Pension Quick Takes: Reactions to Illinois Ruling
by meep
I said my (current) piece on the Illinois Supreme Court pensions ruling yesterday, along with a couple of the reactions.
I will do a roundup of what I’ve caught in my net in a moment, after thanking my top referrers for the past week:
And unsurprisingly, here were some of the searches that brought people to STUMP:
Lots of reactions, so let’s get to them.
Mark Glennon at Wirepoints has a list of major things to know.
I will excerpt a few of these.
• Both earned and unearned benefits are protected forever, the court said. There had been some speculation that the court would draw a distinction, but it didn’t, and it left the door open to none. “[O]nce an individual begins work and becomes a member of a public retirement system,” the court said, “any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to that individual.” (Page 20). That means that reform proposals that would only reduce benefits to be earned in the future, such as Governor Rauner’s proposal to shift all future earnings into Tier 2-like benefits, are unconstitutional.
….
• Naive hopes for “guidance” from the court about what kind of pension reform might be permissible are dashed. The court gave none and there’s no hope for any. Sorry so be such an I-told-you-so, but we wrote months ago to “expect no guidance.”……
• Two years were wasted on an effort that was foolish from the start. If it had been upheld, SB-1 would have reduced the unfunded liability for the state pensions by just 12.5% which, based on today’s numbers, would have left us in worse shape than when the bill was drafted.• Horrid as the consequences are, this decision was rightly decided for earned benefits (though I seem to have the minority opinion on that among pension reform advocates). Validating the police powers defense would have meant years of litigation for the state and each municipality that attempted pension reform, and their budgeting would effectively have been delegated to judges, as we wrote earlier. The constitution indeed says what it says, though unearned benefits and attendant benefits are a different story.
The good news is that legislators who haven’t had the guts now will have a pretext. “Gosh,” they will say, “we tried our best but those darn courts shot it down, so now we have no choice.” Let’s hope their choice is not to raise taxes or cut the budget further, but to amend the state constitution and truly reform the pensions.
That’s right, amend the Illinois constitution. Get on with it. Now. A broad and properly worded amendment will dispose of all state constitutional issues. Attention will now turn to potential obstacles under the contract impairment and ex post facto clauses of the United States Constitution. Expect to see much written about that. Our current take is that those issues would not be an obstacle, though they would be litigated.
I completely agree with Mark on this. The first step is going to have to be amending the state constitution.
The alternative are the pensions failing catastrophically as the hole never gets filled and assets run out.
Greg Hinz of Crain’s Chicago has some number from someone else:
According to Ralph Martire, head of the progressive-leaning Center for Tax and Budget Accountability, the state’s five main pension funds could be filled to meet 76 to 78 percent of their obligations in 30 years if taxpayers contributed a flat $7.4 billion every year. That’s more than the $6.4 billion we’re paying this year, and a lot more than the $4.6 billion Rauner wants to spend next year. But once we bite the bullet, the relative hit 10 or 15 years from now would decline thanks to the effects of inflation. To get to 100 percent funding, we’d have to keep making that payment 12 more years, for a total of 42.
Anything less than 100% funding is underfunding the pension and risking nonpayment. And the flat amount is kind of weird… seems to me you’d be wanting an increasing amount as percentage of payroll.
So let us make a few comparisons: $7.4 billion is a 15% increase over $6.4 billion, and a 61% increase over $4.6 billion.
The entire Illinois state budget in 2014 was $70.4 billion, as $7.4 billion is 11% of that budget.
But wait, $70.4 billion was what was spent… Illinois issued bonds, and gets money from the federal government. How about we compare the $7.4 against revenue? Revenue in 2013 was $38.7 billion. That was including that “temporary” income tax boost. $7.4 billion is 19% of 2013 revenues.
Separate reminder: Illinois has billion-dollar current backlog of bills: [chapter 2-18]
Paying our bills
Illinois now owes over $6 billion to:• Hospitals, doctors and other providers of the health care and critical human services to our residents;
• School districts, colleges and local governments for funding promised by the state; and
• Contractors, vendors and others who have provided services and goods to the state.The bill backlog has been created in large part by a state law which allows the state to defer payment of some bills for an unlimited number of years. This is akin to buying groceries and then not paying the grocery store for a few years – even though you keep buying groceries every week.
Anyway, Illinois is going to have to start cutting.
Dishonest Promise
A promise is a promise, not an eternity. Marriage is a promise as well.
And this promise was not even an honest one.
Contracts made under coercion and threats are not even valid. But even valid contracts can be broken. That is precisely why we have bankruptcy law instead of debtor’s prisons.
In this case, corrupt politicians made bargains with corrupt union leaders at taxpayer expense. Unions further contributed to the mess with coercion and threats. Any sensible person knew these promises could not be met.
Sue For Divorce
The result of the unholy alliance between corrupt union leaders and corrupt politicians was a shotgun marriage made in hell.
Taxpayers need to sue for divorce. The way to do that is bankruptcy court. I repeat Miracles Not Coming; Bankruptcy the Sensible Option.
There will be some kind of bankruptcy, because there will be no bailout of Chicago. It’s not like the rest of Illinois cannot bail it out. And the Feds are not going to be stepping in in a large enough way.
Remember, something that would be a large percentage of their revenues for over 40 years to plug the hole.
Whether we like it or not, the courts generally do not consider any constitutional right to be absolute. Free speech, gun rights, the right to earn a living – state and local governments can violate all of these if the courts think they have a good enough reason, and they often do.
So today’s decision on pension rights essentially means that, in Illinois, government employees’ “right” to ever-increasing pension benefits gets stronger protection than any constitutional right the rest of us have.
Amazingly, the court rejected the idea that changes in benefits are necessary even to bring the state’s finances under control. After all, the court suggested, the state could just raise taxes as it did temporarily from 2011 through 2014.
Never mind that the temporary tax increase didn’t make a dent in the state’s unfunded pension liabilities. And never mind that under the tax hike, job creation slowed and taxpayers fled to other states at record rates.
Indeed, nowhere in the court’s decision is there any consideration of the millions of taxpayers – many of whom are financially struggling themselves and can’t afford to retire – who will have to pay the retirement benefits of former government workers.
Fortunately, taxpayers have a way out besides crossing the border to Indiana or Wisconsin: they can and should demand that legislators put a constitutional amendment to Illinois’ pension clause on the ballot to undo today’s disastrous decision and allow for needed reforms that are fair to everyone.
I agree that the state constitution needs to be amended.
In that piece they link to the effect of the recent tax boost that others were sanguine could plug the hole:
The 2011 income-tax hike put more than $31.6 billion in new revenue in the hands of Illinois state government. To put that number into perspective, $31.6 billion is more than what Illinois spends on all core government services (e.g., education, health care, human services, public safety) in a full budget year.
But Illinois didn’t use that money for education, health care or human services. Instead, the state used the tax-hike revenue to pay approximately $3.6 billion in old bills, make approximately $8 billion in pension obligation bond payments and put the remaining $21 billion into the state’s pensions systems, according Illinois Senate President John Cullerton.
…..
Illinois is still drowning under the weight of its pension debt despite dumping the entire tax hike into pensions and unpaid bills. Consider the following:In 2011, Illinois’ unfunded pension debt was $82.9 billion. Today, it exceeds $111 billion.
In 2011, Illinois’ general fund pension payment was $3.7 billion. Today, it exceeds $6 billion.
In 2011, Illinois’ unpaid bills totaled $8.5 billion. Today, the backlog still exceeds $6 billion, and actually increased while the tax hike was still in effect.
That hole is now even bigger because the reforms were undone.
The Illinois Supreme Court’s pension reform decision Friday runs 15,000 words, but its message to state government can be summed up in two: Pay up.
In their unanimous ruling, the seven justices told the state there is nothing tricky about the Illinois Constitution’s pension protection clause: “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.”
And, they said, there’s a reason why that clause exists and why its language is so simple: To prevent the state from doing exactly what it tried to do with the 2013 pension reform package.
For those who had hoped the state would be able to trim its $111 billion unfunded pension liability, this was the end of the line. The bill is due in full.
Mmmmm, nope. Only until they get around to amending the constitution.
This year, just shy of 20 cents of every dollar in state taxes you pay goes toward pensions. That amount will continue to grow.
This year the state will contribute $6.09 billion to pensions from a total operating budget of $31.1 billion. In the budget year that starts July 1, pension obligations go up to $6.8 billion from an operating budget that will be less than this year’s. If you believe Gov. Bruce Rauner’s budget plan, it’ll be $27.8 billion. (Rauner’s budget plan is in chapter 2, page 23 at this link.)
Welcome to Illinois, where we spend one-fourth of our budget on pensions yet struggle to properly fund our schools or provide adequate services to the developmentally disabled. Oh, and we’ll probably close the fiscal year with around $6 billion in unpaid bills.
Yes, so given all that, why do you think this particular bill will be paid in full? It won’t.
Reboot Illinois with politicians’ reactions:
From Governor Bruce Rauner’s spokesman Lance Trover:
“The Supreme Court’s decision confirms that benefits earned cannot be reduced. That’s fair and right, and why the governor long maintained that SB 1 is unconstitutional. What is now clear is that a Constitutional Amendment clarifying the distinction between currently earned benefits and future benefits not yet earned, which would allow the state to move forward on common-sense pension reforms, should be part of any solution.”
From Senate President John Cullerton:
“From the beginning of our pension reform debates, I expressed concern about the constitutionality of the plan that we ultimately advanced as a test case for the court. Today, the Illinois Supreme Court declared that regardless of political considerations or fiscal circumstances, state leaders cannot renege on pension obligations. This ruling is a victory for retirees, public employees and everyone who respects the plain language of our Constitution.
“That victory, however, should be balanced against the grave financial realities we will continue to face without true reforms. If there are to be any lasting savings in pension reform, we must face this reality within the confines of the Pension Clause. I stand ready to work with all parties to advance a real solution that adheres to the Illinois Constitution.”
Note: Cullerton voted for SB-1
Back to the comments:
State Rep. Elaine Nekritz, a Democrat from Northbrook, said:
“Our goal from the beginning of our work on pension reform has been to strike a very careful, very important balance between protecting the hard-earned investments of state workers and retirees and the equally important investments of all taxpayers in education, human and social services, health care and other vital state priorities. In its ruling today, the Supreme Court struck down not only the law but the core of that balance. Now our already dire pension problem will get that much worse and our options in striking that balance are limited. Our path forward from here is now much more difficult, and every direction will be more painful than the balance we struck in Senate Bill 1. “
….
State Sen. Daniel Biss, a Democrat, said:
“Today the Illinois Supreme Court ruled that Senate Bill 1 is unconstitutional. While this is not the opinion the authors of SB1 had hoped for, we must respect the Court and strictly adhere to this ruling. The Pension Clause of the constitution provides important protections, and today’s ruling proves the depth of those protections.
“The State of Illinois and many of its local governments are still facing serious fiscal problems, including significant pension debt. I look forward to working with all parties to find ways to ensure that adequate resources are available to properly fund our pension systems in the context of a responsible budget that funds crucial services. Our public employees, our government bodies, and our taxpayers deserve nothing less.”
Biss and Nekritz were two of the sponsors of the bill.
From Illinois Senate Republican Leader Christine Radogno:
“Illinois has the nation’s worst-funded pension system and the biggest pension deficit of any state. Nearly a quarter of our budget goes directly to pensions or to pay off past loans used to cover short-term pension costs.
“I am committed to working with everyone to find a solution that adheres to the Constitution. We must work together in bipartisan cooperation with Governor Rauner – who has demonstrated his commitment to tackle the most difficult problems facing Illinois.”
And that’s the bottom line. That situation is not sustainable.
There will be no “cool tricks” that will fill that hole in any meaningful way, unless that trick is a majorly lethal pandemic that targets those over age 60.
Related Posts
Public Pension Assets: It's Not Your Money to Play With, Pension Trustees
Calpers Myths vs. Facts: Page is Gone But The Internet is Forever
Public Pension Assets: Divestments for Everybody!
