Appellate Court Upholds Municipal Ordinance That Reduces Vacation Buy-Back Benefit For Retiring Employees

The 4^th District Court of Appeals in Springfield has upheld a municipal ordinance discontinuing the opportunity for city employees to sell back unused vacation days several months before their retirement.  In Pisani, et al. v. The City of Springfield, the Appellate Court affirmed that Springfield’s withdrawal of its vacation buy-back terms did not modify constitutionally protected pension benefits and had only an incidental, indirect effect on those benefits. 

BACKGROUND

On September 30, 2003, the City of Springfield passed an ordinance that allowed employees to collect a “lump sum vacation buy back payment” up to a year in advance of their retirement date (Springfield Code of Ordinances § 36.58(b)(13) the “2003 Ordinance”).  Such a lump sum payout in the final year before retirement could inflate an employee’s final rate of earnings used to calculate retirement annuity payments.

On July 21, 2015, the City passed an ordinance repealing the lump sum vacation payout provided in the 2003 Ordinance, effectively eliminating the availability of this pension-enhancing payment as of June 1, 2016 (the “2015 Ordinance”).

APPELLATE COURT ALLOWS ORDINANCE TO ELIMINATE ANNUITY BOOSTING STRATEGY

In this case, Plaintiff municipal employees and their unions argued that the opportunity to receive a pension enhancing payment for unused vacation days was a constitutionally protected benefit and that the change in the City’s policy diminished this protected pension benefit. The “Pension Protection Clause” of the Illinois Constitution 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.” Ill. Const. 1970, art. XIII, § 5.  

The Appellate Court first recognized in plain terms how the vacation buy-back payment would artificially inflate the “final rate of earnings.”  Then the Court focused on the Pension Protection Clause and the fact that the contractual basis for protecting pension benefits is between the State of Illinois and the member of the State retirement fund (in this case, Illinois Municipal Retirement Fund, or “Fund”).  Because the vacation buy-back provision was in a local municipal ordinance instead of Illinois statutory law, it was not deemed to be the type of benefit protected by the Illinois Constitution.  In a municipal employee’s contract with a city, no pension is promised.  The City of Springfield, as a participating municipal employer, only has a contractual duty to contribute to the Fund for member employees.

Accordingly, the Court found that a local policy, expressed in an ordinance that changes the terms and conditions of employment and affects a number that is plugged into the pension formula, merely indirectly and incidentally affects the amount of the pension.  The Court emphasized that the constitutionally protected benefit is the statutory formula and not the inevitable variables inherent in the municipal employment relationship.  Employment practices, compensation rates, length of service and layoffs are all inputs that can affect the rate of earnings or remove the opportunity to maximize state pension benefits.  Thus, the court concluded, a change in local municipal policy affecting terms and conditions of employment does not diminish or impair the benefits of membership in the pension or retirement system of the State within the meaning of the Pension Protection Clause of the Illinois Constitution. 

Other Illinois court decisions have suggested there may be limits on the type of changes a municipality can make to employee benefits that are vested. 

Please consult with your legal counsel before making these types of changes.