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A closer look at the Arizona pension case

Friday, Feb 21, 2014

* Crain’s takes a look at the Arizona Supreme Court’s ruling striking down a state law that cut pension benefits

The Arizona case has been on the local radar because Arizona and Illinois are, along with New York, the only three states with constitutionally mandated protections for state pensions.

“My one-word comment is ‘predictable,’ ” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, on today’s ruling. “All the Arizona Supreme Court did is read the plain language and said there’s no need for legal construction here: The language is plain on its face. Hence, it’s unconstitutional.”

At the same time, noting that Illinois Supreme Court justices are elected officials themselves, Laurence Msall, president of the watchdog group Civic Federation of Chicago, said, “Illinois’ financial situation by any measure is far more precarious than Arizona’s, and it is against that backdrop that the courts will eventually rule.”

* What Msall said is true, but check out this lede in the Arizona Capitol Times

State lawmakers cannot balance the budget by limiting pension benefit increases for retired judges, the Arizona Supreme Court ruled Thursday. The justices said a voter-approved section of the state constitution makes public pension plans a contractual relationship. More to the point, that provision says benefits “shall not be diminished or impaired.”

* Our resident pension expert RNUG read the decision yesterday and weighed in

With a few changes in case names and citations, the [Illinois Supreme Court] could use most of it pretty much as it stands.

The parallels with Illinois are amazing. Couple of things jumped out. They referenced contract law, which is what I expect most of the IL decision to turn on. They also noted that, like IL, benefits vest at hiring. In declaring the benefit formula protected, they even cited the IL Miller case as part of their reasoning.

* The full opinion is here. As RNUG notes, there are some quite interesting passages. The unanimous opinion notes that while there is strong legal precedent for allowing the impairment of contracts under certain conditions, the state’s Constitution expressly forbids any impairment or diminishment of this particular contractual obligation.

The opinion also declares that the meaning of the term “benefit” includes benefit increases and references an Illinois decision

This definition of “benefit” also comports with the use of the term in other states that have similar constitutional provisions protecting public pension benefits. For example, construing a similar definition of “benefit,” New York and Illinois have also determined that benefit calculation formulas are entitled to constitutional protection.5 See Kleinfeldt v. New York City Emps.’ Ret. Sys., 324 N.E.2d 865, 868–69 (N.Y. 1975) (including the formula utilized in calculating an annual retirement allowance under the Pension Clause); Miller v. Ret. Bd. of Policemen’s Annuity, 771 N.E.2d 431, 444 (Ill. App. 2001) holding benefit increases to be constitutionally protected).

* Eric Zorn took a look at Arizona’s pension reform history late last year

That state, like Illinois, is one of the handful in which public pension rights are enshrined in the state constitution as a “contractual relationship,” the benefits of which “shall not be diminished or impaired.”

Nevertheless, citing the looming burden of underfunded pensions, the Arizona legislature in April 2011 passed a series of reforms to state retirement systems that included hikes in employee contribution levels and decreases in cost-of-living adjustments.

It was different in some ways yet similar in thrust to the reforms passed this week in Springfield, and the public employees went to court.

In February 2012, Maricopa County Superior Court Judge Eileen Willett issued a stinging rebuke to the legislature, declaring a key reform element unconstitutional in an action that had been filed by a group of schoolteachers.

“When the plaintiffs were hired as teachers, they entered a contractual relationship with the state regarding the public retirement system of which they became members,” said Willett’s written opinion. “Their retirement benefits were a valuable part of the consideration offered by their employers upon which the teachers relied when accepting employment.”

The ruling neatly seconded the argument that lawyers for public employees are certain to make in Illinois: We had a deal. Our side kept up its end of the bargain and relied on your side to do the same. The constitution compels your side to keep its word.

Willett’s ruling ended up forcing the Arizona legislature not only to rescind the increase in payroll contributions, but also to reimburse employees the amounts they lost.

In May 2012, the state lost again in court, this time when Maricopa County Superior Court Judge John Buttrick used a similar constitutional rationale when ruling in favor of judicial retirees who had challenged changes in the cost-of-living formula that was part of the pension reform effort.

That case was fast-tracked to the Arizona Supreme Court on appeal, and three other legal challenges to the reforms were put on hold pending the outcome.

Discuss.

- Posted by Rich Miller        


75 Comments
  1. - wordslinger - Friday, Feb 21, 14 @ 11:55 am:

    I think Msall is whistling past the graveyard.

    Just because he and his crew yell the sky is falling, that doesn’t trump contracts and the Constitution.

    You don’t get legal points for having caused the problem by not paying the freight when you were flush, either.


  2. - Norseman - Friday, Feb 21, 14 @ 12:09 pm:

    The hopes of the Illinois pension reduction proponents rest on the Supreme Court buying the arguments that a emergency necessitates overriding the constitution or that the so-called considerations offered in the law are sufficient to allow the reductions.

    I don’t see how any non-biased justice can rule Illinois’ law constitutional.


  3. - Pensioner - Friday, Feb 21, 14 @ 12:13 pm:

    huuuuhrahhhhh!


  4. - PublicServant - Friday, Feb 21, 14 @ 12:17 pm:

    Another argument that holds no water is the one that says, we’re not reducing anyone’s pension. We’re just adjusting the rate of increase “going forward”.

    The Kleinfeldt decision defines benefits as “including the formula utilized in calculating an annual retirement allowance under the Pension Clause.”

    The AAI is a benefit that regulates the rate of prospective increase in the pension annuity, and the benefit of that Annual Actuarial Increase “shall not be diminished or impaired.


  5. - Excessively Rabid - Friday, Feb 21, 14 @ 12:19 pm:

    == The justices said a voter-approved section of the state constitution makes public pension plans a contractual relationship==

    That seems like confused thinking to me. They were already a contractual relationship, and reducing them unilaterally after the fact is skating on very thin ice. Adding the layer of constitutional protection raises the bar (to mix the metaphors) higher. Declaring an emergency because you don’t want to raise revenues to cover your spending will not meet that standard in any fair court.


  6. - Norseman - Friday, Feb 21, 14 @ 12:24 pm:

    Pensioner, there is reason to be hopeful, but don’t take the AZ decision as evidence that we’ll win here. We do live in Illinois and politics may trump a fair decision.


  7. - peanut gallery - Friday, Feb 21, 14 @ 12:29 pm:

    What’s the point of having a constitution if we don’t have to abide by it? I wasn’t only a kid at the time, but I’m picturing the 1970 convention and someone saying “how can we keep the legislators from pilfering the retirement systems?”. And the answer was to specifically include it in the constitution, which has more weight than any subsequent law that could be passed.


  8. - Steve - Friday, Feb 21, 14 @ 12:32 pm:

    Just a reminder this could mean: changing pensions can only happen in a federal bankruptcy court. Illinois public retirees may get a reprieve for a while but…. recession and drops tax collections do happen so… problems are coming. Illinois can’t declare Chapter 9 but… if there is no money in the pension plan- no checks will go out.


  9. - Proud - Friday, Feb 21, 14 @ 12:34 pm:

    Woudl it not meet constitutional requirements if we kept the current pension as promised to all exisiting employees but all new employees go to something else- 401K style as the rest of the world outside of govt has done?


  10. - RNUG - Friday, Feb 21, 14 @ 12:37 pm:

    This is all about contract law and, even without the pension protection clause in the IL Constitution, it’s pretty clear contracts have to be upheld under State and Federal law. Add in the pension clause and you get rulings like AZ.

    Now that it’s becoming blindingly clear the GA’s political ’solution’ won’t be found legal, it’s time to move on to the real solutions that were ignored during the SB0001 run-up.

    Whatever revenue solution that is arrived at needs to make ANY new revenue beyond today’s 5% income tax level both PERMANENT and DEDICATED to paying down the pension debt while also maintaining the current pension debt payment levels.

    Time to use the financial calculator instead of the political re-election one.


  11. - RNUG - Friday, Feb 21, 14 @ 12:40 pm:

    - Steve - Friday, Feb 21, 14 @ 12:32 pm:

    States may be insolvent but they can’t go bankrupt under Federal law. And if you cite Detroit, that was a city, not a state.


  12. - RNUG - Friday, Feb 21, 14 @ 12:43 pm:

    Also –Steve–, there is already an ISC ruling the pensions must be paid when due. Kind of places actual pension payments a bit higher than anything except State bonds.


  13. - Anonymous - Friday, Feb 21, 14 @ 12:44 pm:

    If it is ruled unconstitutional in Illinois, couldn’t the General Assembly issue a referendum in the next election on whether or not to take that clause out to support the pension reform?


  14. - Wensicia - Friday, Feb 21, 14 @ 12:45 pm:

    RNUG has it right.


  15. - Proud - Friday, Feb 21, 14 @ 12:48 pm:

    Again, why is no one talking about honoring our current pension obligations made, hence being constitutional, and then getting out of the pension business via employee self directed vehicles-401K’s? I assume this would great impact future liabilities and move us towards greater fiscal solvency.


  16. - RNUG - Friday, Feb 21, 14 @ 12:49 pm:

    - Proud - Friday, Feb 21, 14 @ 12:34 pm:

    That would be perfectly legal to change thigns for new hires. Already been done. The new ‘Tier 2′ system (1/1/2011?, I’ve lost track of that date), while not a 401K type, is actually projected to eventually have zero state cost because of the drastically reduced benefits … but that also assumes the State does not have to contribute SS for all the TRS employees. If the State does have to pay SS, it will actually cost more that the ‘Tier 1′ system it replaced.

    You need to understand one thing. It is NOT the yearly cost for the pensions that is a problem,it is MAKING UP the missed payments for roughly 40 years. That debt DOES NOT go away even if you change things going forward.


  17. - RNUG - Friday, Feb 21, 14 @ 12:52 pm:

    - Anonymous - Friday, Feb 21, 14 @ 12:44 pm:

    You can remove the pension clause but you can’t retroactively change contracts. ISC has already ruled (to paraphrase) the terms in place at hiring plus granted enhancements are the pension contract. So you still have to honor the pensions for every existing employee, which won’t solve a thing. As I said in my previous post, the probelm is paying back the missed payments, not paying the current year’s obligation.


  18. - PublicServant - Friday, Feb 21, 14 @ 12:53 pm:

    Steve is one of those reality guys as long as we’re talking about his idea of reality. My version is that the state has already enacted legal pension reforms for anyone hired after January of 2011. Anything more than that will not stand. As RNUG says, the pensions must be paid when due, and they always have been. Some people would say, Steve, that the reality is that the state must enact revenue reform that will allow Illinois to pay its debts and the programs that our representatives have prioritized by enacting them into law. That leaves you two choices Steve. Work with the good people of Illinois to enact fair revenue reform, or … leave.


  19. - Anon. - Friday, Feb 21, 14 @ 1:01 pm:

    ==If it is ruled unconstitutional in Illinois, couldn’t the General Assembly issue a referendum in the next election on whether or not to take that clause out to support the pension reform?==

    They could do that, but reducing pensions already earned would violate the contracts clause in both the federal and Illinois constitutions. Our pension clause was worded to make it clear that those clauses apply. And that $100 billion underfunding is 100% for pensions already earned.


  20. - Proud - Friday, Feb 21, 14 @ 1:01 pm:

    I am guessing this will end up in some sort of “Bankruptcy” issue (I know the state cant, but maybe federal recievership or something). too bad as I think the people that were promised the pension benefits should get it. That being said, I worked for the State on 2 different occassions and both times cashed out my retirement benefits and rolled them over into my IRA anticipating this would happen.


  21. - lake county democrat - Friday, Feb 21, 14 @ 1:06 pm:

    When Wordslinger and this Madigan-hating, partial Raunner defending union critic agree on something, it’s probably true. The state constitution is clear as a bell: we either have a rule of law in Illinois or we don’t. Arizona decided that they do. But Arizona dumped elected judges back in the 90’s. I’ve always believed the Madigan-Cullerton battle is kabuki: we just don’t know how they want this to break. Either the pension law is upheld, which pushes back the budget “day of reckoning” and still spares the unions a lot of grief, or its struck and Madigan gets to say “don’t blame us, look how hard we tried!” As long as the Court’s decision comes after November he might get the best of both worlds.


  22. - Retire2014SURS - Friday, Feb 21, 14 @ 1:07 pm:

    I’m just wondering whether there is any talk about suspending the implementation of the new law until after a court decision has been made. Will the law just go into effect and then, if struck down, money be paid to retirees retroactively?

    Any thoughts or word on this?


  23. - RNUG - Friday, Feb 21, 14 @ 1:16 pm:

    - Proud - Friday, Feb 21, 14 @ 1:01 pm:

    Unless Quinn or Durbin can talk Obama into a bailout (and they don’t want to touch this with a 100 foot pole), it is strictly a state problem to be solved by the state. The only place the Feds come in at all is the references in State law more or less deferring to the Federal Contracts Clause.

    The State has legal remedies to find the funds to honor the pension contract, including further cuts in state services and/or increasing revenue. What the state does not have is the POLITICAL WILL to solve the problem. As someone else here said, this whole ‘pension reform’ thing has been about trying to fit a political solution to a fiscal problem.


  24. - fed up - Friday, Feb 21, 14 @ 1:19 pm:

    time for Madigan & Cullerton to quit trying to stiff retirees and start working a a real solution to the problem They caused. looks like the state will have to pay for skipping all those pension payments, get realistic and start thinking about improving revenue.


  25. - PublicServant - Friday, Feb 21, 14 @ 1:20 pm:

    I appreciate your guess, Proud, but let’s say, for a minute, that you’re right. Do you think that the state or the feds could selectively say that we’ll keep state bondholders whole, and vendors who have done business with the state unscathed, but middle class state employees via their pensions are going to take it on the chin? That’s what SB1 is attempting to do now, and I don’t think there’s a snowball’s chance in hell constitutionally of limiting federal intervention to a single class of debtors, nor do I think the feds plan any intervention at all.


  26. - Cook County Commoner - Friday, Feb 21, 14 @ 1:22 pm:

    Seems voters better start asking candidates at the state and local levels for specific plans on how they intend to pay state and local government pensions without increasing taxes, especially property taxes to fund teachers’ pensions.


  27. - Roadiepig - Friday, Feb 21, 14 @ 1:23 pm:

    I know I have said this before, but here it is again:

    If Laurence Msall truly believes that the financial “situation” warrants breaking contracts for labor already performed, I’m sure he has no problems with the state also breaking contracts with state vendors for products already delivered, and reducing what we pay to bondholders to less than they paid for their bonds to help alleviate this “situation”. After all, we are all in this together, so everyone has to make sacrifices- right Laurence?

    I won’t hold my breath waiting for him to say anything of the sort of course…


  28. - RNUG - Friday, Feb 21, 14 @ 1:28 pm:

    - Retire2014SURS - Friday, Feb 21, 14 @ 1:07 pm:

    From memory with re-reading the suits as filed …

    1) The law doesn’t take effect until 6/1/2014. At that point, the “change/consideration” is a 1% reduction in the percentage taken out of employees paychecks. I don’t think anyone has asked to have that action suspended but I don’t remember all the “We Are One” suit details. Assuming the law is found unconstitutional, those employees may have to make up missed contributions.

    2) Effectively speaking, 1/1/2015 is when the altered AAI calculation hits retirees. I will probably be allowed to take effect since there is, relatively speaking, minimal and possibly only temporary harm to the plaintiffs. I’m pretty sure there is a request to escrow the difference between the old and new calculations until the case is resolved. Assuming some judge agrees to escrow (likely since that is what happened in Maag as it goes through the process) and the law is found unconstitutional, then those funds would be available to make up the missed portion of the AAI.


  29. - RNUG - Friday, Feb 21, 14 @ 1:30 pm:

    First sentence at 1:28 should have read “without re-reading”


  30. - Proud - Friday, Feb 21, 14 @ 1:35 pm:

    PublicServant - Friday, Feb 21, 14 @ 1:20 pm

    As I stated, I think public employees and pensioners should get what was promised. I also thought the employees of Enron and countless other entities that have gone into default should have gotten what was promised them. I fear we wont have the political will to fix the issue and end up insolvent and then pensioners, venders, bond holders, etc will all suffer…..

    I guess I am just being cynical today..


  31. - PublicServant - Friday, Feb 21, 14 @ 1:41 pm:

    All of us in Illinois will suffer long before insolvency Proud, and thank you for supporting us. Moodys will see to that.


  32. - RNUG - Friday, Feb 21, 14 @ 1:48 pm:

    -Proud-

    From a moral standpoint, what happened at Enron, GM, etc. was wrong. From a legal perspective, the law mostly allows it. It allows guys who have venture capitol firms to buy up cash rich busineeses, dump them into a shell corporaiton that bleeds them dry through “management services”, take the comapnies into bankruptcy, and then walk away, dumping their pension obligations on the US taxpayer (PBGC). Remind you of anyone running for gov?

    Situation here is different. States can’t use bankruptcy laws to duck obligations. States are not part of and can not dump employees/retirees on PBGC. So state employees don’t enjoy (if that’s the right word for only being guarenteed a small portion of your pension in the private sector) PBGC protection. In this State, for better or worse, the highest possible protection was placed on state pensions because of previous games with the pension funds.

    Like or not, that is the legal reality of it.


  33. - Jack Handy - Friday, Feb 21, 14 @ 1:51 pm:

    Methinks this whole process is to get us back to where Madigan first took us … the cost shift.

    He knew it then but needed to show everyone else step-by-step.


  34. - fed up - Friday, Feb 21, 14 @ 1:56 pm:

    RNUG,
    . As someone else here said, this whole ‘pension reform’ thing has been about trying to fit a political solution to a fiscal problem.

    This is correct.Quinn might have to open up a Casino, Rahm might have to lease the airport for fairmrket value and not let his friends rape the city like Daley did on parking meters. Time to realistic about funding and stop skipping payments.


  35. - dupage dan - Friday, Feb 21, 14 @ 2:01 pm:

    RNUG - maybe the GA not having the political will could be used as a valid reason to alter the constitution. After all, in their minds it’s a real live crisis - bigger than Madigan himself!

    (snark)


  36. - Judgment Day - Friday, Feb 21, 14 @ 2:01 pm:

    “Whatever revenue solution that is arrived at needs to make ANY new revenue beyond today’s 5% income tax level both PERMANENT and DEDICATED to paying down the pension debt while also maintaining the current pension debt payment levels.”

    Let’s assume this is what has to happen, per court decisions. If that’s what has to happen per court decisions, we’ve got somewhere around a $100 billion dollar hole to make up. So where do we go from here.

    And now I’m sure we’ll get all the tried and true ‘alternatives’ from this last session (like the “We Are One” proposal), but that’s probably not going to sell out there in the financial world. Particularly in light of GASB 67 and 68 (Statement 68 takes effect 06.15.2014).

    So increased likelihood Illinois credit rating goes into the tank, resulting in minimal bonding capacity, since virtually all new revenues have to be directed into cleaning up the pension funding, that means that there’s no need for any new legislation of almost any type, because there’s going to be no extra money to pay for anything else other than pensions.

    The only thing that can happen is to push the costs down to local government, but in most places, they are already making cuts anyway. Just one more set of rules to ignore going forward.

    Course, you can always raise taxes more - if you can get the votes. Good luck with that.

    This may be a ‘victory’ not worth winning. We may not be Detroit, but we may very well be Puerto Rico. Just a thought.


  37. - RNUG - Friday, Feb 21, 14 @ 2:03 pm:

    - dupage dan - Friday, Feb 21, 14 @ 2:01 pm:

    LOL !!!


  38. - wordslinger - Friday, Feb 21, 14 @ 2:06 pm:

    –this whole ‘pension reform’ thing has been about trying to fit a political solution to a fiscal problem.–

    I’ll tell you what the fiscal solution will be if the Supremes rule the current law’s diminishment Constitutional.

    If that happens, it’s katie-bar-the-door, they’ll be coming back for more.

    The whole idea of “solution” outside of discipline and good faith is silly, anyway. One GA can’t bind another to do anything in law. A new GA can toss any law, any time.

    That’s why the Constitutional provision was needed in the first place.


  39. - Budget Watcher - Friday, Feb 21, 14 @ 2:12 pm:

    I’m will admit I’m not versed in employment law, but what would prevent a new governor from terminating the employment contracts for all merit compensation employees and then replacing their contracts with a new 401k style retirement deal? Likewise, couldn’t a new Governor, not beholden to unions, reorganize his inherited workforce by further converting unionized positions to non-union positions…and then offer the non-unionized converts the same 401k deal?


  40. - Peoria guy - Friday, Feb 21, 14 @ 2:14 pm:

    Madigan does have huge sway on the Supreme Court, especially the Chief Justice. Politics will absolutely play a role here.

    As an aside, the TRS with no legislation has about a 25 year window before the fund runs out of money. So there is nothing eminent, but clearly there is a disaster looming in a couple decades.

    I think it is criminal that the legislature has not funded the pension plans, but this is Illinois and we are filled with criminals in our governemnt.


  41. - Anonymous - Friday, Feb 21, 14 @ 2:16 pm:

    And emigration from the state will increase and state debt will go higher!


  42. - Peoria guy - Friday, Feb 21, 14 @ 2:21 pm:

    This is an excellent and concise article by two U of I law professors expalining the possible outcomes

    http://illinois.edu/lb/article/72/80034


  43. - dupage dan - Friday, Feb 21, 14 @ 2:24 pm:

    === That’s why the Constitutional provision was needed in the first place ===

    The record of the 1970 Con Con reveals that clearly.

    The GA and the Gov may well be forced to face their failure - forced to address their desire to be all things to all people with little regard for fiscal restraint. Forced to make the politically impossible decision. Forced to face up to their responsibilities as elected representatives.


  44. - Peoria guy - Friday, Feb 21, 14 @ 2:25 pm:

    Sorry, I really do know how to spell “government” and “explaining” :)


  45. - RNUG - Friday, Feb 21, 14 @ 2:30 pm:

    Revenue reform, done right, could have this state rolling in money and even make it more business friendly. But it would need to be one big inseperable package or it would never pass.

    Here’s my half-baked pipe dream (without numbers):

    A gradual pension cost shift for (TRS) school districts over the next 25 to 50 years, where the district only assumes between 1% and 2% of the total cost each year. It doesn’t free up a lot of money early on, but it is a start that increases every year, puts accountability back locally, and doesn’t overburden the districts all at once.

    A graduated income tax similar to Martire proposal but with higher rates set to allow elimination of the corporate income tax.

    Eliminate the corporate income tax completely.

    Change the income tax exemption for pensions from 100% tax free to something like exempting the first $50,000 or so per person. That lets the modest pensioner also receiving SS still keep their pension tax free or mostly tax free but hits the double and triple dipper or those with golden parachutes. And index the exemption to the federal cost of living.
    A sales tax on services which is a really big pot.

    Maybe even a $1 transaction fee on all CBOT trades.

    Mix it all together and you might have some soup. Business gets something, a lot of the individual taxpayers get something, well off retirees pay a little, and the 1% will have to decide if the business breaks are worth the increased personal rates.


  46. - wordslinger - Friday, Feb 21, 14 @ 2:40 pm:

    –Maybe even a $1 transaction fee on all CBOT trades.–

    Meh, any futures transaction tax is the third-rail in Illinois politics. Has been since Donovan, Rosty and Dixon were carrying the water here and in Washington.

    Look how CME rolled the GA for a tax break in the worst-depths of the recession.

    Threaten to move those servers to Indiana, or something, and people plotz.

    Not that the servers would be as effective in Indiana. Infrastructure isn’t there. Lose a half-second in transmission, that’s real money.

    And not there are nearly as many jobs as some seem to think in the exchanges. It’s not like 20, 10 or even five years ago. With the ongoing IT revolution, they’re shedding them, constantly.


  47. - ThinkTangerine - Friday, Feb 21, 14 @ 2:40 pm:

    - Budget Watcher - Friday, Feb 21, 14 @ 2:12 pm:

    __________

    Most m/c employees don’t work under a contract and are covered by the Personnel Code which gives them the protection of the Civil Service Commission - they have to be fired for caused. As most people here seem to agree, pension benefits vest on hire - so a Governor couldn’t unilaterally convert any new hires to a 401k style system. That has to be done legislatively.

    Whether or not a particular position class/title is considered bargaining unit or merit comp is largely based on a decision that came from the Labor Board - to unilaterally boot a position out of the union is a big fat unfair labor practice. A governor could petition the Labor Board to exclude a class… but he/she couldn’t do it unilaterally.


  48. - RNUG - Friday, Feb 21, 14 @ 2:42 pm:

    - Budget Watcher - Friday, Feb 21, 14 @ 2:12 pm:

    Leaving aside the whole issue that you would have to pass legislation to enact the new pension provisions selectively …

    The only Merit Comp employees you could pull that on are the “at will” employees, mostly the political appointees like directors, deputy directors and bureau chiefs who can be fired at any time for any reason. They are a small minority. Lots of merit comp employees are “4 year term appointment” employees. And some MC’s are in the union. Plus non-union, non-appointment employees enjoy civil service protection. Also, for the appointees, there would have to be a layoff and a considerable gap in time for it to be considered “non-continuous” service.

    Illinois state employee employment law is tricky. Years ago my mom had a case against her agency and I recommended she find an expert on it; she did … the guy who wrote it who was back in private practice and she hired him. I learned enough from him to know that it is never as clear cut as it might appear.


  49. - RNUG - Friday, Feb 21, 14 @ 2:46 pm:

    - Peoria guy - Friday, Feb 21, 14 @ 2:21 pm:

    That was written before the AZ decision … wonder what they would change today?


  50. - Judgment Day - Friday, Feb 21, 14 @ 2:53 pm:

    Actually thinking this type of court decision on pensions could be a very good thing for Illinois, as it could potentially force a complete restructuring of Illinois government, both state and local.

    The biggest problem with trying to ‘fix’ the existing system is that we’re not going to have the time. We can do things over the next 25-50 years, but (and it’s a big one), the accounting statements governing government accounting aren’t going to continue to allow for using such extended time frames in the official REPORTING requirements.

    For example, in much of both GASB 67 and 68 (on pensions and related retirement costs), we have to utilize lesser time periods (virtually always less than 20 years at max) for amortizing expenses and revenues. In simple terms, no more of this 40-50 year crystal ball stuff.

    Now, you can still do it (40-50 years) in practice, but soon (starting 06.15.2014) you won’t be able to report it that way and meet GASB Statements. Which if you use the longer terms, bonding costs are going to be higher, if even available.

    So the cost shift(s) (not just schools, but likely every local government) are going to have to occur, and probably much more rapidly than over a 20-50 year schedule. I’d imagine a max 20 year schedule, or 5% per year.

    Which could mean a very rapid start to restructuring of units of local government. No more business as usual. This could be fun - you could see a substantial amount of more part time (no bennies), and even much more outsourcing in units of local government.

    Wonder if municipalities can just drop their policing responsibilities? Wouldn’t those responsibilities just revert to the County?


  51. - West Side the Best Side - Friday, Feb 21, 14 @ 2:54 pm:

    Peoria Guy - Leaving aside the general comment about Madigan having a huge sway over the entire Illinois Supreme Court, what particular sway does he have over Chief Justice Rita Garman, a Danville resident elected as a Republican?


  52. - Andrew Szakmary - Friday, Feb 21, 14 @ 3:02 pm:

    Some of you on here talking about bankruptcy need to understand that, even if a state like Illinois were permitted to declare it, for both individuals and firms bankruptcy is (and should be) a last resort, i.e. it is completely impossible in economic terms for the entity to honor its contracts, no matter what it does, and abrogation is the only possible way forward.

    I am reasonably sure that this is not the case in Illinois, as there is no plausible way to argue that the state has reached the inflection point on the Laffer curve whereby further tax increases actually reduce revenue. OK, so a typical Illinois taxpayer may now face a 25% Federal marginal tax rate, plus a 5% state rate, plus 7.65% for SS and medicare, for a total of 37.65%. If the state were to raise its income tax to, say, 7% then this individual’s total marginal income tax rate rises to 39.65%. Is that enough to substantially alter his/her work effort? Sure, some of these folks will say, I’ve had enough, and move out of state, but that may be something like 5% of taxpayers, not 40%. The bottom line is that a 40% increase in the income tax rate (from 5% to 7%) would not increase revenues by 40%, but it would still increase revenues very substantially and would probably be enough to pay off the pension debt over 20-30 years. And even at 7%, the Illinois income tax would be lower than it is right now in many other states, e.g. California, New York, New Jersey, etc. Last I checked these states weren’t doing all that badly.

    In some ways I would almost welcome an Illinois bankruptcy, because perhaps then the bankruptcy court would simply override the politicians and order the state to raise sufficient revenues to honor its contractual obligations.


  53. - RNUG - Friday, Feb 21, 14 @ 3:10 pm:

    Word,

    Every decent proposal has to have one or two sacrificial items …


  54. - Judgment Day - Friday, Feb 21, 14 @ 3:14 pm:

    Andrew, you failed to include any local taxes property taxes, etc.). In Illinois, the local property tax burden is considerably higher than in most other states.

    Here, that can easily be 2.5% to 3.0% (if not higher) of the value of your property (annually), and that can be some serious change. Btw, in most areas, a 2.5% to 3.0% tax rate translates into an overall rate of $7.50 to $9.00 per $100 of taxable value.

    Just because it’s not state taxes, doesn’t mean taxpayers/homeowners do not have to pay it.

    You need to figure it in to your calculations.


  55. - fed up - Friday, Feb 21, 14 @ 3:17 pm:

    You will see consolidation of units of local government, several South suburbs have effectively stopped policing their towns. Other towns out west and north have discussed combining police depts, just have to get mayors that dont need the ego trip of appointing the chief. Eliminating the Township level of goverment is mostly possible. Maybe Chicago could eliminate a few Alderman (they collect pensions).


  56. - Federalist - Friday, Feb 21, 14 @ 3:29 pm:

    @RNUG

    Chaning the pension exemption to $50K is a very bad idea.

    First, once thhis train leaves the station, the amount can be reduced as the ’state needs more money.’ Or it won’t be indexed (that’s what the ObamaCare tax is doing on investment income for individuals) so that increasingly it becomes irrelevant.

    Second, it pits people agaisnt each other. What not only the first $10,000? Why not the first $100,000? You can see what the state did on the AAI increase that targets anyone with a pension of above $30,000-=and allin the name of fairness.

    Third, and probably most importantly it will drive those who pay the most state income tax and property tax to antoher state like Texas. I paid over $5700 in Illinois state income tax last (after receiving a state pension) year and $11,427 in personal property taxes. If I am going to be hit with a pension income tax I am out of here. No reason to stay. Something that the ‘tax the rich crowd’ can never seem to figure out.

    Anyway, I thought you should here this view becauase your proposal is being touted by many in government as well as some of the union people.

    I hope it dies a natural death- but I fear not.


  57. - Federalist - Friday, Feb 21, 14 @ 3:34 pm:

    For those who say Madigan has a huge sway over the ISC, I fear you may be right.

    Afterall, this is a very corrupt state.

    But can anyone be more specific as to how this might line up with the various judges?

    I really don’t know, and would love to see some solid anlaysis.


  58. - He Makes Ryan Look Like a Saint - Friday, Feb 21, 14 @ 3:35 pm:

    RNUG
    Looking at Cullertons proposal where employees are forced to choose between colas and health care, where do you think that stands in this argument?


  59. - Tom Joad - Friday, Feb 21, 14 @ 3:39 pm:

    Peoria Guy: If out government is filled with criminals, you should give your list to the State’s Attorney or U. S. Attorney immediately. Maybe you can post your list on this site.


  60. - RNUG - Friday, Feb 21, 14 @ 3:42 pm:

    - Federalist - Friday, Feb 21, 14 @ 3:29 pm:

    It would hit me too. But I think today’s IL retiree, who benefited from low taxes the last 20 - 40 years, should also help pay for the problem.


  61. - Leave a Light on George - Friday, Feb 21, 14 @ 3:43 pm:

    @ Federalist

    “I paid over $5700 in Illinois state income tax last (after receiving a state pension) year…”

    You may have paid $5700 in state income tax but it wasn’t the result of receiving pension payments. Illinois does not tax pensions - any pensions.


  62. - Archimedes - Friday, Feb 21, 14 @ 3:45 pm:

    Sometimes a little perspective regarding costs is needed before throwing around financial armagedon if the pension bill is thrown out. The bill was saving about $1.5 billion in the initial years. One cent on the income tax is worth over $4 billion.

    The real problem facing the legislature is the loss of revenue due to rolling the income tax back to 3.75 cents from the current 5 cents.

    The pension bill bought them about 1/3 of that roll back.

    As pointed out by others, The pension bill was not a panacea for Illinois’ fiscal structure. Too bad there was never any fiscal plan to bring Illinois into balance. Hence Moody’s didn’t increase the credit rating with pension reform, yet somehow lack of pension reform got cited by the press for several downgrades.


  63. - RNUG - Friday, Feb 21, 14 @ 3:47 pm:

    - He Makes Ryan Look Like a Saint - Friday, Feb 21, 14 @ 3:35 pm:

    Generally speaking, when attempting to modify a contract, one of the choices must be for ewither party to be able to choose to keep the contract exactly as it exists. Cullerton’s proposal doesn’t offer that choice; it only offers two bad choices.

    Of course, Cullerton is starting from the premise that retirees are not contractually entitled to health insurance. If the health insurance case is decided in favor of the retirees, the Culllerton proposal won’t have a leg to stand on because you would be forced to give up one of two protected benefits.


  64. - Ano - Friday, Feb 21, 14 @ 3:49 pm:

    Re judgement day @ 2:53 pm. Martire has a clear 50 year plan to flat fund the unfunded liability. Beyond that, coordinate a long term cost shift with trs, add a “superintendents” tax on high pensions like old sb 750, and rolling those tax-on-pension revenues back into the system and you have the makings of a serious solution. Never forget, these cuts were required because this reform had to fit into the math of original time frame of the 50 year ramp which extra harm caused by the 100%funding requirement. That ramp is down to 31 years and counting. And the ramp had a 90% funding level. That last 10% is completely unnecessary The entire pension cut going to our supreme court was a sop to Masal and corporate contributors who hate pensions.The answer is easy, refi the liability and tweak the revenue stream and set an actuarially sound goal of 90% and you have both a fiscal and political solution.


  65. - Federalist - Friday, Feb 21, 14 @ 3:59 pm:

    @Leave a Light on George,

    Yes,I realize that Illinois does not tax pensions.
    I had hoped I had made it clear that even though I did not pay state income tax on my pension, I still paid $5700 in state income taxes.

    I reread what I printed and I thought I was clear. If not, I am sorry and hopefully this will make it more clear.

    @ Federalist

    “I paid over $5700 in Illinois state income tax last (after receiving a state pension) year…”

    You may have paid $5700 in state income tax but it wasn’t the result of receiving pension payments. Illinois does not tax pensions - any pensions.


  66. - Walker - Friday, Feb 21, 14 @ 3:59 pm:

    RNUG: Good comments, but a couple of quibbles:

    Not so simple that “contract” law obviously carries the day. All of the cases of private sector pensions diminished, removed, crushed, passed on to the Feds, were also claimed as “enforceable contracts”. Those who think this is a slam dunk on contracts might be right, but we shall see.

    It doesn’t make sense to reduce Corporate taxes to zero, though I do favor reducing them significantly. What we will see is the 85% of active companies in Illinois trying to escape LLC, Sub-S, or other non-C status, to avoid individual tax rates. Even individuals will somehow figure out a way to incorporate, if it means paying no tax. There is no end to clever tax avoidance. It’s best to keep the Individual and Corporate rates somewhat close to each other, if we want to avoid wholesale evasion by legal restructuring.


  67. - Federalist - Friday, Feb 21, 14 @ 4:04 pm:

    @RNUG,

    I do not consider what I paid in taxes to be low taxes but each one entitled to their own opinion- that is if they paid more than I did.

    Any response to my other points?

    Thanks and thanks for all of your analysis.


  68. - RNUG - Friday, Feb 21, 14 @ 4:10 pm:

    - Walker - Friday, Feb 21, 14 @ 3:59 pm:

    Good points. There is tax evasion and tax avoidance, and tax policy should not really encourage either one.

    As to contract law, the courts tend to treat pension cases a bit differently. Yes, I know the horror stories of people losing their pensions in the private sector, but most of that was done under bankruptcy … which we aren’t dealing with here.


  69. - Federalist - Friday, Feb 21, 14 @ 4:12 pm:

    @Walker,

    Good points. I have enough land holdings that if there were no corporate taxes, I would incorporate. Right now it really is not worth it at the federal level for a variety of reasons AND corporate tax in Illinois is higher for corps. than individuals.

    I do not yet know how all this would play out, but with every action there comes a reaction.

    “There is no end to clever tax avoidance. It’s best to keep the Individual and Corporate rates somewhat close to each other, if we want to avoid wholesale evasion by legal restructuring.”


  70. - Peoria guy - Friday, Feb 21, 14 @ 4:23 pm:

    West Side the Best Side

    My apologies. I didn’t realize that Thomas Kilbride left the Chief Justice position in 10/13. He definitely is tied to Madigan.

    My bad.


  71. - dupage dan - Friday, Feb 21, 14 @ 4:28 pm:

    @ Walker,

    We aren’t just talking contractual pensions here - we are talking about pensions enshrined in the state constitution. There is a world of difference.


  72. - Joe M - Friday, Feb 21, 14 @ 4:31 pm:

    ==Not so simple that “contract” law obviously carries the day. All of the cases of private sector pensions diminished, removed, crushed, passed on to the Feds, were also claimed as “enforceable contracts”==

    However the Illinois Constitution says that no law shall be passed that impairs the obligation of contracts - and the U.S. Constitution says that no State shall pass a law that impairs the obligation of contracts. So states passing laws that impair the obligation of contracts is a different ball game that private companies violating contracts.


  73. - Anonymous - Friday, Feb 21, 14 @ 4:48 pm:

    It is plain and simple. You will see that the judicial system will follow the law of Illinois, no matter how many want the law to be erased. Law is Law.


  74. - South of 70 - Friday, Feb 21, 14 @ 4:58 pm:

    We missed state payments for 40 years. Jim Thompson, Jim Edgar and George Ryan were the governors who delayed those state payments because they did not want to raise the revenue. If the State had made the payments required during Gov. Thompsons term of office, we would not have a pension crisis today.


  75. - Glenn - Monday, Feb 24, 14 @ 10:40 am:

    The weak are meat the strong do eat.

    Thank you, teachers, for keeping taxes lower for the rest of us.

    Now go away.


Sorry, comments for this post are now closed.


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