On May 5th, nearly a full year after it heard oral arguments in the case, the Illinois Supreme Court issued its decision in Matthews v. Chicago Transit Authority, et al., addressing the interplay between a public sector collective bargaining agreement’s provision for retiree health care benefits and Article XIII, Section 5 of the Illinois Constitution, commonly referred to as the “pension protection clause.” The Court held that a class of employees, who had retired prior to a new CBA imposed significant health care cost increases on retirees, had an “enforceable, vested right” to the health care provisions contained in the predecessor CBA. Failure to honor that right constitutes not only a breach of contract but a violation of the pension protection clause.
This decision discusses at some length the circumstances under which a collective bargaining agreement can give rise to an entitlement to retiree health care benefits protected by the pension protection clause and the process by which a collective bargaining agreement may limit or modify those benefits. Following on the heels of the Court’s decisions in Kanerva v. Weems (retiree health care benefits provided by statute are benefits of membership in public retirement system and thus protected against diminishment or impairment); In re Pension Reform Litigation (“Heaton”) (State’s police power cannot be used to justify reduction in pension benefits by legislative action); and Jones v. Municipal Employees’ Annuity and Benefit Fund (same, but noting that under ordinary contract principles, pension benefits may be modified where there has been a bargained-for exchange and consideration), Matthews, as an instance of application of these principles to the world of public sector collective bargaining, provides lessons concerning the promise and the perils of collective bargaining. It also leaves a number of unanswered questions.
Beginning in 1949, the CTA and several of its principal unions incorporated a Retirement Plan Agreement, governing retirement benefits, into their CBAs. Retirement benefits were subject to collective bargaining and evolved over the years with successive CBAs. The Retirement Plan Agreement also contained provisions for retiree health care, and the nature of those arrangements changed over time. Until 1980, CTA provided a monthly subsidy for retirees. After 1980, pursuant to an interest arbitration award, CTA was relieved of the obligation to provide a subsidy and, instead, the Retirement Plan contributed a subsidy, the amount of which increased in succeeding CBAs. The CBA covering the period 2004-2006 provided for a subsidy, capped at a certain amount, and stated that “[t]his benefit terminates when the retiree attains age 65.” The successor CBA, covering the period 2007-2011 and the product of an interest arbitration proceeding, contained radically different terms. Confronting a fiscal crisis threatening the viability of the Retirement Plan, the interest arbitrator directed the creation of separate trusts (each with substantial additional funding, and contingent upon enactment of necessary legislation) to pay for and administer retirement benefits and retiree health care. With respect to retiree health care, the arbitrator ruled that current employees were to pay a “payroll tax” equal to 3% of compensation, and retirees were to contribute up to 45% of the total cost of health care. These terms were incorporated into the 2007-2011 CBA.
Two putative classes of current and former employees filed a lawsuit challenging the retiree health care changes, claiming violations of the pension protection clause and breach of the CBAs entered into before 2007. One consisted of current employees and those who retired after 2007. The other putative class consisted of those who retired prior to 2007. The defendants were the CTA, the two Trusts, and the Board for each Trust. The circuit court dismissed the lawsuit in its entirety, finding that current employees did not have standing to challenge modification of their benefits. The circuit also held that provisions in the CBA allowing for modification of the CBA meant that health care benefits were subject to modification and thus were not vested. The First District appellate court affirmed the finding that current employees did not have standing, but reversed on the vesting issue with respect to those who retired before 2007, relying upon other Illinois appellate court decisions following the Sixth Circuit’s “Yard-Man” principle, adopted in UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), applying a presumption in favor of vesting of retiree health care benefits when such benefits are provided in a CBA. This approach to vesting permitted the appellate court to avoid the constitutional issue. All parties appealed.
In 2015, after the appellate court decision, the United States Supreme Court issued its decision in M&G Polymers USA, LLC v. Tackett, rejecting the “Yard-Man” principle. The Court held that the question of whether a collective bargaining agreement provides for an entitlement to retiree health care benefits beyond the expiration date of the agreement is to be decided by application of “ordinary contract principles” and without any presumption in favor of vesting. In response to this ruling, the Matthews court proceeded to analyze whether the pension protection clause entitled the plaintiffs to continued retiree health care benefits. The Court first rejected the plaintiffs’ argument that the pension protection clause automatically vests retirement benefits of public employees if provided in a CBA. Observing that the contractual relationship protected by the pension protection clause “is governed by the actual terms of the contract or pension plan in effect at the time the employee becomes a member of the retirement system,” the Court emphasized if the underlying contract (here, the CBA) “provides that certain retirement benefits may be modified in the future, then that is the contract protected by article XIII, section 5. Nothing in the pension protection clause requires or permits a court to rewrite the terms of such an agreement.” The Court distinguished legislative changes to provisions in the Pension Code where the provisions did not by their terms allow for modification of benefits or their expiration, emphasizing that where the retirement benefits are provided for in a CBA, it is the CBA that needs to be interpreted. If the CBA provides for vested retirement benefits, then those benefits are constitutionally protected. But if the CBA allows for modification of retirement benefits, then the pension protection clause does not prohibit modification of retirement benefits in accordance with the CBA. The Court specifically rejected the argument that a union is prohibited from agreeing to modify retirement benefits.
Up to this point, the Matthews decision is a ringing endorsement of the ability of public employers and unions to craft retirement benefits for employees and to do so with a reasonable degree of flexibility. But Matthews proceeded to interpret the provisions of the 2004-2006 CBA, concluding that it did, in fact, create a vested right to the retiree health care benefits provided for in that CBA, and that the entitlement was enforceable even though that CBA had expired. In reaching this conclusion, the Court relied upon the provision in the CBA, providing for the Retirement Plan to pay a premium for retiree health care coverage, stating that “[t]his benefit terminates when the retiree attains age 65.” For the Matthews court, this sentence contemplated that the entitlement to the benefit extends past the expiration date of the CBA, since expiration of the benefit is tied to the retiree’s age, and not the CBA’s expiration. The Court rejected the defendants’ arguments that other provisions in the CBA, and the collective bargaining history, demonstrated that retiree health care benefits were subject to modification. The Court remanded the case to the lower courts for further proceedings.
There are several curious aspects to this decision. First, it is interesting to compare the approaches to contract interpretation taken by the M&G Polymers and Matthews courts. In the former, the U. S. Supreme Court remanded the case to the appellate court for it to apply ordinary contract principles without resort to the vesting presumption. The Matthews court, in contrast, took it upon itself to interpret the underlying CBA without remanding it. Second, it is not clear from the decision what the outcome should be for those plaintiffs who retired not just prior to 2007, but prior to the 2004 CBA: do they have an “enforceable, vested right”? They very well may, depending upon the specific terms of the CBA(s) under which they retired, but the Court’s holding is limited to “Williams and the other Class I plaintiffs who retired under the 2004 CBA.” Third, the Court’s near-exclusive reliance on a single sentence in one CBA to find that vesting had occurred, may strike those observers versed in collective bargaining as possibly superficial, especially in a case where the parties have negotiated over retiree health care for several decades and those provisions changed over time. In such a case, it may be that “ordinary contract principles” warrant a broader, deeper examination. Fourth, the 2007 CBA (and companion legislation) effectuated a sea change in the treatment of retirement benefits at CTA, severing pension benefits from retiree health care, establishing separate Trusts with separate responsibilities and governing principles with respect to administration of the two spheres of benefits. It is not clear what impact this decision will have on the radically changed reality at CTA. Finally, public employers who negotiate for benefits for retirees (typically, health care coverage) should read this decision closely. It provides strong support for the proposition that the parties to a collective bargaining agreement may lawfully provide for the future modification (“diminishment”) of retiree benefits without running afoul of the pension protection clause, but that such provisions must be structured with care to avoid a judicial finding of vesting or entitlement where perhaps none was intended. Indeed, the Court’s dismissal of claims by current employees protesting changes in retiree health care benefits provided in previous CBAs is an encouraging sign for the ability of public employers to grapple with modifying benefits protected by the pension protection clause through collective bargaining.
