Illinois’s Pension Fix

by Dave Schuler on July 9, 2014

Last week the Illinois Supreme Court ruled 6-1 that the lifetime free healthcare benefit granted to public retirees is constitutionally protected. The decision is here. I interpret that as a signal that the justices are predisposed to rule in favor of the opponents of Senate Bill 1, Illinois’s recently-enacted “pension reform bill”. I don’t honestly see how the justices could craft a decision that prevented the state legislature from reducing benefits paid to retirees that aren’t explicitly constitutionally mandated while allowing them to reduce benefits that are.

The editors of the Wall Street Journal are appalled:

The ruling is a dreadful precedent for sensible pension reform. The court majority opined that the state constitution is “aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them” and “must be liberally construed in favor of the rights of the pensioner.” And unions have sued to block last year’s de minimis pension fixes that tweaked cost-of-living adjustments, raised the retirement age for younger workers and capped annuities for employees making six figures.

The Court’s decision is completely unsurprising to me—it’s what I have been predicting for years.

The editors of the Sun-Times list the state’s alternatives when the inevitable happens and Senate Bill 1 is struck down:

Things are very wrong when taxpayers are taken hostage by pension debts. In three years, Illinoisans will spend one third of all our state-generated revenue on pensions.

That’s untenable. This is a crisis, and we’re teetering on the cliff. We either raise taxes and drive more of us to move away, or we change the constitution, or we change laws to control double-dipping and too-generous pension benefits approved by local school board members and other officials.

Or all of the above. Waiting any longer is pure insanity.

Raising taxes, the strategy preferred by Gov. Quinn and the state legislature, is unlikely to succeed in solving the state’s problems. You can mandate increased rates but you can’t mandate increased revenue. Amending the state’s constitution is an even bigger “Hail Mary”. Reducing future pension benefits might have worked if it had been adopted some years ago but it won’t solve the problem we have now.

My predictions are that the state legislature will do nothing until after the November election, the Illinois Supreme Court will strike down Senate Bill 1, and that most of the state’s legislators will be returned to office.

The clear message will be that there is no penalty for driving the state to ruin.

{ 12 comments… read them below or add one }

CStanley July 9, 2014 at 9:55 am

I don’t understand how positive rights can be constitutionally mandated. Even constitutionally protected is dubious, but mandated?

Ben Wolf July 9, 2014 at 10:44 am

The only problem I can see with the ruling is that there is no enforcement mechanism, no way of holding elected officials responsible for damnable governance and failure to meet the requirements of a contract they signed, apparently with every intention of not doing so.

So now the burden of compliance falls on the successors rather than where it belongs on their predecessors.

Dave Schuler July 9, 2014 at 11:02 am

CStanley:

Here is the provision from the Illinois constitution in question:

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.

Dave Schuler July 9, 2014 at 11:08 am

Ben Wolf:

The incentives are completely perverse. Lawmakers have every incentive to over-promise and none whatever to perform.

Modulo Myself July 9, 2014 at 11:26 am

The editors didn’t write the Sun-Times pieces. Some COO of Reboot Illinois, a non-profit founded by with hedge-fund money, did. Billions from the ultra-rich flows directly to groups with the core message that the debt from pensions and Social Security is destroying are country. And yet Social Security and pensions are still around, and governments spend more than they take in. Where is the accountability on the side of the plutocrats? If they really cared about American solvency, they would have switched gears a long time ago, and focused on why government spending and promises are fought for so viciously, rather than writing it off as the greed of the unwashed.

PD Shaw July 9, 2014 at 1:10 pm

Recent editorial from the executive editor of Reboot Illinois, ridiculing the Republican gubernatorial candidate’s fiscal plan:

“Rauner tells us that lowering taxes is the answer — it’ll revive the Illinois job market and put more people on the income tax rolls — but gives no practical vision for avoiding the kind of drastic, immediate cuts to essential services about which Democratic Gov. Pat Quinn has warned.

Folks, we’re not talking about the theory of relativity here. There’s no equation in the wings that’ll turn the science of state budgeting on its ear and rain billions of unseen dollars onto Illinois. There’s no gold to be spun from the leaden numbers now facing Illinois taxpayers.

For too long, Illinois lawmakers have made 1+1 equal whatever they needed it to at the moment. What we need now is simple math and a dose of truth.”

I know the executive editor and his wife and he has said in interviews that editorial functions are separate and independent from their billionaire investors, who appear to contribute significantly to Republicans (Romney) and Democrats (Obama and Rauner) alike. I personally have found their content a bit too Broderesque for my taste.

Guarneri July 9, 2014 at 1:24 pm

The politics can be left at the door. Pensions are actuarial creatures. As well documented here and elsewhere they are underfunded in an absolute sense and the actuarial assumptions being made to “catch up” are unsound and unattainable. The taxes required to finance the gap will crush many people. What a shame for a once great state and city. Detroit Too.

two years and counting………

michael reynolds July 9, 2014 at 2:00 pm

Wow. Who wrote that law?

Rhetorical question. Lobbyists wrote that law and most others. I remember being shocked (I was just 19, so I was still shockable) when I realized the law firm I was working for at the time (Wilmer Cutler Pickering, now Wilmer Hale) was actually writing legislation. Not offering input, actually drafting laws.

PD Shaw July 9, 2014 at 2:14 pm

@michael, the “law” is in the 1970 Illinois Constitutions, and the transcripts from the debates show that supporters were concerned that Illinois was making pension promises it wouldn’t keep.

steve July 9, 2014 at 2:14 pm

Query- Would the Illinois Constitution prohibit placing new hires in defined contribution plans?

Steve

PD Shaw July 9, 2014 at 2:41 pm

@steve, no. In fact, sometime during the last few years, pension guarantees were reduced for new hires.

I actually think it would be possible to place existing hires in a defined contribution plan, if the plan was funded to its existing actuarial value. There is no money for this.

PD Shaw July 9, 2014 at 4:12 pm

And by new hires having lessened pension guarantees, I think that includes higher contributions, which are being used to fund current liabilities.

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