Impairing State Contractual Commitments – How Sacred Should Contracts Be? — Aditi Bagchi

Post by Aditi Bagchi

In early May, the Illinois Supreme Court unanimously struck down a 2013 state pension reform law.  That statute reduced various public pension benefits in an effort to reduce overwhelming debt in the public pension system.  The Court affirmed a lower court ruling that the bill violated the pension protection clause in the Illinois state constitution, which provides that “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.”  The Court read the clause to prevent the legislature from any downward revision of a public employee’s pension benefits after the first day of her employment.

Illinois argued that the clause should be read to subject its public pensions to the same limitations as other contractual relationships, including modification or elimination by the state’s police power.  The Court rejected that argument, holding that, especially where the state is itself a party to the contract in question, the hurdle for a substantial impairment of contract is very high and had not been met in this case.

One wonders where this leaves Illinois (and other similarly situated states).  Must it really pay up? Does the fairness of making it pay turn just on the fact of the promise Illinois made to its public employees?  Or does it take into account the terms of public pensions, the dynamics and substance of their change over time, the steps taken (and not taken, that could have been taken) that have left the pension system woefully underfunded?   The Court emphasized both the promise made to public employees and the irresponsible governance that produced the current fiscal crisis.

To what extent does the sanctity of these contracts turn on the fact that the state is a party to them?  It seemed to operate here only to make the contracts more inviolable, and one can imagine good reasons for the state to protect its ability to make credible contractual commitments going forward.  But should it matter that taxpayers are ultimately the ones who will bear the burden of the state’s pension mismanagement?

The situation also raises a more general question about how sacrosanct contracts should ever be.  Importantly, this is not a matter of contract law in isolation.  If a private party cannot pay up, she may be judgment proof or file for bankruptcy.  It is not clear what it would mean to say that “Illinois cannot pay” but Illinois may yet pass legislation that allows municipalities to file for bankruptcy (under federal law, they may not do so without state authorization).  Until then, Illinois’ promises to its public employees may be more sacred – under law – than most other contractual promises.

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