On March 12, 2007, an eleventh-hour amendment was added to Senate Bill 1166 which will significantly impact downstate fire and police pension funds. Currently, downstate fire and police pension funds are limited in the amount of funds that can be invested in equities: funds with less than $2,500,000 are limited to ten percent (10%) of the fund’s assets, while larger funds can invest up to thirty-five percent (35%) of the fund’s assets in equities.
This amendment provides that if a small fund’s investment exceeds fifteen percent (15%) in equities, or a large fund’s investment exceeds forty percent (40%) in equities, the State Board of Investment will automatically assume authority and responsibility for managing the fund’s assets. The State will maintain control over the fund’s assets for at least three years before control may be returned to the local pension board.
The stated purpose of this amendment is to protect pension fund assets from “undue financial risk.” However, the circumstances surrounding this amendment suggest that it is an attempt to reinstate the ban on investments in Sudan or in companies doing business in Sudan that was struck down by a federal judge last month. NFTC v. Giannoulias, 06-C-4251 (N.D. Ill. Feb. 23, 2007)
The amendment was added to a shell bill. A shell bill is introduced with the intention of later amending it to hide the real purpose of the bill. In this case, the shell bill was introduced by Senator Jacqueline Collins, the author of the original Sudan divestment legislation, and the amendment was introduced by Senator Kwame Raoul, a co-sponsor of the original Sudan Divestment Act. After the Sudan Divestment Act was held to be unconstitutional, Senator Collins stated that she intended to make some changes to the legislation so that it would “address the judge’s concerns.”
The federal judge held that the Sudan Divestment Act violated the Foreign Commerce Clause of the United States Constitution, which gives Congress the authority to regulate commerce with foreign nations. State laws that discriminate against commerce with a foreign nation are generally invalid. An exception to this rule, known as the “market participant” exception, provides that states may regulate their own participation in foreign commerce. In other words, each state is generally free to determine how it will spend its own money, and if a state decides that it does not want to spend any of its money on companies doing business in Sudan, it can refuse to do business with those companies. However, the court held that the State cannot restrict local pension funds from engaging in commerce with foreign nations, and therefore, struck down the Sudan Divestment Act.
This amendment would give the State “market participant” status with regard to any downstate fire and police pension funds that exceed the permissible investment in equities. Once the State Board of Investment takes control of the pension fund, it will be required, under State law, to divest its holdings of any companies doing business in Sudan.
This bill is not about protecting local pension funds from risky investments; it is about taking control of local pension funds to accomplish that which the federal courts have determined to be unconstitutional. There are existing provisions in the Pension Code to deal with pension funds that exceed their equity investment limits. There is no need for State control of these funds.
This bill has passed out of committee to the full Senate. If you want to contact your Senator regarding this attempt to seize authority from local pension funds, there is a sample letter printed on the reverse side of this Client Alert. ■
SAMPLE LETTER TO STATE SENATORS REGARDING SB 1166
Dear Senator ____________________:
I urge you to oppose Senate Bill 1166, which provides for State control of downstate police and firefighter pension funds in certain circumstances. Not only is this bill unnecessary, it seeks to revive a law that has been declared unconstitutional by the federal court.
There are already provisions in the Pension Code to enforce compliance with the limitations on equities investments by local pension funds. There is no evidence that the existing enforcement system is not working. In fact, the great majority of local pension funds are in compliance with the Pension Code provisions, indicating that the current program works. There is no need to resort to drastic measures such as imposing State control over activities that have long been entrusted to local authorities.
This bill is not about protecting local pension funds from risky investments; it is about taking control of local pension funds to accomplish what a federal court has determined to be unconstitutional. The federal district court for the Northern District of Illinois has held that the State violates the United States Constitution by imposing restrictions on local pension boards’ investments with foreign nations.
By providing a mechanism to impose State control over local pension funds, this bill would circumvent the federal court’s ruling by imposing State investment restrictions on local pension funds. Furthermore, these State investment restrictions would significantly diminish the ability of the local pension boards to responsibly grow their pension funds’ assets through investment returns, thus shifting more of the funding burden on the underlying local governments and their taxpayers in a time when they can ill afford it.
I urge you to vote against Senate Bill 1166 so that local pension funds can maintain control over downstate police and firefighter pension fund assets and continue to invest these assets in the most financially sound and effective manner. Furthermore, I also urge the State of Illinois to support more meaningful and effective methods to end the atrocities and terrorism in the Sudan.
Sincerely,
Your Name
Carolyn Welch Clifford is a partner with Ottosen Britz Kelly Cooper & Gilbert, Ltd. in Wheaton. She earned her B.S. and J.D. from the University of Illinois in Urbana-Champaign. She serves as the editor of the firm’s publications and is a frequent contributor to many municipal publications. Ms. Clifford concentrates her practice in the representation of firefighter pension funds, fire and police commissions, and fire protection districts. Donald L. Potts is an associate with Ottosen Britz Kelly Cooper & Gilbert, Ltd. in Wheaton. He is a magna cum laude graduate of Northern Illinois University and was Editor-in-Chief of Volume 23 of the Northern Illinois University Law Review. Mr. Potts’ practice is concentrated in the areas of local government law, school law, and employment and labor law.
An Illinois Attorney General opinion concluded that this 35% limit is in addition to the 10% limit for small funds, giving large funds the ability to invest up to 45% of their assets in equities. 1998 Ill. Att’y Gen. Op. 15. However, the amendment does not take this opinion into consideration, limiting large funds to 40% equity investments before the State takes control of the fund.
