The Illinois Pension Mess Is a Huge Game of Chicken

The state has a compelling case on pension reform, but the court could also tell it to suck it up and find another way to pay the obligations. Is a backup plan a good idea?

John Cullerton

Lane Christiansen/Chicago Tribune

John Cullerton addresses the Illinois Senate about pension reform

So, pensions—it’s been awhile, and not much concrete has happened. We may or may not be close to something, though, and Rich Miller has a good column today on how the current roadblock isn’t necessarily the usual suspects (i.e. the state’s Democratic leadership), but the mixed messages of the business community and their proxies:

Cullerton took the plan endorsed by [Ty Fahner of the Civic Committee] and grafted his own pension reform language onto it. Cullerton’s “consideration” proposal wouldn’t take effect unless and/or until the courts ruled that the Fahner-backed proposal was unconstitutional.

Fahner didn’t like that idea, either. And he and lots of big-business types lobbied hard against it, along with a certain editorial board down the street, and forced Republicans off the bill. That killed the proposal, and the Fahner-backed bill was defeated as well.

Meanwhile, the House has passed a few bills that will save some significant money, including a proposal approved Thursday that caps COLAs at $750 a year or 3 percent, whichever is less. The House has already approved legislation increasing the retirement age and capping pensionable income at $113,000.

So: basically John Cullerton set up a fallback plan if the first plan is ruled unconstitutional. Why’s that a problem? I’ll let the Trib editorial board explain.

The person who leads the Senate and who holds significant influence over his members prefers his own pension bill. Cullerton’s Senate Bill 1, which also could come to a vote Wednesday, includes the provisions of Biss’ bill. But it also does something odd: It says if the courts strike down those provisions, a Plan B would kick in.

Cullerton’s Plan B comes up far short of the savings needed to restore fiscal health to the pension plans. It depends on multiple choice: Government workers would choose between the much-coveted, compounded cost-of-living increases they receive in retirement, or access to the state’s health care plan. Cullerton believes his bill has a better chance of being found constitutional by the courts. [NB: Cullerton’s bill includes this choice under the idea that by offering a choice, changes to pensions aren’t made unilaterally, and therefore aren’t violations of the contract.]

But the real message from lawmakers to the courts would be this: Hey, we don’t really trust Plan A, so be our guest, throw it out, we’ll live with Plan B. No, really. We beg you.

This is something of an odd contention—that the court would judge the Biss bill constitutional in the absence of Cullerton’s backup plan, but would find it unconstitutional when it has a face-saving escape route. Courts are not not political, but it’s worth keeping in mind that Illinois has basically the strongest constitutional protections for its pensions in the country, full stop.

Cullerton’s strategy is based in the legal research of Eric Madiar, his chief legal counsel—which isn’t guaranteed to predict the future, but makes a solid case that this statement from the Trib is perhaps optimistic:

These steps will slow the ramp up in future pension benefits, but will not reduce benefits that have already been earned. In other words, they can pass the test of constitutionality…. Some of the best legal minds in Illinois are quite confident that the Biss pension plan meets the requirements of the Illinois Constitution.

The question is whether you can reduce benefits that have been promised but not yet earned. The most relevant case law seems to be Felt v. Board of Trustees of the Judges Retirement System.

In short: the judges’ pension was changed so it reflected their average salary of the last year of their service instead of their last day. (Not a change that’s likely to result in retired judges busking on the CTA, shouting out legal advice for spare change.) And the state Supreme Court told the AG to stuff it, as Madiar writes:

Curtly, the court stated that the Attorney General’s “argument is not convincing” because the statute effectuated a substantial impairment, and because Bardens similarly found that a contract clause violation “was not defensible as a reasonable exercise of police power.” The court continued that while the legislature has an “undeniable interest and responsibility in ensuring the adequate funding of the state pension systems, there was no evidence that the underfunding was due to judicial retirements or timing their retirements after salary increases.”

And it’s Felt where the constitutionality of the proposed pension changes seems weakest. Even the Sidley lawyers who drafted a defense for the Civic Committee admit that Felt is a “balancing test”  of their impact on employees versus the state’s interest in adequate funding:

[T]he proposed prospective pension reform legislation would substantially advance this governmental interest. The evidence is that the proposed legislation would reduce the State’s $76 billion in unfunded future pension obligations by an estimated $20-$25 billion so there is a compelling governmental and public interest served by the legislation.

So far, so good. But (emphasis mine):

Conversely, any adverse effect on current employees would be slight, for the legislation would not retroactively affect any employee’s previously earned benefits at all, but would merely reduce benefits to be earned as a result of future employment. This slight adverse impact should be weighed in light of the possibility that, without reform, the pension funds could run out of money, such that even previously-earned benefits would not be paid. In addition, if this measure were not permitted, current employees could have their salaries reduced prospectively or their jobs terminated. On these facts, there are compelling arguments that the measure is a reasonable exercise of the police power and is valid under the rationale of Felt.

I’ve written about this before—one option the state has is to basically throw itself upon the mercy of the court and beg for the use of its police powers to stave off self-destruction under the weight of its pension obligations. (These don’t have anything to do with the police; it basically means the state can do things it isn’t allowed to otherwise do if there’s a really good reason for it.) But this Felt test looks to be less than a slam dunk. The adverse effect might be slight if you’re a 22-year-old in your first day of employment; it’s less slight if you’re close to retirement and expecting COLA increases. The state has a compelling case, but the court could also tell it to suck it up and find another way to pay the obligations.

It’s not unthinkable, but there’s a lot riding on the “can” in “can pass the test of constitutionality.” It can; it might not. Cullerton’s plan accounts for this uncertainty, but the uncertainty principle applies—and, in probing for it, the possibility that it could change the outcome.

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