By: Mark Glennon*

 

The Civic Committee of the Commercial Club of Chicago recently launched a widely publicized ‘What If?’ Initiative, asking for dialogue about what to do if the Illinois Supreme Court strikes down the state pension reform legislation, SB1. The site for the initiative is linked here.

 

The Civic Committee is a financially conservative Chicago organization that has done important work for many years, but this initiative is wrongheaded, for three reasons.

 

First, SB1 would make little difference even if it is upheld. It would reduce the unfunded liability of state-level pensions by about $20 billion, according to the state’s own numbers. For a little perspective, the impact of just one court decision rendered since SB1 was passed added about $50 billion to the unfunded liability — 2.5 X the savings claimed from SB1. That decision is Kanerva, in which the Illinois Supreme Court said healthcare benefits are part of the constitutional pension protection. Previously, they were assumed to be discretionary.

 

The true unfunded liability of just the state’s pensions right now probably exceeds $200 billion — over 10 X the savings from SB1. That’s what you get if you get if include Kanerva’s cost, additional liabilities resulting from changes made to pension assumptions since SB1 was passed, other corrections for assumptions nobody believes, and built-in worsening of the unfunded liability that is occurring even if actuarial assumptions are met.

 

Second, and this has never been discussed, a court decision in favor of SB1 would lead to endlessly-revised, court-supervised control over budgets and pensions at both the state and local level. That’s because the only plausible basis on which the SB1 might be upheld is the the “police power” theory. That theory would hold that the state’s dire financial predicament trumps the express provision of the constitution prohibiting cuts in pension benefits. The theory is being argued by the state now in the pension litigation with the help of expert economists who are explaining how unable the state is to pay for pensions.

 

But think through what it really means if the courts accept the police power argument. Is it valid only insofar as necessary to make the pension cuts SB1 would make, no more and no less? What if the markets outperform, pension assets surge and tax revenues spike? Could pensioners go back to court and get their pension cuts reinstated? In part or in full? And what if things turn out worse than now perceived (which is sure to happen)? Can pensions be cut further then? Rehearings would be appropriate and fair in either circumstance, which would make the litigation endless.

 

Worse, the same questions would have to be litigated for the other 650 local pensions, most of which are also in trouble, since the police power argument is probably valid for them if it’s valid for the state. Each municipality would need its own trial on the facts. Do we really want courts determining how much municipalities are able to pay towards pensions, which includes questions like how much further they can raise taxes? And for those decisions, too, it would be fair to revise them if circumstances change.

 

Third, SB1 contains an insidious “funding guaranty” that would do more harm than the benefit from the savings it would effect.  That guaranty would force billions into the pensions with no further action by the legislature and make real reform much more difficult. It could be undone only if both the Illinois House and Senate, plus the Governor, agreed.

 

The Civic Committee is inadvertently validating the false narrative that currently dominates the pension debate in Illinois. That narrative, successfully created by politicians in both parties, is that Springfield tackled pension reform with SB1 and the courts are to blame if reform is invalidated. That’s baloney. The bill was inadequate from the start and its invalidation was likely from the start.

 

A better question to be asking is, “What if SB1 is upheld?”

 

*Mark Glennon is founder of WirePoints.

 

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Rich Sustich
If the State should prevail on the “police powers” argument, you might as well say goodbye to the entire Constitution. The reality is there is no immediate “pension crisis” for two reasons: (1) the Supreme Court has consistently held that the State need not maintain pensions at any particular funding. Rather, the State’s Constitutional obligation is to not diminish benefits and to make payments to qualified retirees when due, (2) the “police powers” concept allows the State to temporarily suspend statutory (and in this case Constitutional) provisions in response to some unforeseen circumstance. But the so-called “pension crisis,” could not be further from unforeseen. While some, such… Read more »

Mr. Sustich-

Totally agree about the constitutional point. I wouldn’t worry too much about that, however, because our A.G. has done a poor job on it that borders on malpractice, so she will almost certainly lose.

I would disagree about the immediacy of the crisis, however. Eventually this will boil down to who gets what percentage on their claims, including pensioners. The longer we let excessive pension claims run up, the larger the haircut will be for the poor, economic development, taxpayers or whatever your priorities are. And many pensions are appropriately sized and badly needed by the pensioners. Delay diminishes what they will get, too.

And here’s a comment about Illinois on the Burypensions blog that says much succinctly: “with a VERY clear inability to increase revenue sufficiently to pay anywhere near the promised pensions & benefits …… the workers/retirees are in for a rude awakening. Yet they still believe the State’s constitutional protections from reduction will magically create the necessary funds. “Denial” can be a very destructive behavioral trait.”

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