End and Means: Quinn, Rauner Should Read Between the Lines on Ruling

Sep 1, 2014

Charles N. Wheeler III
Credit WUIS/Illinois Issues
While the fat lady may not yet have sung for the new law slashing pension benefits for public workers, she certainly seems to be warming up in the wings, courtesy of the Illinois Supreme Court.

In a strongly-worded opinion issued at the start of the 4th of July weekend, the justices said the state can’t now force retirees to pay health insurance premiums, after earlier promising free coverage to employees with 20 years’ service. The health care subsidies, the court held, are among the benefits of membership in a public retirement system that the Illinois Constitution says cannot be diminished or impaired.

The ruling — Kanerva v. Weems — dealt only with health insurance premiums, a point stressed by those defending the provisions enacted last December that would require state and university employees and teachers outside of Chicago to work longer for smaller annuities.

“This landmark law was urgently needed to resolve the state’s $100 billion pension crisis,” insisted Gov. Pat Quinn. “We’re confident the courts will uphold this critical law that stabilizes the state’s pension funds while squarely addressing the most pressing fiscal crisis of our time by eliminating the state’s unfunded pension debt.”

“This opinion has no direct impact on the pension reform litigation arguments,” added a spokeswoman for Attorney General Lisa Madigan. “We will continue to vigorously defend the pension reform law.”

The brave assertions remind one of the old joke about the guy who falls off a 10-story building. As he plummets downward, someone shouts out of a 5th-floor window, “How’s it going?”

“So far, so good!” replies the hapless fellow.

Technically, Quinn and Madigan are correct; the pension law (P.A. 98-0599) was not being challenged in Kanerva. But the opinion made clear the justices’ belief that the Constitution’s pension protection clause precluded legislative efforts to cut benefits.

“Under the language of this provision ... it is clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the state’s pension or retirement systems, it cannot be diminished or impaired,” wrote Justice Charles Freeman for the 6-1 majority.

Nor can the pension law’s supporters derive much solace from the dissent by Justice Anne Burke, who argued subsidized health care was outside the scope of the pension clause. “The pension protection clause protects pensions, not subsidized health care premiums,” noted Burke.

The chief argument being made by Quinn and company has been that the state’s fiscal problems are so grave that policymakers have no choice but to ignore future pension benefits by some $160 billion over the next 30 years.

Even were the “no-other-option” rhetoric truthful, the justices hinted that it might make no difference. The pension provision “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them,” Freeman wrote, citing earlier court rulings in 1975, 1996 and 1998. 

Moreover, while the state can cry poor mouth, in fact other options are available, although none perhaps as attractive to some ideologues as punishing public workers. The most obvious example is revamping the state’s tax structure to match more closely today’s economy and the practices of our neighbors.

Consider the state individual income tax, imposed in Illinois at a flat rate of 5 percent. Most states have graduated income tax rates, with top brackets set at, for example, 8.98 percent in Iowa, 7.65 percent in Wisconsin, and 6 percent in Kentucky and Missouri. (Indiana has a flat 3.4 percent rate.) Moreover, Illinois is one of only five states that don’t tax retirement income.

Or look at expanding the sales tax base to include services. Illinois taxes 17 services, while the average state taxes 56, according to the Commission on Government Forecasting and Accountability. Iowa taxes 94, Wisconsin 76, our other neighbors ranging from 28 in Kentucky to 24 in Indiana.

Granted, any tax reform that would bring in more revenue would require political courage, a commodity seemingly in extremely short supply among today’s office holders. No doubt their timidity reflects the wishes of their constituents, who poll after poll has shown want more services and lower taxes, the realities of state finance notwithstanding.

But in the wake of Kanerva, it’s time for lawmakers and legislative wannabes to propose to voters a sensible solution to the pension funding problem, as suggested in this space some 17 months ago.

For starters, try a little long-range perspective. While the benefits owed teachers, prison guards, mental health workers and other public employees are calculated to cost roughly $100 billion more than the state expects to have on hand to pay them, the entire amount is not due now, nor will it be for many years to come. Instead, the unfunded liability could be viewed as similar to a home mortgage — most folks don’t have the wherewithal to pay cash for a house; instead, they spread the payments out over time, perhaps as long as 30 years, and month after month gradually reduce the obligation.

Then analyze the problem. It’s not that pension benefits are too rich, as some critics suggest; in fact, they’re in line with public employee retirement systems across the nation. The actual value of benefits public workers earn in a given year — the normal cost — is only about a quarter of the state’s total contribution to the retirement systems, about $1.7 billion out of $6.9 billion this fiscal year. Instead, the lion’s share of the outlay is going to make up for contributions not made in past years and the investment income those missing dollars didn’t earn.

That said, why not consider pension funding in the same fashion as a family handles its home mortgage? Put into the retirement kitty each year the normal cost — akin to day-to-day household expenses — then make level annual payments that would include both the full interest on the unfunded liability and a portion of the debt itself, so that over time, the “mortgage” would be paid off.

Granted, such a level-payment plan would cost more in its first few years than the 1995 law that likely will govern pension finance if — more probably when — the Supreme Court deems the benefit-cutting statute unconstitutional. But the extra money could be found, for example by selling bonds that would be paid off by a new Chicago casino or through closing some corporate loopholes in the tax code. In the long run, such a level payment plan would save the state money compared to the 1995 schedule, which requires higher contributions each year, just as homeowners with a fixed rate mortgage generally fare better than those with adjustable rates.

The Center for Tax and Budget Accountability, a bipartisan Chicago-based research and advocacy think tank, has been recommending such a plan for years. Now would be a good time for Quinn and his Republican opponent, businessman Bruce Rauner, to heed the Supreme Court’s clear message in Kanerva, and commit to the idea of real pension reform.

Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois at Springfield.

Illinois Issues, September 2014