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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Marcia
I had an odd thought….but I’m not a lawyer. The IL Supreme Court said that pensions are guaranteed but not raises unless the money for them is appropriated….correct? Also, when the government overpays (pensions, unemployment, etc.) it claws back the overpayments, yes? Would it be constitutional to go back to any budget that wasn’t balanced (as is required by the constitution) and claw back the raises where the money wasn’t appropriated? That money (plus interest) is put into the appropriate pensions fund. And the final pensionable salary is also adjusted accordingly. A side effect would be that there would be a lot more interest is meeting that… Read more »
Mike

The constitutional requirement for the state balancing its budget is a farce.

There have been no serious efforts mounted to claim the state budget was not constitutionally balanced.

Benjamin VanMetre of the Illinois Policy Institute described the requirement in a December 31, 2012 article titled, “Illinois’ balanced budget rule not worth the paper it’s written on.”

http://www.illinoispolicy.org/illinois%C2%92-balanced-budget-rule-not-worth-the-paper-it%C2%92s-written-on

Paul

The Illinois Supreme Court ruling on pensions and health benefits for state workers is a conflict of interest. Even though they do not rule on their own pensions (yet) the rules are the same for all with the state plans. The ruling on including health care plans like they do was nothing more than the Supreme Cort acting as the legislature.

Crabcakes

What is the relationship between the pension trusties-“fiduciary duty” and dummied down pension actuarial reports?

Rick

All these points are reasonable and expected of private plans. But in Illinois our constitution has officially placed the Fox In charge of the hen house. The very people who benefit from the system are running the system, with the power to tax. So responsible fiduciary actions are not expected here. Fiduciaries should be independent, in government pensions the fiduciary themselves are probably in line for a pension too from an underwater plan, and wouldn’t dare set a precedent.

TB TB

More and more people are beginning to realize that Defined Benefit plans like public pensions are not sustainable, including the private sector which has more or less done away with them. Here is my solution to this looming crisis that is only going to get worse without any correction of course:

https://drive.google.com/file/d/0B90sU3A85q46OE9BZHJFSWEzbGM/view?usp=drivesdk

Please help spread the word…

Tough Love

Quoting ……”In bankruptcy, the duty to treat creditors impartially is also strict. Current and future pension claims are treated equally. ”

Nice in theory, but political power (real or just perceived) often leads to a different outcome. E.g., why did Detroit’s Police get far smaller pension cuts that all other groups ?

this is what makes defined benefit plans ponzi schemes. unjust enrichment for the few early members of the ponzi. this is illegal.

all payouts, technically, sb clawed back and all monies equally dispersed. will that happen? doubtful. the boomers are too greedy, there are many of them and they vote. that is how we got here. they voted themselves benefits and didn’t pay for it. instead, they pass the cost onto the next 2 or 3 generations.

baby boomers are the greedy generation that ruined the united states.

Anthony G

This is a good point. Suppose I retire in ten years and the pension fund tells me ‘Sorry, we gave all your money to somebody else’. That’s not fair. I have rights to my money just like a guy who retires earlier than me.

Paul

A real examination/investigation needs to be made to determine how much of this is attributable to fraud and malfeasance. Start charging the fund managers and pension fund trustees criminally. Speak to any of these gurus of finance and all of them tell you how great they are. Well guess what if you don’t meet guidance and deliberately (fraudulently) put forth these inflated earnings numbers– then it’s jail for you buddy. This whole pension thing is global look at the Asian countries. The same thing is being reported there. There will be a global collapse. This is your new world order– chaos.

db plans are inherently fraudulent, they are ponzi schemes

nixit71

Until Gen X’ers through Millenials realize this is not a public vs private sector fight so much as one of generational equity, nothing will change. It’s time the young union members direct that question to their 50-something shop steward’s and local reps. If the answer is, “Don’t worry, it’s in the Constitution,” then they don’t have an answer.

yep, total scammers

J.A. Herzrent

Benefit cutbacks have recently been an issue with the Teamsters Central States plan. PBGC is involved. Not sure of current status however. As with many multi-enmployer plans, there were a lot of small companies obligated to contribute, but many of those companies have gone out of business. Government sponsors can’t generally dissolve themselves, although I believe states may eliminate the charter of a city or town so that the municipal entity gets reabsorbed into the county. I believe courts have suspended mandatory distributions from a trust to preserve liquidity and protect all trust beneficiaries. http://caselaw.findlaw.com/us-7th-circuit/1141873.html

that is the problem of the participants of the plan, who should have been paying attention. the taxpayer does not owe anyone for the mistakes of others.

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