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Tuesday, August 8, 2017

Pension Fund Found to Impair Pensioner's Rights to Benefits

In an 86 page opinion, an Illinois Appellate Court determined that a municipality's pension fund was underfunded to the point of being "on the verge of default or imminent bankruptcy," in violation of the Illinois constitution. The court also held that the municipality's actions in failing to adequately fund the pension fund violated state law and a previous settlement agreement between the municipality and the pension fund, and entitled the pension fund to damages, among other relief. Pension Fund vs. City of Harvey.

The appellate court goes into great detail about the facts leading up to the lawsuit, as well as the testimony of the various experts and others relating to the underfunding claims by the pension fund. According to the opinion, in some years, the municipality did not appropriate any funds for the pension fund. In others, the municipality appropriated some funds. In all years relevant to the lawsuit, the money going out from the pension fund to retirees exceeded the funds going into the fund, both by the participants and the municipality. 

The opinion addresses a variety of arguments and issues relating to funding of a pension fund, but one of the most interesting issues addressed by the court is its interpretation of a fund being "on the verge of default or imminent bankruptcy." That phrase comes from the legislative history of Article 13, Section 5 of the Illinois constitution, the constitutional provision that provides that membership in a pension fund is "an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." Testimony about this particular provision of the Illinois constitution included a discussion of what "impair" means, and included the following discussion:
The word "impair" is meant to imply and to intend that if a pension fund would be on the verge of default or imminent bankruptcy, a group action could be taken to show that these rights should be preserved.
No court had made a determination that a particular pension fund fell within this standard, although the appellate court discussed cases that had referenced this language.

In applying this standard to the pension fund at issue in Harvey, the court first acknowledged that the fund was not in bankruptcy. However, the court noted that the language used in this standard was "on the verge of" rather than requiring an actual bankruptcy proceeding. The appellate court held that Harvey's pension fund met the standard because the evidence submitted at the trial court demonstrated that the pension fund would not be able to pay out benefits in as little as five years and that the fund would likely reach a point where the municipality could not make enough contributions to meet the pension fund obligations. The court acknowledged that pension funds are not entitled to a specific mandatory funding level and that the level of funding is discretionary. However, the evidence submitted at trial showed that Harvey had contributed less than 10% of the annual actuarial requirement in 6 out of 9 years, putting the fund "on the verge of default" and giving rise to a constitutional claim by pensioners that its benefits were being impaired.

In its conclusion, the appellate court upheld the trial court's rulings in favor of the pension fund, including an order that Harvey levy funds adequate to meet its pension obligations.

Post Authored by Julie Tappendorf


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