Posted May 8, 2015 1:58 pm by Comments (7)

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By: Mark Glennon*

 

The Illinois Supreme Court today invalidated SB-1, the Illinois pension reform law from 2013. Though the ruling was anticipated, its consequences are staggering. The reform law was voided in its entirety. The “police powers” defense — the argument that the state should not have to pay pensions because it’s too broke — was rejected as a matter of law and no trial will proceed. The court said the constitutional pension protection clause, which says pensions cannot be diminished or impaired, means what it says, for the state and all its cities and towns.

 

Here’s what you need to know:

 

• 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.

 

• “Attendant” benefits, besides the actual pensions, are also constitutionally protected, both earned and unearned. The court reaffirmed its outrageous Kanerva decision last year which so held, and which increased the unfunded pension liability for the state by over 50% — more than $50 billion — by adding healthcare benefits to protected status. Under that ruling, other things like the “13th monthly payment” some pensioners get and the obscene “guarantied” 7.5% return savings account offered only to IMRF pensioners cannot, apparently, be taken away. We wrote about those in detail here.

 

•  All 675 public pensions in Illinois are covered by the ruling — city, county, Chicago’s, CPS, CTA, RTA… all of them, and all of their “attendant benefits” like healthcare are likewise constitutionally protected. Proposed attempts by Chicago to reform its pensions are invalidated.

 

• Expect a rash of credit rating downgrades for the state and many of its cities. Those are probably being written now or, more likely, were already written and ready to be released.

 

• 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.

 

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

 

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nixit71
Mark – Can’t the cost of future benefits still be mitigated via current employee status? Tier 1 employees (especially younger ones) are going to be extremely vulnerable in new contract negotiations as Tier 2 employees’ bang for the buck status just increased greatly. The ruling confirmed the only way to control their benefits is via their current employment status. Although current contracts lay out some ground rules regarding reductions in workforce, there is no reason those have to remain in place in future contracts. Employment is not protected by the Constitution. And both Tiers will have an ample supply of… Read more »
Anonymous
Here is what Illinois needs to do: 1) Restore the 5% personal income tax, and the 7% corporate income tax. 2) Tax retirement income – all of it – just like any other source of income. If this is broad-based and does not single out public pensions, then it would very likely be constitutional. 3) Expand the sales tax to include most services, and temporarily tax food and drugs at 6.25% while the service tax is implemented (as the Civic Fed has proposed). 4) Fully pay its contractual obligations to workers and retirees, bondholders and suppliers. 5) End the handwringing… Read more »

Sorry. Raising taxes aren’t going to help. Yes, people will leave the state. They already are. You might not see it in real estate sales, but the people that have left have done it on paper.

Mike
After the pension sentence was added to the Illinois State constitution on December 15, 1970, legislative benefit hikes to underfunded pensions escalated in the 19 pension funds in the Illinois Pension Code. Instead of hiking pensions, pensions should have first been fully funded. The politicians did not negotiate in good faith to protect taxpayers, citizens, and the fiscal soundness of the pension funds. The politicians and public sector union lobbyists, public sector worker bosses, and public sector were in cahoots in a war on taxpayers. In Illinois, jacking up public sector pension benefits was more important than the fiscal stability… Read more »
TCP
According to the TUA (Taxpayers United of America) 12,000 current state retirees have pensions over 100,000 a year, valued in the Millions. For example one state superintendent paid in about $400,000 but collects almost $200,000 a year, a possible 7 million package?? Many Chicago teachers are getting $90,000 a year pensions. And the unions are saying pensions are their hard earned money?? No it is the politicians and the unions who constantly negotiated higher pension benefits oh and health benefits too. It is all non union workers in Illinois whose hard earn money will pay for this, making millionaires out… Read more »
Anonymous

This is great! After all the outgoing streets are clogged of people fleeing Illinois, traffic will be a thing of the past! Even a constitutional change will only be forward facing. The only way out of this mess is to outsource very State job to private companies. Or raise taxes or both…

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