STUMP » Articles » Illinois Pensions: A Court Ruling and on How Promises Fail » 9 May 2015, 12:49

Surprising no one, and especially not me, the Illinois Supreme Court unanimously ruled that the fairly minor Illinois pension reforms were unconstitutional under the state constitutional clause disallowing changing contracts with employees.

Let’s just check out a plain news report:

SPRINGFIELD — The Illinois Supreme Court on Friday struck down a 2013 law that sought to fix the nation’s worst government-employee pension crisis, a ruling that forces the state to find another way to overcome a massive budget deficit.

In a unanimous decision, the seven justices declared the law passed 18 months ago violates the state constitution because it would leave pension promises “diminished or impaired.”

“In enacting the provisions, the General Assembly overstepped the scope of its legislative power. This court is therefore obligated to declare those provisions invalid,” Justice Lloyd Karmeier said in writing the court’s opinion.

…..
It would have crimped pensions perks in several ways in an effort to erase the shortfall by 2044. Perhaps most significantly, it would have erased the 3 percent compounded cost-of-living adjustment added in 1989, replacing it with a formula that gave the increases on a portion of benefits, depending on years of service. Some would have had the option of freezing their pensions and contributing to a 401(k)-style plan.

It also would have delayed the retirement age for workers aged 45 and younger, on a sliding scale. Workers would have had to contribute 1 percent less to their retirements and the pension agencies would have been allowed to sue the state if it didn’t contribute its full annual portion to the funds. Those were additions to help the matter survive a court challenge.

At the March argument before the high court, the opponents to the law argued that the constitution’s language was clear — promised pensions could not be reduced.

I happen to agree with that interpretation of the current Illinois state constitution. (Not that I am a constitutional lawyer)

Illinois is not the only state with such a clause, and it sounds like the reason for the clause is similar to those elsewhere: because the politicians wanted to be able to underfund the pensions.

Underfunding the pensions was the real signal that the pensions were not protected nor would get paid, by the way. At least the public unions in New Jersey have caught onto that fact.

Let us think about the kinds of promises governments can actually make and keep, borne out by actual experience. Let us think specifically about Constitutional promises.

What governments are excellent at: promising not to do stuff.

The U.S. government has been excellent at not quartering troops in citizens’ houses even before the Bill of Rights was signed. Way to go, U.S. government!

It is very easy to follow up on a promise never to do something. These are called negative rights — most of the rights in the Bill of Rights are promises to leave people alone in various ways.

There are positive rights in the Bill of Rights, and those have differing levels of success, such as right to speedy trial. That is often impaired by actual court dockets.

Governments have made very long-term financial promises in a variety of guises and have been less successful with these. Think on bonds: there is a specified period of time over which cash flows are promised, and, get this, the amounts being promised are known when the promise is made.

A government issues a 20-year bond with a semiannual coupon at 5%, everybody knows the timing of the cash flows and how much each cash flow is.

And yet, even with that, governments do default on such promises from time to time. They try not to do this too often, because people will be loathe to lend to such serial defaulters. They charge higher interest or don’t go for the bond issue at all.

Now let us consider defined benefit pensions.

The amount being promised is uncertain — not exactly sure when the person will retire, what their initial pension payment will be (because it’s a certain percentage of n-year average final salary, and the percentage won’t necessarily be known), nor how long those payments will be made. It’s not known what the assets backing these promises will do. That’s a hell of a lot of uncertainty built into there.

Actuaries are involved in making assumptions around these, and one checks experience from time to time, but you won’t know how right those assumptions were for decades. You may find out that people are living a lot longer than you originally projected.

But let us suppose actuarial valuations have been good for Illinois.

Let’s look at the state of things before the pension reforms are undone.

Here is the “required” contribution as a percentage of revenue:

But that’s not what was contributed, of course.

The Public Plans Database doesn’t have this for all the plans together, but let’s check out the largest Illinois pensions.

First, the teachers pension, Illinois TRS:

As far as I can tell, the “required” contribution has never been made for Illinois TRS.

My own development of the unfunded liability for Illinois TRS can be seen below. There is more than just underfunding the pension that has contributed to this experience (and I cover a longer period than the Public Plans Database)

But the underfunding is a conscious choice, as opposed to many of the other changes. Illinois TRS is at about 40% fundedness.

But let’s look at the largest of the pensions, the municipal fund. It’s in a relatively good situation, at about 90% fundedness.

They pretty much put in the whole required contribution every year, except relatively recently, and even there the shortchange was not by much.

Let’s check out one of the worst-funded pensions in Illinois: Chicago Police. It’s less than 30% funded.

Want to see why?

Ugh.

Note that the government was contributing essentially a level percent of the “required” contribution, while the amount needed increased. The ARC was about 50% of payroll for 2013… holy crap, that’s huge.

This may explain the reaction at the blog of a Chicago cop called Second City Cop

On the one hand, this is great news for the pension. It means that words enshrined in legislation have actual meaning.

On the other hand, it’s not very good news, because the words words enshrined in legislation have actual meaning.
…..
This ruling is a huge blow to Rahm’s efforts to gut contractual protections and may mean he has to eat Daley’s mess in short order. You see, the legislature (and city council) passed numerous pension bills and laws at the behest of their union constituents and and received tens, probably hundreds of thousands of dollars in contributions from the unions, knowing full well that the promises made were mathematically impossible without regular incremental tax hikes. The legislature (and city council) then failed to make those contributions, declaring various pension holidays or “deferring” payments or promising “no new (property) taxes” to get reelected – we remember Shortshanks saying this during numerous election cycles. Combine this with assorted neighborhood expenditures, crooked contracts and associated overruns, numerous financial debacles (including the No-lympics) and you have a recipe for disaster coming to fruition on Rahm’s watch.

Hey Rahm, I warned you.

Second City Cop gets why this is a disaster for Chicago.

But hey, let’s look at the happy talk from others.

I like going to Fred Klonsky’s blog for reactions I know will be the opposite of mine (to a certain extent).

Glen Brown’s reaction post:

Today we celebrate a legal and moral victory. We can believe in the Illinois Constitution for protection and believe in the sanctity of contractsonce again. We can believe the Pension Protection Clause “confers additional, independent protection for public retirement benefits separate and distinct from the protection afforded by the Contract Clause” (Brief of ISEA, RSEA, Heaton and Harrison, Plaintiffs-Appellees, 22). We can believe the Pension Protection Clause decisively has no reference to “subject to police power.” We can believe Illinois legislators “may not rewrite the Pension Protection Clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve” (32). We can believe “no reserved power allows a state legislature to sidestep the plain prohibitions set out in its own constitution” (41) at least for now.

As readers of my blog know, I have stated many times to possess a right to a promised deferred compensation, such as a pension, is to assert a legitimate claim with all Illinois legislators to protect that right. There are no rights without obligations. They are mutually dependent.

Fulfilling a contract is a legal and moral obligation justified by trust among elected officials and their constituents. Senate Bill 1 was, indeed, a foul insensitive attack on public employees’ and retirees’ rights to constitutionally-guaranteed benefits.

I wrote four years ago that challenges lie ahead for current public employees, retirees and their families, and for every citizen of Illinois. These facts have not changed: there are liars and thieves among us who will continue to choose which contracts to honor and which ones to violate in the future.

I happen to agree with all of this, actually.

Everybody is going to get whacked, and the Illinois pols tried to hit only the easiest target. Guess what, guys — you’re still going to get hit. Yes, you can take the bondholders and taxpayers with you, but there will be hits to the pensions as well.

It’s just going to take a bit longer.

A different take from the same blog:

Bob Lyons: The Illinois Supreme Court did give them a road map: DON’T GO HERE, THERE ARE RULES.

– By Bob Lyons. Bob is one of the two elected annuitant representatives on the TRS board of directors.

….. While we celebrate the rule of law, remember the five pension systems have over a combined $111 billion in unfunded pension liability that is due over the next thirty years. Unfortunately the state may next waste some more time trying to change the constitution to remove our protection in a futile effort that tries ignoring the ex post facto clause in both the Illinois and United States Constitutions. Hopefully the day will soon come when the governor and legislators realize they need their collective wisdom to look at trying to raise revenue in a way that Illinois can pay all of its bills and still increase prosperity.

I used to believe in the money fairy, too.

Sorry, Mr. Lyons. You can cry “takings clause” all you want, and “ex post facto”, but the point is with pensions: you’ve not been paid the benefits yet.

I totally understand that you earned them, at least with respect to the written contracts, though politically people may not look kindly on a pension system that awards pensions to people with only one day’s worth of service.

Crying “ex post facto” is not going to cover cuts there. There will be cuts to current retirees at some point, because Illinois cannot actually cover its promises.

The long-term decreasing funding ratios should tell you that.

And I know this is a very long post already, but one last bit.

The Chicago Tribune editorializes:

So the huge enterprise of government in Illinois now confronts a financial challenge unlike any it has known: The new taxation necessary to satisfy all of these state and local pension demands would make this a ghost state.

……
Now, though, the game changes. Illinois is about to endure a new and toxic tension between those who have court-protected benefits and those who don’t. That group includes not only taxpayers who must pay for those benefits, but the parents of school-age children, the Medicaid recipients, the university students and all the other Illinoisans who may think their needs, or their children’s needs, are as meritorious as public pension funds.

Friday’s unanimous court opinion says all those Illinoisans are dead wrong.

So as the slashing of non-retirement costs intensifies, don’t blame the chief executive officers who have to wield the knives. Blame the state and local lawmakers who, over the decades, built this miserable Illinois slaughterhouse.

And Rich Miller of Capitol Fax retorts:

A ghost state? C’mon, man.

Raising the state income tax back up to close to where it was before January 1st wouldn’t make this a “ghost state,” but it would prevent draconian budget cuts that would devastate this state. The Tribune blindly refuses to admit this because it hates that tax hike so very much.

Sometimes, you gotta find more income to pay your bills.

I have no doubt that they will increase taxes, but that puny boost is not going to do much in the way of filling the huge pension hole.

Anyway, seems to me that the next step is amending the Illinois State constitution to remove that 1970 clause. Then all the pensions will have as protection will be the assets actually in the funds.

Which was all the protection they had before, though only a few have started to realize it.

But maybe they’ll actually have more sure pensions once that clause is gone, because they will no longer be caught in the fragility of can’t fail thinking.

Compilation of Illinois posts