The Legal Problems of Illinois’s Pensions

Why righting the state’s fiscal cliff is so complicated

A group of protestors

What with Governor Quinn’s Squeezy the Pension Python slithering into Illinois late last year—combined with dire warnings about what will happen if the state’s pension mess isn’t cleaned up pronto—most people have focused on the cuts that will have to happen to keep the fiscal ship from pulling a Titanic. The main question has been: Do Mike Madigan and his cronies in Springfield have the political will to do what needs doing? But there’s a question few are addressing that is even more important: Is pension reform legal?

Don’t laugh. Illinois is one of two states (the other is New York) whose constitution gives extraordinary protection to people who have public pensions coming to them. These pensions are contracts, “the benefits of which shall not be diminished or impaired.” In other words: All pension benefits here are guaranteed from the time a public employee is hired.

The key remedies being floated in most pols’ proposals—notably, raising retirement ages, increasing workers’ own contributions, and reducing cost-of-living adjustments in pension payouts—would result in benefits being diminished. Which would very likely violate that constitutionally protected contract. Which makes nearly certain that whatever pension fix lawmakers pass will wind up being contested in court. That battle could drag on for years, with Illinois’s fiscal mess worsening all the while.

How would such a legal challenge play out? Amy Monahan, an employee benefits law expert at the University of Minnesota Law School, says that Illinois could argue that it can—and routinely does—“cut” promised future benefits simply by firing an employee. In effect, the state could make the case that pension benefits that haven’t already been earned aren’t any more guaranteed than employment itself is.

Another argument the state could make, Monahan says, is that its inherent police powers allow it to change the pension system to ensure solvency. In 1998, Illinois pension officials tried a similar argument. It didn’t work. The state’s Supreme Court found that the pension funds were not at risk of bankruptcy, nor were the benefits at risk of being diminished.

But that was 15 years and two recessions ago. Today the numbers might look more compelling to a judge. “Even if the Illinois Supreme Court says pension benefits are contractual on day one for as long as that person is employed, the state can still make changes if it’s reasonable and necessary to serve an important public purpose,” says Monahan. Still, that’s a long shot, she admits.

A move that would be much more likely to pass legal muster: Start taxing public employees’ retirement income. John Cullerton, the senate president, made that very suggestion in 2010. “It would just be a matter of fairness,” he said. After all, pension income from other employers is typically taxed. [Clarification: In Illinois, retirement income is not taxed, but it is common in other states.]

Or Illinois could negotiate a tough deal with workers and pensioners similar to the one hammered out in 2012 between the mayor of Providence, Rhode Island, and local unions. It included a freeze on cost-of-living adjustments until the city’s retirement system is funded at a reasonably healthy 70 percent. But that would be more difficult at the state level, where most employees are unionized.

Failing all those, only one option remains: Scare up more money to meet existing pension obligations—a move that would have to win the approval of voters. Hey, how about charging admission to see Squeezy in action?

* * *

By the Numbers

The state’s pension problem is the worst in the nation. Here are some of the sobering figures.

$198.6 billion
Illinois’s total pension liability (as of June 2012)

$94.6 billion
Illinois’s total unfunded liability (as of June 2012)

40.4%
Percent of liabilities funded in Illinois (worst in the nation)
 

Compared to . . .

99.8%
Percent of liabilities funded in Wisconsin

71%
Percent of liabilities funded in Michigan

59.6%
Percent of liabilities funded in Indiana

$6,505
Unfunded liability per Illinois resident (in 2011)

SOURCES: Illinois Commission on Government Forecasting and Accountability; Morningstar

 

Photograph: Michael Tercha/Chicago Tribune

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1 year ago
Posted by Joe Cardinal

Arizona and New Hampshire also have similar public pension protection clauses to that of Illinois, in their state constitutions. Their courts rejected those states new laws to force state employees to pay more towards their pension. In Arizona, the State had to pay back with interest, the extra money they had taken out of state employees' paychecks.

Courts Block Efforts at Public Pension Change
http://www.governing.com/news/state/sl-courts-block-efforts-at-public-pension-change.html

Arizona courts also blocked an attempt by the AZ legislature to reduce COLAs.
http://www.azcentral.com/news/politics/articles/2012/05/29/20120529maricopa-judge-pension-raises.html#ixzz1wMtPh84v

1 year ago
Posted by ChicagoGal

Funds were diverted for decades to keep Illinois taxes artificially low. Now it's time to put revenue on the table.
Wisconsin and Iowa have graduated income taxes.
It's time to increase taxes on folks like those on the Civic Committee of the Commercial Club.

1 year ago
Posted by Andrew Szakmary

Your assertion in the article that ONLY public pension income is exempt from the Illinois state income tax is incorrect. ALL pension income, whether from public employment, private employment, Social Security, IRAs, etc. is currently exempt. This issue should be revisited and this exemption should, perhaps, be fully or partially repealed. But there is no way that taxing ONLY Illinois state and local pensions will pass constituional muster, because it would constitute a backdoor diminishment of contractual benefits. Also, the U.S. Supreme Court has ruled that you cannot tax pensioners who have moved out of state, so I don't think that placing a huge tax on public pensions would solve your fiscal problems in any case.

1 year ago
Posted by worriedillinoisan

Lawmakers could also change the constitution.Currently 25% of the budget goes towards the pensions of 5% of the population. Obviously this is not sustainable. Raising taxes again might be the tipping point for some people to leave the state. Taxpayers are not forced to stay in Illinois,and if it gets too expensive to live here, they will leave.Illinois already has seen a mass exodus in the last decade. Pensions can't be paid if there is no one to tax.

1 year ago
Posted by HomeIL

The public union supporters, want no cuts to their pensions, and want us to pay higher "graduated" Illinois income taxes.
But they forget to mention that the Illinois Constitution prohibits a graduated income tax rate.
Instead, how about removing from the Illinois constitution the clause that prohibits making changes to public employee pensions? Then we can make cuts to public employees pensions.

1 year ago
Posted by wmoser

Andrew: you're correct; I've added a clarification (which also appears in the forthcoming print issue).

And I agree with this: "But there is no way that taxing ONLY Illinois state and local pensions will pass constituional muster, because it would constitute a backdoor diminishment of contractual benefits." If Illinois was going to go the tax route, it'd have to tax all (or many) retirement benefits, which would go over like a lead balloon, given that it's one of the few avenues in which Illinois is a low-tax state.

1 year ago
Posted by Commonsense

"Those who cannot remember the past, are condemned to repeat it,"

George Santayana

At the last Illinois constitutional convention in 1970, the representatives of the public employee unions fought for the inclusion of a provision that would mandate that pension contributions be made, as required, to ensure proper funding. This provision was rejected. Instead, a compromise provision was added to guarantee that employee pensions would not be diminished or impaired.

In the mid-1990's when the State's budget became strained, it (read elected officials here) decided not to make its annual contribution to the pensions, rather than deal with the hard fiscal issues at hand. The unions challenged this action in court, trying to compel the State to make the contributions. The State argued, and the Illinois Supreme Court agreed, that the State's obligation was to pay the benefits promised, not to make any certain level of funding. Thus, the State could elect to make no contributions to the pensions so long as it paid its promised benefits.

For the past two decades, our elected leaders have played this kick the can game of under funding the pensions, and only now that they've depleted the funding ratio to laughable lows (worst in the nation) do they want to address the problem.

And how do they want to fix things? Exactly the way the public union representatives worried that they would 42 years ago, by slashing the benefits of retirees and active public employees.

Here is the Big Lie. If they succeed in passing these drastic cuts to promised benefits, and if the inevitable legal challenges are defeated, we are being told that our fiscal/pension problems will be solved.

Ha! If you believe that one, than you believed all of the lies that have been told out of Springfield for the last 40 years. We have a problem, and it needs to be solved, but not in a way that violates the constitution and the promises that were made. Here are my ideas for a solution that shares the burden of the problem Sringfield created:

1. Current employees contributions must be increased.
2. All retirement income must be subject to State Income tax (not just public employees)
3. Eliminate pay/benefits/pensions for most elected or appointed public office holders.
4. Reduce the number of units of local government by 50%.
5. End the defined benefit plan for all new state and local employees, shifting them into a defined contribution plan.
6. Amend the constitution to require the State to make contributions as determined annually by plan actuaries to the pension system

Only with a solution that respects the promises made, recognizes our current fiscal problems, and puts in place a solution for the future, can we be assured that this problem will not repeat itself.

1 year ago
Posted by MarkH

The big lie is that teachers and school administrators and other school district employees are "State employees". Where is the employer/employee relationship. Who sets the salary, benefits, and bumps the salary during the last three years of employment? Not the State, but the school district and it is the state that is on the hook for the pension.

Pensions should be the responsibility of the employer, in this instance the school district. Ifthey had "skin" in the game weh would have seen the transition from a defined benefit to a defined contribution system ages ago.

Yes, we need to amend the Illinois State constitution, but do you really believe that the Illinois legislature is capable of or even willing to place this type of measure on the ballot? Especially when reducing pension benefits for teachers would set a very bad precedent, in terms of their pensions which are even more generous than those of the teachers?

1 year ago
Posted by unionteacher

I am a member of the SURS retirement system. I pay 8% of my salary into the pension and another 0.5% into a retiree healthcare fund. This is significantly more than other workers pay into social security. I also pay into Medicare like everyone else. I am not a legal expert, but I believe the Illinois constitution is legally binding. Even if the legislature could actually make a constitutional change, I doubt that any retroactive change would hold up in federal court. Ex post facto laws are mentioned in the U.S. constitution. In any case we are talking years. I do think there is a way around the constitution if all affected bargaining units agree to a change.
It is important to remember that two factors created this problem. First, the legislature took “pension holidays” over the years. A fancy way of saying they didn’t pay their share. If a private business took a holiday from paying their portion of social security someone would be in prison. Second, every local board across the state gave employees an “offer they couldn’t refuse” with early retirement incentives. The practice of padding pensions has stopped but the damage is done. I knew of colleagues who literally would have taken a pay cut to keep working. The local boards wanted higher paid employees off their payroll and knew the pension liability was at the state level. My point is that every person in this state is responsible for the decisions made by elected officials at both the state and local level.
I do not speak for my union, but as someone who will be working for many more years I understand there will be some changes. If you asked a triage medical worker, I think she would say you have to stop the bleeding before or at the same time that you start an IV. Workers like me are not the problem until we retire.
Here is what I personally would do.
1. Freeze COLA for 4 years on pension income over $40,000. (protects lower income)
2. Freeze COLA for 4 years on new retirees under the age of 67 for all income. (disincentive to retire early)
3. Tax all retirement income over $60,000 ( most surrounding states tax retirement income)
4. Raise employee contribution by2% ( most current workers would agree to be part of a solution)
5. State guarantees to fulfill their funding obligations. (I believe they are already obligated)
There is a lot more to this but I have ranted enough:)

1 year ago
Posted by Scooter

The Untapped Gold Mine for Funding Illinois Teacher Pensions
The State of Illinois should levy an income tax on amounts paid under all retirement plans including pensions and funds withdrawn from rollover IRAs and similar sources of retirement income whether from private sources or government sources. There is currently no State income tax applicable to these funds but they are federally taxed. This would double the amount of income tax revenues obtained by the State of Illinois. This money should be used solely to fund the teacher pension plans and retirement medical coverage.
The Illinois Constitution contains a specific provision protecting the teachers’ pensions. This provision was enacted because it was obvious that the State of Illinois legislators intended to defraud the teachers. The taxpayers of Illinois were Unjustly Enriched by having a lower income tax rate for years because the legislators misappropriated the money that should have funded the teacher pension plans. Any private employer would face criminal and civil sanctions for such abusive behavior.
The State of Illinois elected to make teachers ineligible to receive Social Security retirement payments which also means many teachers are disqualified from receiving Medicare Coverage. Instead the State of Illinois promised to provide retired teachers with a pension and medical coverage. Now some legislators are seeking to deny medical coverage to the teachers or to force teachers to agree to a huge default in the amount of pension payments in order to receive medical coverage.
Impeachment proceedings should be brought against the legislators who are urging that the teachers be deprived of certain pension rights by passing a law which is unconstitutional. Impeachment should be applied to all legislators who vote in favor of such a law. The Constitution of Illinois serves to protect the minorities from oppression by the majority. The teachers with accrued pension rights are just such a minority protected by the Constitution. Some legislators are so brazen as to suggest that Judges be exempt from the intended pension default – which is nothing short of a callus bribe of the judiciary to obtain their approval of an illegal, unjust and unconstitutional law. Legislators who join in such a conspiracy should be impeached.
Even apart from the violation of constitutional rights, the Legislature cannot pick and choose upon which obligations the State of Illinois will default. If the State is going to default on an obligation, there are laws reflecting moral principals governing the priority of creditors to be first paid in the case of a default. The lowest priority should be the bondholders of Illinois obligations – that is where the State of Illinois should first default. Obligations to pay Employees have always been the highest priority and therefore the teachers’ pensions should be protected.
The Statue of Liberty is hanging her head in shame at the unconstitutional abuse heaped on the teachers employed by the State of Illinois.
Best regards, Scooter

1 year ago
Posted by herbert

Illinois legislators seem inclined, as a matter of desperation, to pass pension reform legislation, then have it contested in the courts. Most certainly it will be found unconstitutional. The lawmakers then can simply say to the electorate, "We tried." So it goes.

7 months ago
Posted by Stateworker

I worked for the state for over years and from what I have come up with is our lawmakers in Springfield are corrupt! They created a 100 billion dollar debt by stealing from State workers pension plans and mismanaging them. Their way of fixing the mess they created is take away benefits promised to state workers as well as tell State workers and retiree's there pensions will be effected because they messed up. The saddest part is our lawmakers pensions and benefits will not be effected even thought they created the MESS! Its time to get our corrupt lawmakers out of office with the hopes of electing some honest ones! As long as I have lived in Illinois our state government has had problems being corrupt!!

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