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By: Mark Glennon*

 

It’s a question several readers have asked in various ways, so let me take a crack at it. To illustrate the issue most clearly, think of a worker or new retiree in one of the worst funded of the hundreds of police and firefighter pensions in Illinois, in a muncipality that’s also sinking fast:

 

I’m retiring soon and my pension is bleeding down to zero. The pension continues to pay out full amounts due to those already retired. Shouldn’t they be saving at least something for me? Aren’t the trustees supposed to be fiduciaries for me, too?

 

The short answer has two parts:  As a legal matter, an Illinois court would probably never allow cuts now to protect future claims. As a matter of common sense and fairness, however, yes, that should be happening now for many Illinois pensions. Doing so would also be consistent with fiduciary duties applicable on other topics.

 

In Illinois, most of you know that the Supreme Court has made clear that benefits cannot constitutionally be cut and that they are a contractual duty owed to pensioners. The court also recently made clear that if a pension runs dry, pensioners can sue the sponsoring unit of government for their benefits. I’ll let practicing lawyers weigh in if they have a different opinion, but my sense is that Illinois courts would stick to those simple rules. They’d say pension trustees have no duty to save assets or worry about future claims. If the pension runs dry, pensioners can always sue the government.

 

But is that the right and sensible answer? Not for many pensions across Illinois.

 

Pension trustees are fiduciaries for the members of their pension, including those not yet retired. “Fiduciary” duties are strict, and fiduciary law is well established in other areas. For example, trustees of trusts and directors of corporations also have fiduciary duties. Those general rules apply to pension trustees, except as modified by the Illinois Pension Code. That Code specifies some specific duties and exceptions, though I see nothing that addresses this point.

 

One widely recognized fiduciary duty outside of the pension world is to treat claimants equally. That’s why recently retired and soon-to-be retired pensioners should fairly ask, “What about me? Why should those first in line stand to get most or all of their benefits leaving me with little or nothing?”

 

It’s simply a fact that many pensioners can’t count on getting much out of a lawsuit against their municpality. Some of those cases are obvious. Harvey is zombie city, with pension liabilities over $30 million — twenty-some percent funded. The Budget Director in East St Louis said last year the city should file for bankruptcy. Its pensions are $67 million short. Many others are in trouble. Heck, just last week, the former head of the Federal Deposit Insurance Corporation wrote that Chicago and the State of Illinois should be in bankruptcy.

 

Many pensions in Illinois don’t have enough just to pay current retirees. There’s nothing there for current workers.

 

In the private sector, it’s a different story. A corporate director of an insolvent company becomes a fiduciary for creditors, and those creditors have to be treated impartially. In many states, including Illinois, that duty arises even as the company approaches the “zone of insolvency.” The duty of impartiality to creditors is strict enough that many directors, fearing liability, choose to use a proceeding called an assignment for the benefit of creditors to make sure all claims are paid proportionately.

 

In bankruptcy, the duty to treat creditors impartially is also strict. Current and future pension claims are treated equally. In fact, creditors paid in full within 90 days of a bankruptcy have to return those payments if they exceed what creditors get in the bankruptcy (in the case of private sector bankruptcies, that is).

 

There’s another reason why it would be sensible to hold back payments for the benefit of future creditors: The ultimate, total payout would be larger because the pension would be able to invest longer term. Even some of the larger pensions in Illinois have already had to shorten their investment horizon because they only have enough money for near term payouts.

 

To repeat, however, don’t expect an Illinois court to allow or require pension trustees to cut current benefits to provide some protection for future ones. It’s just another of the countless inequities in our pension system.

(Updated to correct the third from the last paragraph. The 90-day period under which over payments can be recouped, called “preferences,” applies to private sector bankruptcies but not to Chapter 9 municipal bankruptcies.)

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

 

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