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By: Mark Glennon*

 

If a leading voice for Illinois Democrats and public unions on the legality of pension reform is correct, this is the consequence: No Illinois constitutional amendment, act of the United States Congress or Federal bankruptcy can ever, for eternity, reduce unfunded liabilities in our municipal and state pensions. Only voluntary trades made at the discretion of  pensioners, which obviously can’t accomplish much, are permissible, he says. Statewide, those unfunded liabilities total $371 billion, according to recent data compiled by the Stanford Institute for Economic Policy Research and based on more accurate “market based” numbers.

 

Eric Madiar is a prominent Democratic lawyer who works on pension reform issues. He was chief counsel to Illinois Senate President John Cullerton. Cullerton runs most of the show on pensions for Illinois Democrats and is the go-to guy for public unions. I think it’s fair to say that Madiar states legal views consistent with those of Cullerton and most public unions. He recently published a detailed legal piece on what he sees as Illinois’ permissible options for pension reform. His article was summarized on Monday by Greg Hinz at Crain’s under the headline, What are Illinois real pension options now?

 

That dire consequence of permanent doom results from a novel argument made by Madiar, which is that the Illinois Constitution’s pension protection clause should be read to mean that the state could never give its consent to municipal bankruptcy. That consent is required under the United States Bankruptcy Code and Illinois, unlike states like Michigan and California, hasn’t given it. There’s no Federal preemption issue here because the Bankruptcy Code expressly requires that consent. As Madiar sees it, the Illinois Constitution bars any branch of government from giving that consent because bankruptcy indirectly means cutting pensions.

 

And amending the Illinois Constitution to loosen or delete the pension protection clause isn’t an option, according to Madiar — an opinion that others have expressed before. They think any such amendment would be invalidated under the United States Constitution (the Contracts Clause and “Taking” theories). That’s a plausible argument, though we still need a credible, independent, constitutional expert to weigh in on it. Regardless, the amendment process and legal challenges would take many years, so even some ardent pension reformers I’ve spoken to aren’t placing much hope in an amendment. Perhaps more importantly, amending the constitution is politically impossible to implement for years. A three-fifths vote of both houses of the General Assembly would be needed, and the majority is beholden to public unions.

 

So, the key is that first point: Would courts really rule that authorizing municipal bankruptcy is unconstitutional in Illinois? That would mean the concept of bankruptcy — an orderly readjustment meant to share losses fairly and provide a fresh start — that has been around for over 500 years — isn’t available to governments in Illinois. It would be more like ancient Greece, where debtors and their family members became enslaved to their creditors.

 

Accepting Madiar’s view would require an absurdly broad reading of the pension protection clause, I would say, but you can’t dismiss the chance that an Illinois court would rule absurdly. Just look at the 2014 Kanerva decision in which the Illinois Supreme Court added healthcare to the list of constitutionally protected benefits for state retirees. That ruling added over 50% to the state’s unfunded pension liability, even though “healthcare” isn’t even mention in the constitution.

 

Before I go through Madiar’s list of options and why they won’t accomplish much, here are two he didn’t mention:

 

Just don’t fund the damn things

Don’t laugh — we’re largely doing that already and support for doing more is growing behind the scenes. Annual pension contributions set by Springfield for Illinois state and local pensions fall far short of what’s needed even to keep their unfunded liabilities from increasing further, with a tiny number of exceptions. We’ve written often about that, and it will only worsen since the post-recession bull market for their stock investments ended last summer and interest rates remain stuck near record lows. And I’ve heard more and more folks in position of influence, in both parties, say in private there’s no choice now except to starve the pension beast if we want to maintain basic government services, and hope that somehow an answer appears in later years.

 

Not funding them only compounds the ultimate liability, of course, but pensioners seem content knowing that if the pensions bleed dry they can always sue directly on their pension obligation, which the Illinois Supreme Court recently ruled is the case for Chicago. They might take further comfort in a line from that Greg Hinz article, which foolishly says that pensions are “effectively guarantied by a first lien” on the government’s assets. Wrong. Pensioners are unsecured creditors for the unfunded liabilities and general obligation bonds have a payment priority. If pensioners ever end up going to court to get a judgement and try to execute on assets they also will find that most or all assets are already mortgaged to secure other bonds.  A judgment lien won’t help.

 

Move

People and employers are already fleeing, we know, but the exodus would become a stampede if taxes were ever raised enough to adequately fund pensions. That’s why no reform opponent, none, ever states the size the tax increase that would be needed, and nobody in either party has the guts to propose that increase. Willful blindness, denial and outright dishonesty prevail. Personally, I sure won’t stick around if this isn’t fixed by when my youngest graduates from high school, about six years from now. Pension promises were made through a combination of error, fraud and graft, and I, like many, have no intention of helping pay them in full.

 

The rest of Madiar’s list of options, and why they can’t accomplish much, is below. It’s important to remember as you go through these that all unfunded pension liabilities are owed for work already performed.

 

Cullerton’s Contractual Proposal

Madiar and Cullerton have long focused on giving pensioners the option of foregoing their automatic three percent COLA in exchange for a promise that all future salary increases would be pensionable. In other words, a voluntary trade would be offered for something that’s not the employee’s right.

 

Fine, offering a trade that employees can ignore if they want sure wouldn’t seem to be a legal problem. The obvious question, however, is how much net savings there would be for the state. If it’s a swap pensioners would want to take, wouldn’t that be a swap the state should not take? Maybe, maybe not — it would depend on individual circumstances and people aren’t always rational. Madiar says it would result in a little less than $1 billion in annual pension contributions, and there’s supposedly an actuarial report around supporting that, though it has never been published. But how about the other part of the trade? If the state has the right to cap pensionable salaries at current levels, shouldn’t it already be doing so, and what’s the cost of giving up that right?

 

The bottom line on this is that we should do it if it will save money, but show us all the numbers. And even if it saves a full $ 1 billion per year, that hardly solves the problem. For a little perspective, the state’s total pension contribution is over $7 billion per year, and that’s at least $3 billion less than pensions need from sinking further.

 

Cash buyout option

A few hundred million dollars per year might be saved in pension contributions if pensioners were offered the option of taking a buyout equal to about 75% of the present value of their projected pension, Madiar and others think. This one is hard to take seriously. Actuaries I have talked to scoff at it because the first takers would be heart attack sufferers, cancer victims, AIDS victims, severe diabetics, overweight smokers and the like. Neither Madiar’s article nor anything I have seen on this idea addresses that problem. The present value of a projected pension could not be adjusted to reflect individual longevity chances. The folks who would stay in the pension system would be the healthiest ones who account for the biggest projected liability, so the numbers would backfire. In any event, the supposed savings of few hundred million dollars in annual savings aren’t much in light of the size of the problem.

 

Restructuring Contributions

The annual contribution schedule for the state could be flattened and made longer, lowering near term contributions, which has also been called “reamortization.” This is actually the “just don’t fund the damn things” option under a different name. It’s not “reform” because it would do nothing to reduce costs. In fact, lowering near term contributions and postponing the liability increases the ultimate cost.

 

Pass the buck to locals

The idea of making local school districts and community colleges responsible for part of TRS (the state teachers’ pension, which accounts for about 60% of the state’s unfunded liability) and SURS (for colleges and universities) has been discussed in many forms. Obviously, it might help the state but would just make local taxpayers liable. The key issue there is whether that shift would be accompanied by elimination of the mandate to participate in those pensions. If so, that would impose some needed discipline in the system. Either way, however, most of these proposals focus only on shifting “normal cost,” which is the new annual cost incurred for pensions that year. It would not reduce the unfunded liabilities taxpayers face.

 

Other proposals not mentioned by Madiar

A number of other proposals address future work and new hires. A list of some of those proposals was published by the Illinois Policy Institute. Most of them should have been done long ago, and should be done now. However, they would not reduce unfunded liabilities but only attempt to cap the problem, and reducing the unfunded liabilities is what’s essential.

 

Conclusion

The real point of Madiar’s article, and of Greg Hinz’s positive review of it, was the same as public unions and Illinois Democrats always are trying to make: We just have to pay up by raising taxes. If that happens, or if Madiar’s legal analysis is correct, you can pretty much wipe Illinois off the map.

 

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

 

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