In a 6-1 decision that may have significant ramifications, the Illinois Supreme Court held in Kanerva v. Weems that state-subsidized retiree medical premiums for certain public sector retirees are a protected benefit under the pension protection clause of the Illinois Constitution. This decision is important because it may significantly restrain the state’s ability to address escalating retiree medical costs by reducing the subsidies that it provides to active retirees.
Illinois currently subsidizes the cost of retiree medical coverage for participants in various state pension systems, including for participants in the State Employees’ Retirement System (SERS), the State Universities Retirement System (SURS) and the Teachers’ Retirement System (TRS). Illinois passed the State Employee Group Insurance Act of 2012 (Public Act 97-695) which required that current retirees begin making contributions based on a formula. Unlike prior legislative changes to the state retiree medical subsidy rules (which only applied to new participants on a prospective basis), Public Act 97-695 required retirees who were entitled to fully or heavily subsidized retiree medical coverage to contribute (or contribute more) to the cost of those premiums.
The new contribution scheme was challenged by a number of groups and retirees as violating the pension protection clause of the Illinois Constitution. This clause, from Article XIII, section 5 of the Illinois Constitution, says that “[m]embership in any pension or retirement system of the State…shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” The plaintiffs’ claims were dismissed at the pleadings stage at trial for a number of reasons, including on the ground that retiree medical benefits are not traditional retirement benefits and thus not subject to protection under the Illinois Constitution.
The Supreme Court reversed and held that the state’s subsidies toward the cost of retiree medical coverage are indeed subject to constitutional protection, which the legislature may not diminish or impair. A key part of this decision involved the Court’s recognition that in order to receive state subsidized retiree medical benefits, a person must be a participant in one of the state’s public pension systems. Because the state’s subsidies toward retiree health coverage are conditioned on membership in an Illinois state pension system, the Court reasoned that these subsidies should be subject to the pension protection clause. The Court remanded the case back to the trial court to determine whether the benefit reductions of Public Act 97-695 violate the pension protection clause.
Impact of Kanerva on State-Subsidized Retiree Medical Coverage and Ongoing Pension Reform Litigation
The immediate impact of Kanerva is that it gives state subsidized retiree medical benefits constitutional protection. As the Supreme Court remanded the case back to the trial court for further consideration, it is still unclear what changes the legislature can make to retiree medical benefits without running afoul of the pension protection clause.
It is hard to tell what impact Kanerva will have on the consolidated challenge to the recently enacted pension reform legislation under Senate Bill 1. For example, the Court did not clarify the scope of the term “diminish or impair” under the pension protection clause as it would apply to the benefits that are disputed in the pension reform litigation. Kanerva also did not address one of the key arguments that the state is making in its defense of Senate Bill 1—that Illinois retains certain sovereign powers to amend the pension provisions of the Illinois code to reduce pension benefits for current workers and active retirees in light of the state’s precarious fiscal situation. Further, the pension issues involved in the challenge to Senate Bill 1 are different from the retiree medical subsidies in this case. After Kanerva, these issues remain unresolved.
At the same time, the Court reiterated that when it interprets the pension protection clause, it will do so liberally in favor of the rights of the pensioner. This language may prove troubling for the state should the Court resolve the Senate Bill 1 challenge under the pension protection clause.