Past Due: Options For Pension Reform Plan B May Be Limited

Dec 1, 2014

A version of this story first appeared on the Illinois Issues Blog in July 2014.

After years of trying to find a solution to the tackle the state’s $100 billion unfunded pension liability, lawmakers approved pension changes in December of last year. Illinois was SAVED! Crank up the tunes, call up the bond rating agencies, put Squeezy the Pension Python out to pasture — happy days are here again!

That is, until a pair of court decisions drew the needle across the record with a loud scratch. In November, Sangamon County Circuit Court Judge John Belz sided with unions, public employees and retirees and ruled the law unconstitutional. “The state of Illinois made a constitutionally protected promise to its employees concerning their pension benefits,” Belz wrote in his opinion. "Under established and uncontroverted Illinois law, the state of Illinois cannot break its promise.”

Public employee union leaders saw both rulings as validation of their long held position that the plan is unconstitutional. “We are gratified by the court’s ruling…which makes clear that the Illinois Constitution means what it says. The court held today, as our unions have long argued, that the state cannot simply choose to violate the Constitution and diminish or impair retirement benefits if politicians find these commitments inconvenient to keep,” said a written from the We Are One union coalition. “This is a victory for every Illinois resident who believes in the integrity of the Constitution. It is a victory for a basic principle of fairness, that working people and retirees who earned modest pensions and always paid their share should not be punished for politicians’ failures. And it is a victory for the members of our unions, who work hard every day in every Illinois community to teach kids, protect public safety, care for the most vulnerable and much more. Today they are more secure in the knowledge that their life savings can’t be taken away from them.”
 
The case is almost certainly on its way to the Illinois Supreme court, and some are looking to a decision they made earlier this year when making their predictions about what the court might do. The Supreme Court ruled in Kanerva v. Weems that health care benefits for retirees fall under the pension protection clause—the very sentence of the state’s Constitution that supporters of pension reform had hoped the justices would be willing to overlook. The pension clause states: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

 The ruling indicates that the justices are inclined to side with public employees and retirees. In the 6-1 opinion, Justice Charles Freeman wrote: “Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner.” Justice Anne Burke wrote the dissenting opinion. In it, she did not question the protection of the pension clause, but she argued that retiree health care benefits did not fall under that protection.

Some lawmakers seem to see the ruling as writing on the wall for the pension reform law. “The court cannot rewrite the Pension Clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve. The clause was aimed at protecting the right of public employees and retirees to receive their promised benefits and insulate those benefits from diminishment or impairment by the General Assembly,” Senate President John Cullerton said in a written statement. “If the court’s decision is predictive, the challenge of reforming our pension systems will remain. As I have said from the beginning, I am committed to identifying solutions that adhere to the plain language of the constitution.”

Kent Redfield, an emeritus professor at the University of Illinois Springfield, says that while the ruling pertains to a different case, the language used is clear. “You could find some way to parse some of it, but it’s really, really difficult. There’s no logical way to get to upholding Senate Bill 1 (the pension reform legislation) based on the clear content of this ruling and the way they’ve construed the pensions clause.”

Rep. Elaine Nekritz

Others disagree that the ruling is a harbinger of the pension law’s death. Rep. Elaine Nekritz, who was key player in getting SB 1 passed, says that the justifications the law makes for reducing benefits were not part of the retiree health care case. She says that the court has yet to consider those points. The law lays out the dire fiscal situation that the state is in and claims that state elected officials need special powers to curtail the estimated $100 billion unfunded liability and save the state from a budget disaster. However, one line in today’s decision seems to blow a hole in that argument. “In light of the constitutional debates, we have concluded that 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.”

Supporters also claim that a reduction in the amount that employee would pay into the system represents a consideration they are being given for a change to the contract that is their membership in a pensions system. Nekritz says that the ruling is clear that benefits are protected, but she says it is unclear if that protection is absolute. “Does it really mean that we can do nothing, or are there some things that we can do based on the legal arguments that we make under Senate Bill 1?”

Those arguments did not convince the lower court, and if they fail before the Illinois Supreme Court, too, what options do legislators have to try and fix the pension crisis?

Cullerton had proposed offering employees a choice between receiving subsidized health care coverage or keeping their current pensions benefits. If they had chosen health care, they would have seen a reduction in their retirement income including a cut to the expensive compounded interest cost of living adjustments (COLAs) retirees currently receive. Cullerton said that this scheme could potentially fulfill a legal standard of giving employees consideration for a reduction in benefits. The Senate approved the plan, but it was never called for a vote in the House.

However, that plan was based on the idea that health benefits were not protected by the Constitution—a concept that runs counter to today’s ruling. “The concept of consideration is still viable. The court has not rejected it or defined what the limits are. It’s just hard to see what you can give up in exchange,” Redfield says. “It’s hard to see what other major carrot you can offer to people in terms of giving up their COLA.”

Skokie Democratic Rep. Lou Lang introduced legislation that would extend the current income tax rates, which are due to start rolling back on January 1, to pay down the unfunded liability.

But Lang’s plan also calls for larger contributions from employees and an increase in the retirement age. Both of these provisions could be seen as a reduction in benefits by the court. Much of the revenue from the temporary income tax increase has gone toward making the required annual pension payment after lawmakers voted to skip payments and short payments for several years in the past.

Governor-elect Bruce Rauner

Gov.-elect Bruce Rauner has advocated for moving employees’ future benefits to a system that looks more like a 401-K. He says that all benefits earned by workers and retirees are protected by the clause, but future benefits are not. That same argument has been made by pension reform supporters in the past, including House Speaker Michael Madigan.

Such a plan would go even further than SB1, so it seems unlikely that it would be upheld if SB 1 was rejected. But it is possible that if the Supreme Court rejects the law, it could strengthen his case for offering a defined contribution plan to newly-hired employees. “It may embolden Rauner to say ‘well we’ve got to get everybody going forward into a defined contribution [plan],’” Redfield says. However, such a proposal would have no impact on the unfunded liability for current employee and retiree benefits. It also means the state would likely have to start contributing to Social Security benefits for positions that do not currently offer them.

Meanwhile, outgoing Gov. Pat Quinn has emphatically stuck by his opinion that SB 1 is constitutional. “We believe the pension reform law is constitutional. This landmark law was urgently needed to resolve the state’s $100 billion pension crisis. It was also urgently needed to ensure that teachers, university employees and state workers who have faithfully contributed to the pension system have retirement security,” said a written statement from his office. “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.”

Redfield says that new revenues and cuts to state services to cover the cost of the pension systems might be the only real option available to address the problem if the court rejects SB 1. If that happens, the state will almost certainly face another credit downgrade if it fails to act to address the liability. The current budget is based on $650 million in borrowing that has to be paid back. If the temporary income tax is allowed to expire, in Fiscal Year 2016, the tax rate will be lower for the entire fiscal year instead of just half of it. Lawmakers had also hoped to begin logging pension savings from SB 1 in FY16. It’s shaping up to be one doozy of a budget for Rauner and legislators to sort out. “You want to be around for a historic session for the General Assembly? I think everybody has a front row seat,” Redfield says.

Illinois Issues, December 2014