Key Points

  • The Illinois Appellate Court, First District, held that payments for unused vacation and accumulated sick leave made in installments through regular payroll are "lump sum salary payments" excluded from final average compensation under the Illinois Pension Code.
  • The court treated a lump sum as a known and definite amount owed for one of the statute's listed categories and read the plural "payments" to permit installments toward that amount.
  • The court held that the retirees' dictionary-based reading conflicted with the statute as a whole and produced absurd results, including unequal pensions for identically situated employees and 13-month years of credited pay.
  • Because only one reading was reasonable, the court held the statute unambiguous and declined to apply the Carmichael rule construing ambiguous pension statutes in favor of pensioners.
  • The court affirmed SERS board decisions reducing the pensions of seven retired ISBE employees or excluding the payouts from their calculations, including repayment directives to two retirees.

An Illinois appeals court ruled on Oct. 16 that state employees cannot raise their pensions by collecting pay for unused vacation and sick days in installments through their regular paychecks during their final years on the job.

A First District panel affirmed decisions by the board of trustees of the State Employees' Retirement System of Illinois, known as SERS, that excluded those payouts from the pensions of seven retired employees of the Illinois State Board of Education, known as ISBE. Justice Pucinski wrote the opinion, and Justices Hyman and C.A. Walker joined it. The board's decisions reduced the pensions of five of the retirees and directed two of them, Sally Cray and Elizabeth Minder, to repay pension overpayments.

The court described the case as one of first impression. The Pension Code calculates a state retiree's annuity from final average compensation, the employee's average monthly pay over the 48 consecutive months of highest pay within the last 120 months of service. The code excludes from that figure "lump sum salary payments" for vacation, accumulated unused sick leave, discharge or dismissal, and approved holidays. The panel held that the exclusion reaches leave payouts spread across many paychecks, not only payouts made in a single check.

The payouts came from a provision in the collective bargaining agreement between ISBE and Local 3236 of the Illinois Federation of State Office Educators, first negotiated in the 1999 to 2001 agreement. An employee who gave irrevocable notice of retirement 24 or 36 months in advance received pay for accrued leave in bimonthly paychecks over that period, rather than in one payment at retirement. The retirees said they had believed the payments would increase their pensionable pay.

The parties briefed and argued the appeal on the facts of Mark Wancket, who retired on Dec. 31, 2011, after 32 years of service. Wancket gave notice around January 2009 and liquidated 75 unused vacation days and 58.6 unused sick days, which added about $1,250 to his monthly salary. The increase produced an estimated $80,000 in pension overpayments over a decade.

SERS discovered in late 2021 that ISBE had been reporting the leave payments as "base pay" to the state comptroller and the retirement system. SERS recalculated the affected retirees' pensions and offered refunds of pension contributions wrongly withheld from the leave payments. A hearing officer recommended that the board deny Wancket's challenge, and the board issued final decisions against him and the other retirees in October 2022. Cook County Circuit Judge Michael T. Mullen affirmed the board.

On appeal, the retirees relied on dictionary definitions. Black's Law Dictionary defines "lump sum" as "A single payment made once, usu. at a particular time, as opposed to a series of smaller payments." Under the retirees' reading, the exclusion covered only one-time payments, and installments counted as pensionable pay.

Pucinski acknowledged the dictionary support but wrote that the retirees' reading of the phrase in isolation "is unsustainable, as it conflicts with the broader statutory text and scheme and leads to absurd results." The panel adopted the retirement system's view that a lump sum is a known and definite amount owed for one of the listed categories, and that the plural word "payments" permits installments toward that amount. The retirees' approach, the court wrote, "places too much weight on how the payments are made and too little on what they are for."

The court tied the exclusion to the legislature's effort to prevent pension spiking, which the opinion described as the artificial inflation of a pension by shifting payments into the period used to calculate it. "We do not think there is a material distinction between a single payment and several smaller payments, where the effect of both is to shift compensation earned over time into the period used to determine final average compensation for pension annuities," Pucinski wrote.

"[L]arge, one-time payments would have the most unpredictable impact on the actuarial assumptions of the pension system," the retirees argued in explaining why the legislature might have excluded only single payments. The panel called that premise unfounded.

The court offered two scenarios to show that the retirees' reading produced absurd results. In the first, two employees with identical jobs and identical banked leave would draw different lifetime pensions because one took the payout at retirement and the other took it over two years, which the court called "a significant disparity arising from an arbitrary difference." In the second, an employee paid for two months of banked leave over the final two years would be credited with 13 months of pay in each of those years.

The leave payments, Pucinski wrote, are "compensation from prior years that has been squeezed into the retiree's final years of employment." "We find it doubtful that the Illinois legislature intended for an employee's unilateral choice to result in such a significant windfall," the court wrote. The panel said its analysis accorded with decisions from Connecticut, Tennessee, Arizona and West Virginia.

The panel also declined to apply Carmichael v. Laborers' & Retirement Board Employees' Annuity & Benefit Fund of Chicago, a 2018 Illinois Supreme Court decision requiring courts to construe an ambiguous pension statute in the pensioner's favor. The court held that the statute was unambiguous because the retirees' reading was unreasonable when the provision was read as a whole. "That an isolated word can bear more than one meaning does not make a statute ambiguous when only one meaning remains reasonable after the provision is read as a whole," Pucinski wrote.

Stephen A. Yokich of Dowd, Bloch, Bennett, Cervone, Auerbach & Yokich LLP represented the retirees. The retirement system and its board were represented by the office of Illinois Attorney General Kwame Raoul.

The ruling leaves in place the board's October 2022 decisions, including the pension reductions and the repayment directives to Cray and Minder.