City of Countryside v. City of Countryside Police Pension Bd. of Trs.

2018 IL App (1st) 171029

122 N.E.3d 297

428 Ill.Dec. 288

The CITY OF COUNTRYSIDE, Plaintiff and Counterdefendant-Appellee,

v.The CITY OF COUNTRYSIDE POLICE PENSION BOARD OF TRUSTEES, Frank Bozzi, Kenneth Brunke, Bernard Duffy, Suzanne D'Urso, Paul Mallon, Ernest Millsap, Lou Moravecek, Joseph Peitrantoni, Gary Schwab, Tim Swanson, John Mikel, Mark Battaglia, and Brian Cozen, Defendants and Counterplaintiffs-Appellants.

Nos. 1-17-1029 & 1-17-1069 cons.

Appellate Court of Illinois, First District.

September 28, 2018

Thomas S. Radja Jr., of Collins & Radja, of Naperville, for appellant City of Countryside Police Pension Board of Trustees.

Steve Calcaterra, of Naperville, for other appellants.

Kathryn C. Thomas, of Chilton Yambert Porter, LLP, of Chicago, for appellee.

PRESIDING JUSTICE DELORT delivered the judgment of the court, with opinion.

¶ 1 This dispute between a city, retired police officers, and the city's police pension board concerns how the officers' preretirement salary increase should be factored into their pension calculations. In summary, the circuit court held that the officers had received more in pension benefits than they were entitled to because their pensions had been incorrectly calculated. The court also rejected the pension board and the retirees' defenses to the city's claim. We affirm.

¶ 2 I. BACKGROUND

¶ 3 The events giving rise to this dispute began almost 20 years ago. The following chronology and recitation of facts is taken from the pleadings, exhibits, affidavits, and other evidence of record that the circuit court relied on in granting summary judgment. In 2002, the City of Countryside (City) engaged in collective bargaining with the Fraternal Order of Police union (FOP) regarding contracts for the City's police officers, sergeants, and lieutenants. The bargaining resulted in two contracts, one for officers and one for the higher ranks. Both contracts are dated October 24, 2002, and contain the following provision:

"Section 14.3: Longevity Benefit

In addition to the salary amounts set forth in Section 14.1 of this Agreement, eligible officers, employed as of August 1, 2001 and thereafter, shall be paid the following longevity amounts which shall be considered part of the base salary attached to their rank for all purposes: $800.00 effective August 1, 2001; $850.00 effective August 1, 2002. In order to receive this longevity benefit, the following conditions must be met:

a. The officer must have twenty (20) years of service with the City of Countryside Police Department;

b. The officer must be pension eligible, as set forth by statute; and,

c. The officer must designate a pay period in which to receive the longevity increase for either of the following two (2) election periods:

January 1st to January 15th ; OR July 1st to July 15th ;

d. In the event the officer fails to select either of the above election periods, the Employer shall issue the longevity stipend on the last payroll period in December of each calendar year, retroactive to August 1, 2001, for all eligible officers in the bargaining unit as of that date.

The foregoing longevity stipend shall only occur for that payroll period affected and shall not increase the value of any accumulated or accrued benefits of the officer which may be payable." (Emphases in original.)

Furthermore, section 25.1 of the contracts provided an integration clause titled "Complete Agreement." It states as follows:

"The parties acknowledge that during the negotiations which preceded this Agreement, each had the unlimited right and opportunity to make demands and proposals with respect to any subject or matter not removed by law from the area of collective bargaining. The understandings and agreements arrived at by the parties after the exercise of that right and opportunity are set forth in this Agreement."

¶ 4 During the negotiation process, the City's labor attorney sent a memorandum to City officials outlining provisions of the proposed contracts and touting the inclusion of a new "longevity benefit" that would cost the City's pension fund $10,200 per retiring officer annually but save the City itself an estimated $655,347 annually in decreased salary costs because the retirees' lower-seniority replacements would earn far lower salaries than their predecessors. The memorandum states that the $800 or $850 longevity benefit would increase a retiring officer's salary by $20,400 "for pension purposes." The City's general counsel sent a letter to the City's negotiators stating that the City could bargain with the union for more generous pension benefits than those permitted by state law, and, if it did, the pension board would have no choice but to honor the City-union agreement and award pensions based on the negotiated agreement.

¶ 5 On October 26, 2002, the City's labor attorney and the FOP's attorney signed a "Letter of Understanding" (Side Letter). It referred to the recent bargaining for new police contracts and, in particular, to the longevity benefit established by section 14.3. The Side Letter stated that it was "RESOLVED" between the FOP and the City "THAT THEY AGREE AND APPROVE" a particular calculation method regarding section 14.3 longevity benefits. Under this method, when an eligible officer took a longevity benefit, the officer's gross wage base for pension purposes would be calculated by multiplying the one-time $800 or $850 longevity benefit times 24 payroll periods, resulting in a final salary for pension purposes that was either $19,200 or $20,400 higher than the officer had actually received in the prior year. The Side Letter provides the following specific example of the calculation method:

" $59,717.22 annual wage base

+ $20,400.00 longevity benefit ($850)

= $80,117.22 base salary upon retirement

$60,087.91 75% annual pension amount

$ 5,007.32 monthly pension amount"

Thus, under the example, a single $850 one-time salary increase would increase the officer's annual pension from $44,787.93 (75% x $59,717.22) to $60,087.91—a $15,299.98 annual increase for the rest of the officer's life. This method creates the anomalous result that an officer's annual pension would be higher than any annual salary he had ever actually received during active service. Defendants Frank Bozzi, Lou Moravecek, and Tim Swanson were among those representing the FOP members on the bargaining team, and they all eventually took advantage of this longevity benefit and the Side Letter calculation.

¶ 6 On September 10, 2003, the City adopted a resolution authorizing the mayor and clerk to sign the FOP contracts.¹ Copies of the contracts were attached to the resolution, but neither the resolution nor the contracts adopted or even referenced the Side Letter. The record contains some evidence that certain City officials acquiesced to the new longevity benefit and Side Letter with the understanding that it would be paid only to a few officers who were retiring imminently, and that, after it came to light that the benefit was illegal, it would be discontinued. The City and police union later negotiated successor contracts to the 2003 contracts, each of which contained provisions similar to section 14.3. None of the successor contracts were accompanied by any document similar to the Side Letter. Over time, about 10 retiring officers took advantage of the section 14.3 calculation method and received pensions calculated under the method in the Side Letter.

¶ 7 In 2004, the City's labor attorney wrote to the City's police chief, referencing a May 13 report from Illinois Department of Insurance (DOI) examiners that stated that DOI believed that "increasing ‘salary’ to inflate pensions and induce retirement is contrary to the Pension Code and actuarially unsound." The labor attorney downplayed concerns about potential illegality of the calculation method, stating that DOI might "be misguided" and emphasizing that the longevity awards had not "been held" to violate the Illinois Pension Code ( 40 ILCS 5/1-101 et seq. (West 2004) ) and that they remained a contractual obligation between the City and the union. The attorney sent a copy of his letter to the City administrator.

¶ 8 Over time, the City administration changed. A new City finance director, Gail Paul, questioned the legality of the Side Letter computation method. In 2009, the City's labor attorney provided her with a lengthy written opinion concluding that no court had ever specifically addressed the issue, and that, at any rate, because the City and the union had bargained and contracted for the calculation method, it "resulted in a vested right by present eligible officers to having the ‘longevity benefit’ calculated as part of their ‘salary’ upon retirement." The City's general counsel adhered to his earlier opinion that the calculation was negotiated between the City and the union and that, although "arguments can be made that the Pension Board is not required to be bound by the agreement, should you choose to follow it I feel that there is no grounds to fear liability on your part or the part of the City based on the contractual agreement being negotiated and approved by both parties."

¶ 9 In 2010, the City's labor attorney requested an advisory opinion from the DOI regarding the computation method. In its response, the DOI stated that section 3-125.1 of the Pension Code ( 40 ILCS 5/3-125.1 (West 2010) ) defines salary for pension purposes as "the annual salary, including longevity, attached to the police officer's rank, as established by the municipality's appropriation ordinance." Additionally, the DOI stated, under its administrative regulation interpreting section 3-125.1, when longevity pay is paid in a lump sum, it must be prorated to determine a monthly equivalent. The adjusted monthly salary is then used to compute salary for pension purposes. 50 Ill. Adm. Code 4402.35(d) (1996). Accordingly, the DOI concluded, "only the $850 (1/26th of the annualized increase of $22,100) would be considered pensionable."

¶ 10 A few months...