Anyone following the pension reform debate knows that Illinois has long diverted the moneys needed to properly fund its pension systems to avoid tax increases, cuts in public services or both. Some may not admit it, but they know it. They also know this practice is the primary reason why the systems are underwater.
Since much of my time over the last three years has been spent on our State’s pension problem, I wanted to find out how long it’s been that way and how long we have known about it. Well, as chronicled in an article I wrote now published by Chicago-Kent College of Law, I have an answer.
1917. No, that’s not a typo.
In 1917, the Illinois Pension Laws Commission warned State leaders in a report that the retirement systems were nearing “insolvency” and “moving toward crisis” because of the State’s failure to properly fund the systems. This nearly century old report also recommended action so that the pension obligations of that generation would not be passed on to future generations.
The 1917 report’s warning and funding recommendation went unheeded, as were similar warnings and funding recommendations found in decades of public pension reports issued before and after the Pension Clause was added to the Illinois Constitution in 1970.
These reports have consistently warned the public and lawmakers for decades of the dire consequences of the State’s continued underfunding, and of the significant burden that unfunded pension liabilities posed for taxpayers. They have also been advised that the Pension Clause bars the legislature from unilaterally cutting pension benefits of retirees and current employees.
Indeed, one of the Clause’s purposes is to prevent the State from reneging on its pension obligations during a fiscal crisis due to the burden imposed by the State’s unfunded liabilities. The Clause was added at a time when the pension systems were no better than they are today.
These reports also reveal that, as early as 1979, Moody’s and Standard and Poor’s advised the State that it would lose its AAA bond rating if the State did not begin tackling its increasing unfunded pension liabilities. Also, in 1982, Governor Jim Thompson succeeded in passing legislation making pension funding far more dependent upon stock market returns to stave off higher State pension contributions. Interestingly, that legislation resulted from a report commissioned by Governor Thompson, which highlighted how the pension systems should consider investing in mortgage-backed securities to obtain higher stock market returns.
Further, a 1985 task force report noted that Standard and Poor’s reduced its bond rating for Illinois from AAA to AA+ due to the State’s “deferral of pension obligations,” and that another rating agency viewed the State’s pension funding as a future financial “time bomb.” Finally, the much heralded 1995 pension funding plan was designed to increase the State’s unfunded liabilities and postpone the State’s actuarially-sound pension contributions until 2034.
Given this well-documented history, it’s extremely hard to legitimately believe that our State’s current situation is so surprising that the Illinois Constitution can be ignored and pension benefits unilaterally cut. As noted in my previous legal research, the Pension Clause does not support such a result.
The likelihood of that result occurring seems even more remote given the Illinois Supreme Court’s July decision. In that decision, the court explained that the Clause was intended to “insulate” benefits from “diminishment or impairment by the General Assembly”, and that the court could not rewrite the Clause “to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve.”
Make no mistake about it, the court’s July decision strongly signals doom for the argument that the 2013 pension reform bill is constitutional because the legislature can trump the Pension Clause when it declares a fiscal necessity. So too does the State’s sordid history of failing to properly fund the State’s pension system.
When it comes to Illinois’ pension funding problem “what’s past is prologue.” Addressing this problem, however, requires the acceptance of this history as well as the obligations and boundaries imposed by the Pension Clause.