After over a year of a budget stalemate, in which Illinois had neither a budget nor even trial balloons for policies that might go into a budget, the dam finally broke this week. As always, Rich Miller has a good roundup, calling the potential grand bargain “a whole lot grander than we thought last week.”
It’s true. Greg Hinz broke some details about it last week: Dems give some on a temporary property-tax freeze, workers’ compensation, and a plan to curtail pension growth that John Cullerton had been pushing in some form for years anyway. In exchange, the income tax rate would go up. That might seem like a crappy deal—I get what I want, you get blame for raising taxes—but I’ve written quite a bit on the near-impossibility of righting the state’s financial situation without doing so. Hinz thinks it’s actually a really good deal for Democrats, and given how much compromise it would get from the Republican/Rauner agenda, he’s got a point.
Then Paris Schutz and Amanda Vinicky of Chicago Tonight broke even more details, and the grand bargain looks even more grand. Then Miller rounded up news from Jordan Abudayyeh, Monique Garcia, and Jeff Johnson, and what’s on the table right now addresses a lot of issues that have been floating around for many years. If it goes through with all its constituent parts—and it appears that the bargain will be structured so that they have to—it’s a big deal, even beyond the big deal of having a real budget again.
One of the key components was reported on by Schutz and Vinicky: “A concept put forth by Cullerton that offers state employees a choice between accepting reductions to cost-of-living raises in retirement in exchange for a higher future pensionable salary.”
The one thing I’ve learned in following the legal debate over pensions in Illinois is to pay attention to what comes out of Cullerton’s office, in particular legal analysis by Cullerton’s former chief legal council, Eric Madiar. He outlined the legal basis for why the most recent attempt at pension reform would fail in a thorough, historically grounded brief, and was completely right about it. Last year Madiar outlined his argument for Cullerton’s concept in another lengthy brief. Now it’s looking like the Cullerton/Madiar approach will get its turn; while far from guaranteed, it looks vastly more plausible.
State workers’ pensions in Illinois are governed by a strict constitutional amendment that prevents them from being diminished, and that amendment was strengthened by the debate over it during the Constitutional Convention that established it and years of case law. They’re treated like a contract. Cost-of-living adjustments, health insurance, all that is a promise the state has made that it cannot go back on.
What it can do, in theory, is offer you something in exchange for taking away something, what’s known as “consideration.” If the state wants to make the COLA smaller, it can’t do that unilaterally—it can’t breach the contract—but it can offer employees something they might want in trade.
But what to offer in return? Madiar found something that isn’t guaranteed by the state, at least according to the courts: salary increases. “Illinois courts have long held that public employees do not have a vested right” to expect continued (or increased) salary levels, work hours, or other terms of employment, Madiar’s brief notes, even though these factors could later influence someone’s pension.
So let’s say you’re a state employee. You start at $50,000 a year; after 10 years, you’re making, say, $60,000 a year. When you retire, you get a certain percentage of that salary as pension and a three-percent annual cost-of-living adjustment.
The state can’t take away that COLA when you retire, but it can change that salary schedule. Since that salary increase is not guaranteed, the pension attached to that raise is not guaranteed. You’re guaranteed a pension based on your $50,000 starting salary, but not the additional $10,000 you start to earn after working for 10 years. Madiar notes that in New York, which also has very strict pension protections, courts have allowed public employers to “offer future salary increases on the condition that the increases not qualify as pensionable income.”
The Cullerton/Madiar plan would offer Tier 1 employees (those who were hired before less-generous pension benefits were established for new employees in 2011) a choice: if you keep your three-percent annual cost-of-living increase in retirement, any raises you get do not count toward your final pensionable salary (though you don’t have to pay a pension contribution on those raises either). Based on the language in Madiar’s brief, it appears that the agreement would hold for salary schedule increases as well.
If you accept the three-percent COLA cut, down to “the lesser of three percent simple or half the rate of inflation, and delay the receipt of those increases to the earlier of five years after retirement or age 67,” then your salary increases count toward your final pensionable salary. In 2015, Cullerton, who had union support for the plan, said that it would save about a billion dollars a year. (It wouldn’t necessarily be the exact same plan this time around, but based on Schutz and Vinicky’s description, it would appear to be similar or identical.)
This “consideration” approach has been floated before by Cullerton, but it was rejected because it didn’t save as much money as the pension-reform bill that would eventually rejected by the Illinois Supreme Court—for exactly the same reasons Madiar predicted all the way back in 2011. Lawmakers (and pundits) went for a bigger cut, but there was a substantial opportunity cost in the years spent putting together a doomed bill—a big risk and a predictable failure.
Now that they’re back at the table, it appears that this alternative approach, laid out by someone who predicted the previous failure, will finally get its chance.