By: Mark Glennon*

 

A Chicago trial judge, Rita Novak, today ruled that the pension reform law for two Chicago pensions is unconstitutional. Her full opinion is linked here.

 

That ruling was entirely predictable and is a correct application of the Illinois Supreme Court’s ruling earlier this year invalidating SB-1, a pension reform law for state pensions. Like it or not, the supreme court said you can’t cut pension benefits. The reform law for Chicago’s pensions would have cut benefits. It’s that simple. It won’t be reversed on appeal.

 

But Novak went much further, apparently rejecting an argument made by the city on an issue far more important in the longer term. For that part of her opinion, if I was still teaching in law school (which I used to do as an adjunct), I’d give her a ‘D.’

 

Specifically, the city argued that it’s not liable on the underlying obligation directly to pensioners if the pensions ever run dry. Surprisingly, as we wrote before, that’s an open issue. Yes, the city is liable to make the annual payments to pensions required by state law, but those payments can be whatever the legislature feels like setting.

 

That issue is critical in the long run because, if the city is right, one constitutional route to real pension reform would be simply to stop funding the pensions and begin funding some alternative at more affordable levels. No liability on the old pension would attach to the city.

 

Novak did not come right out and say explicitly that the city is directly on the hook to pensioners, but she apparently meant that with this convoluted language and reasoning:

 

Contrary to the city’s argument, it is not the Pension Code that creates the contractual relationship. Rather, if the state or municipal employer creates a pension system, the contractual relationship that is mandated derives from the Constitution and so does the `enforceable obligation’ to pay the benefits.

 

In other words, the state constitution somehow creates a contract not just with the pension but with the city, too. To heck with what the legislature wrote or intended when it created the pension.

 

That’s wrong. She should have analyzed the the particular statute that created the pension to see if it imposed liability. That’s not just my opinion. A few weeks ago I asked James Spiotto, a nationally recognized legal expert on municipal insolvency, about the issue. His response was immediate — you have to look the at the particular statute for the pension in question. (Illinois has 19 such statutes for its various pensions.) Novak, instead, based her reasoning only on some vague language in the SB-1 decision about the contractual relationship between employer and employer: “When the Supreme Court defined the rights guaranteed by the pension protection clause, it did so with reference to mandating `a contractual relationship between the employer and the employee’ and `creating an enforceable obligation to pay the benefits,’ ” Novak wrote.

 

That’s it. That’s the extent of her analysis of the issue. In fact, the issue wasn’t even before the Illinois Supreme Court in the SB-1 case, and it wasn’t about municipal pensions. The mess she made of the issue may be left dangling out there indefinitely. An appellate court could easily uphold invalidation of the reform law without addressing the issue, just based on the SB-1 decision. That’s what Novak should have done.

 

It’s not all bad news, arguably. First, the bill wouldn’t have solved much anyway. It would have reduced unfunded liabilities by less than $2 billion according to one earlier estimate. They now exceed $10 billion.

 

Second, the invalidated law also would have substantially increased the required annual contributions by the city to the two pensions. Now, we will revert to the old funding schedule requiring some $250 million less from taxpayers over the next five years. Ironically, Mayor Emanuel had been asking for relief from that anyway. The can is kicked and unfunded liabilities will spike further.

 

Why might that be good news? With a super-majority in the Illinois General Assembly unwilling to really tackle the pension crisis, Illinois may be forced into a different strategy for Chicago: Just don’t fund the damn things.

 

Yes, kicking the can harder may be the only option for now — until control of the legislature changes. That’s effectively what we are doing now to a very large extent anyway. Eventually, the liability would become so preposterous that even the blind would have the most extreme image of insolvency  burned into their optical cortexes. At least that would save taxpayers from pouring more into a bottomless hole. Rating agencies and the bond markets just might like it. They have so far. It’s higher annual contribution requirements that spooked them recently. They focus on near term liquidity more than long term solvency.

 

I’m not yet ready to say that would be best, but it’s starting to look like we’re being pushed there.

 

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

 

 

 

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MovetoIndy

The best thing to do at this point is leave Chicago and Illinois.
Luckily there are fiscally responsible low tax states nearby like Indiana 🙂

Tough Love

Two of it’s richest property owners saw the writing on the walls and have already left …. Oprah and Michale Jordan.

Tough Love

Quoting … “A Chicago trial judge, Rita Novak, today ruled that the pension reform law for two Chicago pensions is unconstitutional. ”

Gee, a “CHICAGO” trial judge (likely in the DB pension Plan for Chicago judges), decides that the (undeniably necessary and urgent) pension reform is unconstitutional.

Surprise, surprise …. is the conflict-of-interest not obvious ?

Mike

All judges in Illinois are in the Judges Retirement System of Illinois (JRS).

JRS & the General Assembly Retirement System (GARS) have the best benefits of all the Illinois public sector pension funds.

There are very few Republican Judges in Cook County.

Here is what the Chicago Tribune had to say about Cook County judicial elections in an October 18, 2014 article titled, “Tribune Endorsements, Cook County Judicial Races.”

http://www.chicagotribune.com/news/opinion/editorials/ct-judges-endorse-edit-1020-20141017-story.html

mark glennon

You’re sure right about that. Brazen conflicts of interest run throughout this and judges don’t even mention it. Nor has press written about it. We did an article about that here:http://www.wirepoints.com/judicial-review-of-pensio-bill-to-be-poisoned-by-conflicts-of-interest/

Paul

Judges have been excluded from pension reform legeslation and furthermore there are constitutional gurantees that a Judges salary and pension cannot be reduced. Mark knows this. Seperation of powers prevents the legeslature from cutting a Judges dough. So your conflict of interest arguement fails miserably. A Judge also pays taxes yet rules on tax law. Lets not get into la la land.

Tough Love

Following pension reform in NJ a few years back (INCLUDING the Judges), the judges sued so as to not have their pay reduced, as you described. They won, and NJ Citizens PROMPTLY changed their Constitution to have the greedy judges INCLUDED in the reductions.

mark glennon

Paul, sorry to have to be blunt, but I don’t think you understood the article I linked to, and you’re really not doing your side any favors with your comments here. We like to get opposing views here, but yours aren’t cutting it because you pretend to understand things that you don’t. So, expect deletions.

Mike

– His response was immediate — you have to look the at the particular statute for the pension in question. (Illinois has twelve such statutes for its various pensions.)

What are the 12 statutes?

mark glennon

Mike- They are listed on page 4 of this pension handbook done by Jenner & Block: https://jenner.com/system/assets/assets/6348/original/2012_20IL_20PENSION_20HANDBOOK_20-_20FINAL.pdf?1334067232

It’s an excellent piece of work, by the way, though much of it is outdated because it was done in 2012.

Mike

There are 19 (18 if you combined CTA & RTA / Metra / PACE), not 12?

mark glennon

Thanks for the eagle eye, Mike. I was thinking about just Chicago when I wrote that, and made the correction.

Peter A. Quilici
The realpolitik of the pension situation is that sooner or later the degradation of public services and increased taxation to fund the benefits will get on the average citizen’s radar. The 60% or more who never bother to vote. Right now we’re playing legal academia games regarding constitutional interpretation, interplay of the various pension codes and legal citation “gotcha” games so loved by the $400 an hour crowd with honorable mention to equitable principles of fairness. The rubber will hit the road when the apathetic masses awaken and the politicians and judges see their elected sinecures threatened. I don’t think the folks with a vested interest in… Read more »
Sean
Very well said, Peter. As a person who actively invests in the markets, AND as a person who once worked in the public sector (school teacher and a brief stint at the FDA), I can assert that those people in the public sector, for the most part, truly do not have a clue as to the magnitude of the problem. To add to your point, what they don’t realize is that their benefits were secured mostly by flying in under the radar, which is easy to do when the party is in full swing, the beer is flowing, and the music is blaring. Well, that party is… Read more »
Tough Love

Well said !

mark glennon

Peter- You are exactly right. Most voters won’t focus on this until they actually see the tax bill, then it’s too late. That’s the problem we try here to get ahead of, but it’s a tough battle.

Good government fan

This writer seems to be encouraging government to simply walk away from its debt. What’s next – school bonds? Infrastructure bonds? Why would any bond house do business in such a crazy and long term corrupt state that on top of all its ills, engaged in such totally totalitarian behavior?

Jim Palermo

Good Questions, Good Government Fan. But let me put a different spin on it and ask why anyone would buy bonds from, say Stockton or San Bernardino. Calif., two cities that went bankrupt and left pension benefits intact while stiffing the bondholders?

Paul

What is naive Nixit, is to not understand that it was YOUR elected representative government that passed the pension laws. Public workers and pensioners did NOT pass the laws. Furthermore it was THE PEOPLE of Illinois who ratified the State Constitution, a super- legeslature. It is immoral for a State to not honor its contracts plain and simple and your twisted ideas of what is moral would also allow for breaking other rules of law or rules of society if one disagrees with them.

nixit71
19 comments on a hot, sunny Saturday in July…must’ve struck a nerve. Paul, I am not arguing legality, just morality. When you say MY elected representative, what you really mean is OUR elected representative. Yet on the other end of the bargaining table, there is only YOUR elected representative (Assuming your union. Play with me, won’t you?). Why does the union guy get 2 votes to only my one? Not very moral, if you ask me. Since these union reps have their hands deep into the taxpayer pie, private citizens should vote in the next union club elections. Better yet, let me run for union president. My… Read more »
Mike
Public sector union lobbyists lobbied the politicians for the legislative benefit hikes to pensions that were already underfunded. That obviously makes no taxpayer sense. The taxpayers were not lobbying politicians to hike pension benefits to underfunded pensions. The taxpayers were not told about the pension benefit hikes, and certainly were not educated about the impacts of the hikes. There were easily on average 10 changes to the pension code each year from 1971 – 2011, many of them benefit hikes, for over 400 changes in that timeframe. So what was the result of the pension sentence added to the state constitution on December 15, 1970. Was it… Read more »
Sean

Right Paul. If you keep saying this to yourself, over and over again, you might even start to believe it for yourself, but you and your buddies will be the only ones. It’s so easy to spot those who are benefiting from the racketeering.

No. Nixit nailed you right between the eyes. The tide is turning, and like ALL things, eventually the truth wins out, and financial reality reasserts itself.

Math is a terribly difficult thing to understand. Discount rates, rates of return on assets aren’t important, until they are. The excuse, “I just don’t get finance”, doesn’t work when the foundations crumble and barbarians are at the gate.

Paul
There is a State Constitutional pension clause that mandates pensions to be contracts and yet you seem sumprized Mark when the Judge rules pensions are contracts, AND the State has an ENFORCEABLE OBLIGATION to pay the benifits. Contacts Clause….Pension Clause…simple analysis. Govt. CANNOT simply not fund the pensions as a means to unconstitu t ional pension reform. The correct legal analysis is to apply the plain meaning of the constitution as the court did AND NOT analyzing the particular ststute that created the pension. Furthermore Mark, its simply wrong to advocate for our goverments to simply not fund pension obligations JUST AS it would be wrong to… Read more »
nixit71
If we’re playing the morality card with pensions, then how moral can it be: – to forego pension payments and stick future generations with the bill? – for one generation to receive services, not pay their fair share, then exempt their retirement income from taxation to help pay down the debt? – for wealthy teacher union executives to piggyback off TRS and short change the system millions of dollars every year for decades? – to donate significant sums of money to politicians to change your COLA calculation from simple to compounded interest? – to use a career’s worth of sick days in you pension calculation, days that… Read more »
mark glennon

Well done, Nixit. The moral imperitive is to NOT pay many of these pensions, and to argue otherwise is sanctimonious crap. It’s also true that many smaller pensions should be paid, and the recipients need them. But the longer this broken system persists the larger the haircut will be even for those smaller ones. Instead of focusing on a rational insolvency plan that distributes the losses equitable, so-called progressives are, as usual, screwing the little guys.

Paul

So wich pensions do ya pay and wich ones do ya renege? And how is it that the progressives are screwing the little guys?

Tough Love

100% of the share (which is assuredly OVER 50% of the Total) of ALL Public Sector pensions that would likely NOT have been granted in the absence of the Public Sector Union/Elected Official Collusion … specifically, our Elected Officials’ trading of of their favorable votes on Public Sector pay, pensions, and benefits for Public Sector Union campaign contributions and election support.

Sean
THANK YOU nixit71! I and millions more like you, are tired of the whole “They need to obey the law and pay our pensions… a promise is a promise” etc etc ad nauseum. Yeah, guys like Paul (above) love to play the law-abiding society crap, claiming that we “dissolve into chaos” if we don’t take a moral view of paying our debts. What garbage. News flash Paul, and all you other hogs at the trough: Promises and contracts formed by extortion ARE NOT MORAL, and should not be legal. Enough of your moral whining already. Mathematics and gravity can be defied for only so long, so in… Read more »
Paul

Please explain how pensions are extortion?

Sean
Come on Paul, you know better. It’s always easy to see who the beneficiaries of the racketeering are, because they always try to steer the discussion away from the basic truths and into a diversion onto some meaningless bunny trail. Paul, no one is advocating that public sector retirees should live under bridges and eat cat food, but really, please, just one time, let me hear you admit that SO MANY of the benefits and perks are WAY, WAY BEYOND what you would get in a private sector job. We NEVER hear anyone from the camp of the “public servants” being willing to admit that, “Yeah, we… Read more »
Paul

Sean , I will conceed that public sector pension benifits are way beyond what exists in the private sector. I will also point out that a government lawyer for the States Attornies office makes an average salary far less than the average private attorney makes. The pension is a deffered compensation. Look at average salary for private and govt professionals with similar educations and this will explain why govt. Professionals get a better pension.

Tough Love

Paul, I’d bet that the average Public Sector attorney works NO MORE than 2/3 the hours of the average Private Sector attorney, has “Vacation time” and “benefits” of 2x the value, has a retirement Plan of 4+X the value, and hasjob security of 10 times that of the average Private Sector attorney.

And please …… when speaking of such Private Sector attorneys, exclude in all such comparisons the elite group near the top of their class from Americas best Law Schools, as such elite lawyers will VERY RARELY will be found in the Public Sector (or would ever WANT to work there).

Sean
Thanks for your comment Paul. I do believe that you have a valid point, when it comes to professionals in the public sector. When I worked at the FDA, there were a number of MDs working for FAR less than they could make in the private sector, etc, so I do get it. It’s just that, in other lines of work, the pendulum swings far the other way, in that many positions’ pay and benefits are far out of line with what is financially feasible. Truthfully, it would be nice if ALL people, whether public or private, could have a decent pension they could count on (I… Read more »
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