service time and thus retire with a higher benefit at an earlier age. ERI was created as a financial incentive to employers (they could either not replace the retiree or hire younger employees at a lower salary). Allowing an employee to retire with a higher benefit and yet return to work under a contract was exactly what the General Assembly was trying to avoid when it enacted the ERI statute with the return to work prohibitions. Specifically the Committee took the following into consideration when making this determination:
 The timing surrounding the creation and dissolution of EC[L].
 The timing surrounding the Agreement with the City as it relates to [plaintiff's] retirement.
The de minimis nature of EC[L]'s employment outside the agreement with the City.
 The fact that [plaintiff], his wife, and his daughter were the only employees of EC[L].
 The fact that [plaintiff], at the time of the original execution of the Agreement, was both ...