Little optimism for Illinois pension reform appeal

Illinois' pension reform law is headed to the state Supreme Court, where many believe a lower court ruling rejecting its constitutionality will be upheld.

That result would challenge the state's ability to keep its pension funds solvent while also throwing a wrench into possible reform for Chicago funds.

Attorney General Lisa Madigan's office is seeking an expedited ruling on the constitutionality of the December 2013 law aimed at bringing the state's retirement systems to full funding and reducing contributions by roughly $145 billion over the next 30 years after a Sangamon County Circuit Court judge ruled last month the law was unconstitutional.

Ms. Madigan appealed the ruling to the Illinois Supreme Court on Nov. 26. Illinois' five state retirement systems had an aggregate funded status of 42.9%, the worst in the country, and a combined unfunded liability of $104 billion, as of June 30, according to a report from the state Commission on Government Forecasting and Accountability, Springfield.

Inadequate state contributions were a major contributor to the shortfall, the report found.

Judge John Belz sided with employee and retiree organizations that argued the pension law, which was signed by Gov. Pat Quinn on Dec. 5, 2013, violates the state's constitutional clause that pension benefits “shall not be diminished or impaired.”

“The pension protection clause contains no exception, restriction or limitation for an exercise of the state's police powers or reserved sovereign powers,” Mr. Belz wrote in his Nov. 21 ruling.

Mr. Belz rejected the state's argument that pension benefits could be altered in light of Illinois' $100 billion pension funding crisis.

Maura Possley, a spokeswoman for Ms. Madigan, maintained the law is a “reasonable and lawful response” to the state's pension crisis that “balances the interest of taxpayers and retirees.”

“While the pension clause of the Illinois Constitution protects pensions as a contractual relationship, courts have repeatedly held that the state may modify contracts when modification is justified by a legitimate need to protect the general welfare,” Ms. Possley said.

A spokesman for Mr. Quinn did not return telephone calls seeking details on the appeal.

Laurence Msall, president of the Civic Federation, an independent government research organization in Chicago, said Mr. Belz's ruling was expected and necessary to move the case to the Supreme Court.

Mr. Msall also noted the Supreme Court's ruling could have implications for Chicago as it works to address its $19.5 billion pension funding shortfall.

The state General Assembly must pass any reform to the Chicago plans.

In June, Mr. Quinn signed a pension bill that raises employee and employer contributions and reduces retiree cost-of-living adjustments for two of the four pension funds Chicago directly oversees — the $5.3 billion Chicago Municipal Employees' Annuity & Benefit Fund and $1.4 billion Chicago Laborers' Annuity & Benefit Fund.

While some Illinois policymakers might look to other states such as Rhode Island or Michigan for advice on pension reform, those can be “apples to oranges comparisons,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a non-profit advocacy group in Chicago.

Illinois, New York and Arizona's pension laws are “ironclad,” but not every state has those constitutional restrictions, Mr. Martire said.

Mr. Martire said Illinois' pension protection clause in the constitution is “explicit” and he expects Mr. Belz's ruling will be upheld.

The reform law decreased cost-of-living adjustments current and future retirees, capped pensionable salaries and raised retirement ages. It also increased employee contributions by one percentage point, created a defined contribution plan for a portion of employees and gave the state retirement systems authority to sue the state to compel it to make required pension contributions.

The law was scheduled to take effect June 1 but was put on hold by Mr. Belz until its legality was determined.

Mr. Martire added the law poses other issues aside from its constitutionality.

State contributions are reduced in the short-term as part of the law passed and raised to unaffordable levels farther down the road, he said.

State officials “bought themselves two or three years with another politically designed but fiscally impractical payment plan,” Mr. Martire said. “There has been very little fiscal reality in this discussion (and) a lot more political gerrymandering.”

Reamortizing the debt to a level dollar amount is a more affordable and constitutional approach, he said. If the state's $100 billion unfunded liability were paid off in $7 billion or $7.2 billion installments each year, the state's retirement systems could be 70% to 78% funded in 30 years and 100% funded in 43 years, he estimated.

“If you get to a rational lower level dollar payment amount ... it frees up tons of resources to invest in current services that back-loaded repayment won't pay up,” Mr. Martire said.

Following Mr. Belz's ruling, Fitch Ratings announced in a statement that it was maintaining its A- rating for Illinois because the benefits of pension reform had not yet been factored into the state's credit rating due to pending court challenges. Standard & Poor's also said in a statement that Illinois' A- rating would be maintained.

Acknowledging the state has other funding obligations, Mr. Msall said, “the state with the worst credit rating is in danger of further downgrade if it doesn't come up with a plan, not even just if (the pension law) is found unconstitutional, but what it will do with a budget that by Quinn's own admission underfunds obligation needs by half a billion dollars.”

Moody's Investors Service announced in a statement that the Circuit Court ruling was a credit negative for Illinois.

State Rep. Joe Sosnowksi said he plans to refile a proposal to repeal the state constitution's pension protection clause because of Mr. Belz's ruling and an earlier state Supreme Court ruling on retiree health-care benefits.

In July, the Illinois Supreme Court ruled health insurance premium subsidies are “a benefit of membership in a pension or retirement system” and as a result “are constitutionally protected from any diminishment or impairment.”

Mr. Belz's original proposal died in committee last year.

Illinois needs the flexibility to cap pension benefits in order to meet its other funding obligations, Mr. Sosnowski said. “(The state) continues to cut funding in areas (it) wants to invest in like education ... because of the pension crisis and other spending issues,” he said. n