Illinois Appellate Court Upholds Asset Consolidation

by John E. Motylinski

After a long road, we now have a decision in the case challenging Illinois’ decision to consolidate the investment assets of downstate police and firefighters’ pension funds. In a terse, 11-page ruling, the appellate court in Arlington Heights v. Pritzker, 2023 IL App (2d) 220198, affirmed the constitutionality of consolidation.

This lawsuit stems from Public Act 101-610. Prior to the Act, downstate police and firefighters’ pension funds were responsible for investing their own money. The Act consolidated these assets into two statewide investment funds. However, the local funds retained their separate identities and remained responsible for their business (except for investing).

A coalition of pension funds, retirees, and active members sued Governor Pritzker, the Department of Insurance, and the two statewide investment funds alleging that Public Act 101-610 was unconstitutional. These plaintiffs offered two theories of why the consolidation was improper: it purportedly (1) violated the pension protection clause of the Illinois Constitution, and (2) constituted an unlawful “taking” in violation of Article I, Section 15 of the Illinois Constitution.

The appellate court rejected these arguments and found that Public Act 101-610 was constitutional.

The court first addressed the pension protection clause arguments. This provision holds that membership in a public pension fund is a contract whose terms are governed by the Illinois Pension Code. As a result, “once someone begins work and becomes a member of a public retirement system, any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system and cannot be applied to that individual.” The court noted that the pension protection clause “is broad because it protects all of the benefits that flow from the contractual relationship.”

However, the appellate court was unwilling to find Public Act 101-610 diminished a “benefit.” The plaintiffs claimed that their ability to vote for local pension board members (who could then choose how their funds were invested) were protected “benefits.” But the court found “[v]oting for the local board is, at best, ancillary to a participant’s receipt of the pension payments and other assets.” Choosing who invests funds “does not guarantee a particular outcome for benefit payments.” The appellate court also cited Illinois Supreme Court precedent that held the pension protection clause “does not control the manner in which state and local governments fund their pension obligations.” As such, voting for the board members who deal with the funding “is no more than a procedure that may have some impact on the funding,” but that “is not a direct impact on the payment of benefits” as required to show a pension protection clause problem. Thus, the appellate court found Public Act 101-610 passed muster under the pension protection clause.

The appellate court also made short work of the plaintiffs’ arguments that Public Act 101-610 constituted an unconstitutional “taking.” Article I, Section 15 of the Illinois Constitution provides that “private property” cannot be “taken or damaged for public use without just compensation as provided by law.” The court concluded that the plaintiffs did not show that “private property” had been implicated by Public Act 101-610. While the plaintiffs “have a constitutional right to receive pension benefits, they do not have a property right in any particular assets or level of funding.” Simply put, the plaintiffs “do not own the funds that were consolidated. Public Act 101-610 merely required one fund to transfer assets to another. The participants’ “rights to receive benefit payments are not impacted by these transfers.” Since there was no “private property” involved, the court found no unconstitutional taking.

The appellate court upheld Public Act 101-610 as constitutional. But that is not the end of the story. On March 14, 2023, the plaintiffs asked the Illinois Supreme Court to take up the case. The high court is not required to do so, and it remains to be seen whether it has an appetite to weigh in on these issues. Accordingly, pension funds and observers statewide now look to our Supreme Court for what will be the final decision in this case, one way or another.