*** UPDATED x1 *** A way forward?
Friday, May 8, 2015 - Posted by Rich Miller
* The Illinois Supreme Court gave us a sort of road map for what pension reforms would be acceptable. Emphasis added…
The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible.
Moreover, no possible claim can be made that no less drastic measures were available when balancing pension obligations with other State expenditures became problematic. One alternative, identified at the hearing on Public Act 98-599, would have been to adopt a new schedule for amortizing the unfunded liabilities. The General Assembly could also have sought additional tax revenue. While it did pass a temporary income tax increase, it allowed the increased rate to lapse to a lower rate even as pension funding was being debated and litigated.
That the State did not select the least drastic means of addressing its financial difficulties is reinforced by the legislative history. As noted earlier in this opinion, the chief sponsor of the legislation stated candidly that other alternatives were available. Public Act 98-599 was in no sense a last resort. Rather, it was an expedient to break a political stalemate.
The United States Supreme Court has made clear that the United States Constitution “bar[s] Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole [citations].” (Internal quotation marks omitted.) United States v. Winstar Corp., 518 U.S. 839, 883 (1996). Through Public Act 98-599, however, the General Assembly addressed the financial challenges facing our State by doing just that. It made no effort to distribute the burdens evenly among Illinoisans. It did not even attempt to distribute the burdens evenly among those with whom it has contractual relationships. Although it is undisputed that many vendors face delays in payment, the terms of their contracts are unchanged, and under the State Prompt Payment Act, vendors are actually entitled to additional compensation in the form of statutory interest if their bills are not paid within specified periods. 30 ILCS 540/3-2 (West 2012). In no sense is this comparable to the situation confronted by members of public retirement systems under Public Act 98-599, which, if allowed to take effect, would actually negate substantive terms of their contractual relationships and reduce the benefits due and payable to them in a real and absolute way. Under all of these circumstances, it is clear that the State could prove no set of circumstances that would satisfy the contracts clause. […]
The State protests that this conclusion is tantamount to holding that the State has surrendered its sovereign authority, something it may not do. The State is incorrect. Article XIII, section 5, is in no sense a surrender of any attribute of sovereignty. Rather, it is a statement by the people of Illinois, made in the clearest possible terms, that the authority of the legislature does not include the power to diminish or impair the benefits of membership in a public retirement system. This is a restriction the people of Illinois had every right to impose.
As the ultimate sovereign, the people can, “within constitutional restrictions imposed by the Federal constitution, delegate the powers of government to whom and as they please. They can withhold or [e]ntrust it, with such limitations as they choose.” … The powers they have reserved are shown in the prohibitions set forth in their state constitutions. Munn v. Illinois, 94 U.S. 113, 124 (1876).
Reamortize the debt, raise taxes, spread out the pain evenly, and/or pass a constitutional amendment that doesn’t violate the Federal constitution’s “contract clause.”
If there is an attempt by the governor at passing a constitutional amendment, I’d bet it would be challenged in federal court. This thing is nowhere near over.
*** UPDATE *** Greg Hinz…
City Hall and the Rauner administration had no immediate reaction to the decision, but it implies bad things for them.
Emanuel last year negotiated reductions in benefits with unions covering about half of city workers and is working with police and firefighters for further changes. But the language of today’s decision appears to allow no exception for “negotiated” reductions in benefits. Rather, the benefits are owed, as in any contract.
Rauner, in turn, has proposed shifting all current workers into a new system with reduced benefits. But the court decision suggests that a worker is entitled to accrue benefits at the old rate until he or she leaves the payroll.
- 47th Ward - Friday, May 8, 15 @ 12:31 pm:
===This thing is nowhere near over.===
Agreed. But I am pleased that the “dine-and-dash” solution has been taken off the board.
- a drop in - Friday, May 8, 15 @ 12:32 pm:
The people are sovereign. That’s why we have constitutions.
- Fly on the Wall - Friday, May 8, 15 @ 12:33 pm:
I think the most interesting angle will be if taxing districts are given the option to declare bankruptcy. If that happens, I think all bets are off and this decision doesn’t mean much. Not saying that is a good option or even better than the status quo, but its something that Rauner obviously wants.
- Juvenal - Friday, May 8, 15 @ 12:34 pm:
Rich, I don’t read the court blessing a constitutional amendment.
They are simply recognizing that the state’s police powers in this case are explicitly restircted by the people via their ratification of the Constitution’s pension clause.
Other than that, I agree: the Supreme Court was certainly providing the GA and governor with a road map, where any one solution might be unpalatable, but taken together spreads the pain fairly evenly and unnoticably.
- Wordslinger - Friday, May 8, 15 @ 12:34 pm:
It’s not over, just a matter of how it gets paid.
Let’s just not listen to the cynical thieves and their hysterical stooges on how to go about it this time.
- Juvenal - Friday, May 8, 15 @ 12:37 pm:
Fly on the Wall: read the opinion piece in the Tribune on why muni bankruptcies are rare and on why, when they have occurred, they have not resulted in a massive reduction in pension benefits.
In Stockton and Detroit, bankruptcies led by Republicans, they realized quickly that reducing pension benefits provided no salvation. Retiree health care costs were shifted, but you don’t need to declare bankruptcy to do that.
- OneMan - Friday, May 8, 15 @ 12:38 pm:
Interesting it didn’t put asset sales in there (like the tollway)
- erik - Friday, May 8, 15 @ 12:38 pm:
I still don’t understand why no one is taking the re amortization option seriously..can someone here please explain this too me?
- Liberty - Friday, May 8, 15 @ 12:39 pm:
The constitution set up the contract, it is doubtful it can be changed by changing the constitution without changing the federal and state contract clause: “A governmental entity can always find a use for extra money,” the Court observed, “especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”
- Lord Stanley's Cup - Friday, May 8, 15 @ 12:43 pm:
Did the Court give a magic potion formula that prevents people from getting older? Because reamortizing makes the math easier, but it doesn’t make the problem - using today’s contributions to fund annuitants, any easier.
- Team Sleep - Friday, May 8, 15 @ 12:45 pm:
At this point, I would much prefer amortization over tax increases.
This is all so fascinating.
- Frenchie Mendoza - Friday, May 8, 15 @ 12:45 pm:
I think this is where the hammer drops: Rauner will embrace a politics of punishment — a scorched earth policy — and essentially destroy the playground because he’s barred from removing items from it or blocking it.
State employees are the targets. Can’t diminish the pensions? Well, then we destroy the employees.
- Juice - Friday, May 8, 15 @ 12:49 pm:
erik, A couple of reasons. If you are talking about the Martire plan, that would require an increase in contributions of over $3 billion from what the Governor proposed (over a billion from what has been certified) so we still need revenue to do it. If you are just talking about reducing the funding target or kicking out the schedule, that costs the state more money in the long term, and is really nothing other than doing what we did to get here in the first place. So it’s just a trade of between instant gratification versus longer term pain.
- Formerly Known As... - Friday, May 8, 15 @ 12:49 pm:
==the cynical thieves and their hysterical stooges==
Pat Quinn, Mike Madigan and John Cullerton?
In fairness, Cullerton was the more diplomatic leader in this mess by calling Madigan’s bill for a vote in the Senate when Madigan petulantly refused to call Cullerton’s bill. Regardless, any first year law student or nearly any commenter here (RNUG, etc.) could have told them this was patently unconstitutional. Certainly our distinguished leaders, Rauner included, have developed some sort of backup plan in the years since this became law? /s
- AC - Friday, May 8, 15 @ 12:50 pm:
I’m guessing it will take a few more unconstitutional pension cutting bills before the legislature truly gets the message. Rauner probably believes his pension cutting proposal is still constitutional, even after this decision.
- foster brooks - Friday, May 8, 15 @ 12:52 pm:
Look for a push to aconstitutional ammendment like new jersey did…another way is rauner will try to reduce salaries for pension reform. privatization is another angle rauner will try. Increasing retirees health care co-pay deductibles dependants premiums to astronomical levels.
- Juvenal - Friday, May 8, 15 @ 12:54 pm:
Lord Stanley:
You can redo the formula by changing the target from 100% funding that was used in the Quinn bill to the 90% that was used in the Edgar pension ramp which the Tribune salivated over at the time or the 80% funding level that Pew and most others find perfectly acceptable.
- archimedes - Friday, May 8, 15 @ 12:56 pm:
I agree that the shots at public employees and unions will intensify. The whole pension discussion the last few years has been successfully slanted to public employees are getting more than us - so they are getting more than they deserve.
I would look to a “voluntary” movement to Tier 2 or some sort of Defined Contribution in exchange for keeping some compensation and other benefits. If you want to keep Tier 1 - fine, you will receive less compensation or reduced benefits.
It will have to be negotiated and will be hard.
Of course, this will do nothing to mitigate the unfunded liability - the debt - for earned pensions. That battle is over. The State can do nothing to reduce the unfunded liability.
- Crispy - Friday, May 8, 15 @ 1:02 pm:
Lord Stanley: No, old age hasn’t been abolished, but the birth rate has been going down for a long time. My understanding is that the relative burden diminishes at some point down the road as the Baby Boomers begin to die out. Not sure on this, though–maybe someone who’s an expert on pensions can weigh in.
Frenchie: He’s not a god, and he has less political leverage now than he did at the start of this thing. Sure, he shouldn’t be underestimated, but there’s no need to make him out to be bigger than he is. As the Ill. Supremes just pointed out, nobody’s above the law.
- chi - Friday, May 8, 15 @ 1:03 pm:
=Get the money by kicking those who are able to work, lazy, drug addicts, and the like off the welfare and medicaid rolls.=
How big are our welfare rolls? How much would we save in a post-ACA world by reducing our medicaid rolls? And that’s just addressing the math, not the morality or macroeconomics of these brilliant ideas.
And also- there’s “economic theory” to support trickle down economics. But it is anything but sound.
- chi - Friday, May 8, 15 @ 1:05 pm:
=Emanuel last year negotiated reductions in benefits with unions covering about half of city workers=
Which unions were in favor of the bill? When did they agree on it? They keep using this line but I don’t think it happened.
- Michelle Flaherty - Friday, May 8, 15 @ 1:07 pm:
Rauner’s press office issued the following statement:
“We appreciate the court’s ideas but we are not going to acknowledge it until the governor’s Turnaround Agenda has been approved.”
- Juice - Friday, May 8, 15 @ 1:07 pm:
Crispy, the burden is dominated over time, but it’s when the Tier 1 folks die out versus the baby boomers, so it will be longer. Birth rates and death rates are largely irrelevant since the pension contribution is based off of the scope of public sector employment versus a larger scale societal issue.
- Crispy - Friday, May 8, 15 @ 1:10 pm:
Juice–thanks.
- Juice - Friday, May 8, 15 @ 1:10 pm:
Rauner react “At least the court had the good sense to address term limits first, before some other people I know.”
- Soccermom - Friday, May 8, 15 @ 1:11 pm:
Juvenal —
Thank you for pointing out the 100 percent funding is just ludicrous. I’m a fan of 85 percent, myself.
Because — let’s all say this together — all state employees are not going to retire all at the same time.
sigh.
- Arsenal - Friday, May 8, 15 @ 1:12 pm:
“Get the money by kicking those who are able to work, lazy, drug addicts, and the like off the welfare and medicaid rolls.”
And once that 1% of the unfunded liability comes in, where will we find the rest?
- Joe M - Friday, May 8, 15 @ 1:12 pm:
== Rauner probably believes his pension cutting proposal is still constitutional, even after this decision.=
Rauner will probably not read this decision or even news accounts about it. That is work for his underlings He will rely in his insider underlings to fill him in on the details - and tell him what he wants to hear.
- Juice - Friday, May 8, 15 @ 1:12 pm:
chi- The Mayor’s office sat down with almost all the unions that are covered by the Municipal Employees fund and the Laborers fund. (CTU has some CPS employees in the municipal fund, but were not invited to the table) The unions who were at the table agreed to a deal, but then one of the locals changed their mind and opposed after the agreement, but the others stayed firm.
- Sir Reel - Friday, May 8, 15 @ 1:15 pm:
“Leaves the payroll” could lead Rauner to think he can lay off tier 1 employees to reduce the pension hit. He and his crack staff probably haven’t read the contract enough to realize bumping would mean tier 2 employees would more likely leave the payroll. It could get ugly.
- Norseman - Friday, May 8, 15 @ 1:15 pm:
Michelle, perfect comment for Good Friday.
- Juice - Friday, May 8, 15 @ 1:17 pm:
Soccermom, I hate to be contrarian, but I have to. The target should be 100%. If we are anywhere below that, we have to continue to pay interest, which grows over time and is just a way for us to continue to fork over more tax dollars to wall street money managers and private equity charlatans. If we are at 100%, all we have to pay is normal cost, which is and will be more than reasonable, and will allow us to better confront certain future market fluctuations. (And if we ever have the fortune of being above 100%, I say we throw a huge party.)
- Chad - Friday, May 8, 15 @ 1:20 pm:
The value of land just over the Indiana border just wnt up by 300%.
- Rich Miller - Friday, May 8, 15 @ 1:22 pm:
===The target should be 100%. If we are anywhere below that, we have to continue to pay interest, which grows over time and is just a way for us to continue to fork over more tax dollars to wall street money managers and private equity charlatans===
It’s a good point, and the same can be said for a normal re-amortization - which increases interest costs. We need some different thinking here.
- Juice - Friday, May 8, 15 @ 1:29 pm:
===We need some different thinking here.===
My vote, take the $70+ billion we have in assets, load it up in a van, drive it to Des Plaines, take it to Rivers, put all of it on black.
- illinoised - Friday, May 8, 15 @ 1:30 pm:
“Until the Turnaround Agenda is approved” is wearing thin. We did not select a CEO, someone charged with coming in and saying “my way or the highway,” we elected a governor, charged with finding solutions within a governmental framework. I am thinking the governor does not understand his job. Now that the Civic Federation and the State Supreme Court are singing the same song as the CTBA, and a ridiculously low amount of municipalities have sided with the Turnaround Agenda, I am hoping the governor starts to learn that he is not in a corporate board room anymore.
- anon - Friday, May 8, 15 @ 1:37 pm:
“It will have to be negotiated and will be hard.” And why would any union agree to negotiate away pension benefits after this court ruling? And what union member would allow the leadership to do so? Of course, the obvious answer to why Rahm can’t rely on the agreement of some unions is that pension cuts apply to all employees, whether union or not.
- Juvenal - Friday, May 8, 15 @ 1:38 pm:
Juice:
That is like arguing that no one should buy a house unless they can pay cash.
Soccermom is correct here: we are not paying interest on our pensions.
The only question is what funding level can we afford that will make the lenders for our capital spending much happier, if not completely satisfied?
The analysts are perfectly happy with 90%.
In fact, if you look around the country, I am sure you will see plenty of states with stellar bond ratings and pensions that are funded far below 90%.
Given our current pension funding level, I’d say they will probably be much happier with 80 percent, and while we know that 90% is the actuarially recommended funding level, 85% would probably thrill the bond houses given our current status.
- AC - Friday, May 8, 15 @ 1:43 pm:
One thing is certain, risk averse unions who agreed to Cullerton’s compromise bill, aren’t going to be as willing to compromise as they were.
- illinoised - Friday, May 8, 15 @ 1:44 pm:
I’m with Juice, Soccermom and Erik.
- Juice - Friday, May 8, 15 @ 1:45 pm:
Juvenal, I am not arguing that no one should buy the house unless they can pay cash, but if you have the luxury to buy a house without taking out a mortgage, I would argue that is the preferable thing to do. We can afford to make the payments to get to 100% funded if we wanted to make the political choices to do so, and I think we should. And, if you actually talk to the actuaries, lowering the funding target saves hardly anything, so what is really the point?
- Juice - Friday, May 8, 15 @ 1:46 pm:
Adding to AC, the Kanerva decision killed Cullerton’s bill before it killed the bill that was killed today. (Since the court actually had to respond to the police powers argument this time.)
- archimedes - Friday, May 8, 15 @ 1:53 pm:
Agree with Juice.
The State is incurring interest on the unfunded liability - the rate is the discount rate of the pension systems, about 7.5%. The State, even with the ramp, is not paying sufficient amounts to cover the normal cost and the interest on the unfunded liability until about 2030 - when the unfunded liability starts to decline (COGFA).
If the goal is 90% funding, it simply means the State would pay the full normal cost plus an interest amount (7.5%) on the remaining unfunded liability.
Remember - the unfunded liability is not the full pension payments to be paid at retirement (actually - the amount not covered by assets). It is the present value of that amount discounted (by about 7.5%) to the current year.
- A Jack - Friday, May 8, 15 @ 1:54 pm:
Well certainly the Governor can takes this out on his employees. But he also wants to make Illinois more attractive to business and he needs well motivated employees to make that happen. If he takes actions seen as punitive, moral will go down and the rest of his agenda will fail miserably.
His best bet to save face is to negotiate an increase in contribution rate while offering up a nominal pay increase so that there is enough incentive for membership to ratify the new contract. Granted his single mindedness might prevent him from doing something reasonable, but I can still hope.
- OneMan - Friday, May 8, 15 @ 1:55 pm:
But he also wants to make Illinois more attractive to business and he needs well motivated employees to make that happen
Not sure how much state employee motivation helps or hurts a states attractiveness to business.
- JS Mill - Friday, May 8, 15 @ 1:56 pm:
@Juice- I advocate the reamortization concept but your statement about the interest is on point. Extending the debt will increase interest costs. Not in anyway ideal, but it may be more practical given the tax sentiment that prevails today.
Some of the comments about tax payers losing give me pause. They (we) have been losing all along. The State (ILGA/Governor) have been collecting tax money and then diverting the money away from statutory obligations to fund other projects for decades. That is why we have the debt. Those of us in the system have always paid twice. We pay the same taxes everyone else pays and we pay into the pension. No complaints, it just is. If revenue streams are increased through taxation we will all continue to pay.
We don’t need pension reform and what was attempted wasn’t reform, it was reduction. We need legislative reform and I think the ILSC said as much in laying out a path forward. I don’t know if it was intended but I think that message was clear.
- Team Sleep - Friday, May 8, 15 @ 2:02 pm:
A pension system as a whole is not much different than the Social Security system. You must have people paying into the system to make it vibrant and steady, which means that it can never truly be funded at 100%. You can try, but people move into the system and leave the system at an uneven rate. For instance, what happens if we fund the pension system at 100% and then an early retirement buyout is offered? Or what if a large chunk of workers in their 50s “panic” over the next two years and start retiring? All of a sudden things are not what they seemed a short while ago.
- JS Mill - Friday, May 8, 15 @ 2:08 pm:
=Or what if a large chunk of workers in their 50s “panic” over the next two years and start retiring?= Too late, that is already happening.
the CPS pension was actually funded in excess of 100% not that long ago. During the Daley admin, pension money was used to buy labor peace (providing healthy salary increases) and now you have a system that is poorly funded. That happened even as they levied for pensions.
- grumpy - Friday, May 8, 15 @ 2:14 pm:
==distribute the burdens evenly among Illinoisans==?
Now that’s novel thinking. Perhaps we start with a goal to at least achieve an comprehensive taxation system that equalizes the overall tax rates for all working citizens, rich and poor.
The highly illuminating graphs in the recent ITEP “Who Pays” report reveals how the poorest Illinois workers pay the highest rates and the uber-rich pay the lowest. I think all fair-minded people could agree that the current system is grossly unfair.
A flat ITEP graph would be a good base line to start with, with rates set up to solve the structural deficit problem.
- Pelonski - Friday, May 8, 15 @ 2:33 pm:
A few thoughts:
1)The court clearly stated being a member of the pension system is a contractual relationship. They then went on to say that contractual obligations are protected from impairment by both the Illinois and US constitutions. Finally, they explained that the State is much more likely to be determined to be impairing a contract when they are a party to that contract. I think even a revocation of the pension clause would still lead the court to conclude that the pensions of people in the system prior to revocation are protected. This issue would definitely be argued in both state and federal court.
2) The unions do not have the power to negotiate changes to the pension benefits. They don’t represent every pension member, and even if they did, it’s unlikely that the collective bargaining process could override the pension clause.
3) Being required to make the pension payments will in no way lead the state into insolvency. Reinstating the 5% income tax rate, eliminating some tax exemptions, and/or expanding the sales tax base would provide more than enough revenue. Would this affect economic growth? Probably, but the effect taxation has on economic growth is generally overstated. At the federal level, we raised taxes in the 90s, but the economy continued to grow at a fast pace.
- Waffle Fries - Friday, May 8, 15 @ 2:33 pm:
Contracts…the state departments basically have all providers it contracts with over the barrel. Also, don’t we have the longest timeframe for Prompt Payment interest in the nation (90 days - which was changed from 60 a few years ago).
- Arthur Andersen - Friday, May 8, 15 @ 2:33 pm:
A couple points on the re-amortization/target funded ratio to remember:
1) The major cost difference between 80-90-and 100-percent funding programs occurs in the final years of the funding program, as the unfunded is paid down. Think about it like your home mortgage, where a little more of each payment goes to pay down principal (and a bit less covers interest) every month.
2)to Juice’s extreme chagrin, a 100% funding target means higher fund assets at any point in time, meaning ceteris paribus, the fees paid to “Wall Street money managers and private equity charlatans.”
To that latter phrase, I’ve about had a bellyful of the demonization of the investment management industry because a small handful of investors live large and/or are politically active. These “charlatans” put the dough on the table that kept the State pension systems alive through decades of insufficient State funding.
Oh, and juice, you are 100% wrong on birth/death rates being irrelevant to pension funding. Increased longevity is a small, but growing, component of the overall funding problem.
- A Jack - Friday, May 8, 15 @ 2:35 pm:
@One Man, do you call the Governor when you are researching a move to the state or perhaps some of the representatives of regulatory agencies that you may have to interact with? And after you move, do you get audited by the Governor or perhaps some revenue employee? I have had calls from doctors thinking about moving here and concernedabout the high rates of medical malpractice insurance. And certainly there have been business friendly projects that various past governors have wanted, like the ‘business portal’ that requires motivated employees to create and maintain.
- Ghost - Friday, May 8, 15 @ 2:46 pm:
Honestly i see this as a face saver for the gop and rauner. They can pass a tax increase, say they didnt want to, and did their best; but they were held histage by (insert adjectives here) supreme court and did it agianst their will and better judgment so they could get in with the business of governing and protecting the people.
they are working hard to bring foxcon to illinois and away from the unfair wages and taxes enforced on foxcon by china….
- Juice - Friday, May 8, 15 @ 3:24 pm:
AA, my point on the death rate was more about the baby boomers specifically. I did not mean to imply that increase longevity doesn’t have an impact, it certainly increases liability. But the funds are going to see a much larger impact from the dying off of tier 1 participants vs the dying off of baby boomers.
And my ineloquent comment on “private equity charlatans” was partially in jest and partially a shot a the Governor. Your point is noted and correct. However, I would note that many of their increase in fees would come from improved asset performance from having greater assets, and less from increasing contributions from taxpayers. But I am sorry to have offended you.
- Joe M - Friday, May 8, 15 @ 3:38 pm:
For months and months various politicians, including Rauner, have been saying that they hoped when the Supreme Court ruled, if they ruled against the law, they hoped that the Court would provide some guidance as to what actions they would accept as constitutional.
Well the Court did give some guidance: One alternative, adopt a new schedule for amortizing the unfunded liabilities. Another option, seek additional tax revenues. Well, Governor and the GA, what are you waiting for?
- Mama - Friday, May 8, 15 @ 3:52 pm:
“I would look to a “voluntary” movement to Tier 2 or some sort of Defined Contribution in exchange for keeping some compensation and other benefits. If you want to keep Tier 1 - fine, you will receive less compensation or reduced benefits.” Hello! You need to read the Supreme Court’s decision. In a nutshell, “Employees’ benefits can not be reduced.”
- Illinois Manufacturer - Friday, May 8, 15 @ 3:55 pm:
Recognize state assets like the Tollway Authority on the Balance sheet. Its worth 25 billion and it makes the hole smaller. Also let them work out of state Missouri needs to toll I-70 and will need someone to run it
- drbill - Friday, May 8, 15 @ 4:20 pm:
Folks, get ready for the tax on pension income to get really serious. Maybe with a 30 or 40K exemption to take out the SSI recipients and lower pensioners - but it is coming and it probably is constitutional!