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Pension dispute boils down to individual vs. collective contract rights

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Illinois

* Greg Hinz gives us the story on what could be a very big disagreement between House Speaker Michael Madigan on one side and Senate President John Cullerton and Gov. Pat Quinn on the other over pension reform…

As I reported in my blog on ChicagoBusiness.com last week, the bill at issue dealt only with the Water Reclamation District of Metropolitan Chicago. It would have enacted an agreement between the district and all but one of its unions that called on workers to contribute an additional 3 percent of their salaries to the pension fund and the district to double its contribution from property taxes.

The bill passed the House unanimously—a rarity when it comes to pensions. Since workers still would be getting a defined benefit, albeit one that would cost more, everyone seemed pretty happy.

But when the bill moved to the Senate, Mr. Cullerton claimed sponsorship and moved to amend it. Specifically, he wanted to add a clause allowing workers to stay in the current system without paying that extra 3 percent if they froze their pensions at current levels.

Mr. Cullerton obviously hoped that would be a model in negotiations on restructuring the state’s overall pension systems. The Chicago Democrat, like Gov. Pat Quinn, is a strong believer that pension changes cannot be imposed by fiat but only as part of a negotiated process in which workers have some choice.

Anyhow, Team Cullerton seemed to think it had the green light. They filled me in and re-tweeted an item I did on the president’s “big pension move.” And the chief sponsor of the House bill, Rep. Elaine Nekritz, D-Northbrook, told me she was OK with the change.

Then Mr. Cullerton abruptly yanked his own amendment. His folks make it pretty clear that was done at the request of Mr. Madigan. Indeed, Madigan spokesman Steve Brown effectively confirmed that, telling me, “I think the speaker felt the bill was fine as it passed the House.”

What’s not clear as of this writing is whether Mr. Madigan pulled out the rug unfairly at the last second, or whether Mr. Cullerton got a little ahead of things. Different sources are giving me different answers.

* More details from Chris Wetterich…

But the two Chicago Democrats see the water reclamation district plan in different ways — Madigan believes changes can be imposed after negotiating with unions, while Cullerton thinks all employees have to be offered a choice.

Cullerton wants to let workers decide between an altered pension, which would cost the employee more but be better funded, and the current system, which would cost workers the same but could have other consequences, such as not having future raises counted when pensions are calculated.

The concept is called “consideration” by Cullerton and the Senate Democrats’ legal counsel, Eric Madiar.

The choice would apply to all public employees, not just those in unions. The state constitution makes public employee pensions a contractual right regardless of whether an employee participates in collective bargaining.

Cullerton and Madiar contend that simply negotiating with unions won’t be enough for any legislation to comply with the state constitution’s language. Late last month, after proposing a plan that follows the Cullerton-Madiar structure, Gov. Pat Quinn said he also believes that simply negotiating with the unions won’t pass constitutional muster.

In the case of the water reclamation district, only about 800 of the 2,000 employees are unionized.

I think Cullerton probably has the right idea here. How can unions negotiate pension changes for systems with lots of people who aren’t union members?

posted by Rich Miller
Monday, May 7, 12 @ 11:53 am

Comments

Maybe Madigan has realized the futility of this and justs wants a bill passed so they can say they tried.

Comment by LIberty_first Monday, May 7, 12 @ 12:22 pm
I guess my question would be if the unions do the negotiating for us will they represent the retired members the same as working members. We don’t pay them their monthly take so will they throw retirees under the bus to keep the working and paying members happy? You also can be a working state employee that is not a union member but you still have to pay fair share which is only a buck less than union members pay.

Comment by Nieva Monday, May 7, 12 @ 12:27 pm
Rich, I think your last sentences are correct, and I don’t see how any plan than diminishes things passes constitutional muster.

Unless I have something wrong, as I read the bill (HB 4513), it’s a tax increase posing as something else. Employee pension contributions get increased (diminishing the net benefit), but the bill empowers (probably encourages) the employer to “pick up” employee contributions (probably in lieu of higher wages/salary) at some point (the fingers never leave the hand). And then, the bill empowers an increase in the real estate tax (see 13-503) by the local agency. So the Springfield crew gets pension relief and the locals get to raise taxes. Slick.

Comment by JustaJoe Monday, May 7, 12 @ 12:28 pm
Madiar’s analysis of the pension clause: http://www.niu.edu/statebudget/pension_reform/_pdf/Pension%20Clause%20Article%20Final.pdf

My question is, does the “consideration” need to be “equal” to the diminishment? If so, how can loss of health care be compared to pension benefits, isn’t that comparing apples to oranges? I admit, I don’t grasp all the legal mumbo jumbo.

Comment by Anonymous Monday, May 7, 12 @ 12:35 pm
The mass transit act of 2008 raised CTA employee pension contributions from 3% to 6%. Unions were part of that negotiation, but there was no specific choice given to individual employees. The MWRD proposal seems similar.

Comment by muon Monday, May 7, 12 @ 12:37 pm
cullertons plan wont pass constitutional muster. By altering the formula for which you base your pension on is an obvious diminshment.

Comment by foster brooks Monday, May 7, 12 @ 12:37 pm
Clearly, there appears to be no current legal requirement to fund pensions at a specific level, Or, at least no requirement that is effective.

What are the thoughts on this:

1. Employees can stay in the current plan at the current benefit levels and accept the risk that the state won’t fund it at appropriate levels or fund it all.

2. The state creates a new pension plan with new benefit levels, new employee contributions, and an iron clad guarantee that the state will fund it at 100%.

Each employee as an individual could choose what option they wanted.

I know what option I would choose.

Comment by Foxfire Monday, May 7, 12 @ 12:50 pm
Anonymous - the courts have ruled this is a contract between the member and the state subject to contractual law which says both parties have to agree to change the contract.

Comment by LIberty_first Monday, May 7, 12 @ 12:50 pm
Foxfire, how would you do the “iron clad guarantee”?

Comment by steve schnorf Monday, May 7, 12 @ 12:54 pm
Foxfire - #1 is not an option as the courts have already ruled on this issue. The supreme court said the courts cannot get involved until the state doesn’t pay a pension and not before. The court cannot force a funding method on the state but can force the state to pay the benefits.

Comment by LIberty_first Monday, May 7, 12 @ 12:55 pm
Assuming the pension obligations cannot be abridged because of the constitutional claim then Cullerton is correct- It has long been the law that Unions have no right to abbrogate contract claims absent their exclusive representation of the individual at issue- unions can only change the rights of current employees who are represented by them in a recognized bargaining unit

Comment by Sue Monday, May 7, 12 @ 1:00 pm
The real question right now is can the legislature raise the member contribution

Comment by LIberty_first Monday, May 7, 12 @ 1:06 pm
Does this strengthen or weaken the moves by Wisconsin to limit collective bargining?

I wonder if Illinois made the same move would that make this reform more likely to hold up to union led challenges?

Comment by Jade_rabbit Monday, May 7, 12 @ 1:09 pm
Sue, they certainly can by negotiated contract require non-members to grieve exclusively thru the union

Comment by steve schnorf Monday, May 7, 12 @ 1:22 pm
Where are all these “contracts” everyone keeps talking about? Who are the parties to the “contract”? Did the individual employee sign them, did the employer? If the state constitution is changed to allow pensions to be “diminished or impaired”, how do these so called contracts continue to have perpetual life under the U.S. Constitution’s contract clause. The defenders of the status quo think they have an unassailable and logical position. They don’t.

Comment by wishbone Monday, May 7, 12 @ 1:37 pm
I am concerned there are lots of folks with lots of years in the system (I have 31 years in SURS) that may be prompted to retire before they really want to. If a law is passed that is anything like what the governor is proposing, I will get out, although i would like to work for 3 or 4 more years. If that happens, then 2 years down the road the law is struck down as unconstitutional, I am still on the outside, I will not be able to come back at that point into my job. The risk of staying and the law passing constitutional muster and then being stuck in the new system with much lower benefits is too high. Too bad we can’t get an advisory opinion out of the Supreme Court before the law goes into effect.

Comment by SIUPROF Monday, May 7, 12 @ 1:56 pm
Jade Rabbit has the obvious answer. If collective bargaining with respect to wages is repealed, the state and locals can balance the pension deficit on the wage (and healthcare) side of the ledger. That won’t be pretty, but if Cullerton’s view prevails (any pension reform has to be accepted by every single employee), it’s the only solution this side of bankruptcy court. Or so it seems to me.

Comment by Lycurgus Monday, May 7, 12 @ 2:00 pm
I side with Cullerton. The constituion specifies “membership in any pension or retirement system…”. Individuals are members. Further, any consideration to alter the contract cannot be pre-existing, such as promising to pay what you already owe. On the other hand, consideration only has to be adequate - not equal - so the new promise doesn’t have to be equal in value to the increase in employee contribution rates.

Comment by Archimedes Monday, May 7, 12 @ 2:04 pm
SIUPROF isn’t the only one. There will be droves but not all older employees. Younger, talented teachers aren’t stupid. But with regard to “contracts”……a constitutional provision really means nothing until tested in the courts, right? It’s guaranteed to end up there, costing the taxpayers lots. Increased taxation, whether property or otherwise is also to be expected to pay for that. How do the taxpayers want to spend their money?

Comment by Inactive Monday, May 7, 12 @ 2:05 pm
Archimedes: “On the other hand, consideration only has to be adequate - not equal - so the new promise doesn’t have to be equal in value to the increase in employee contribution rates.”

It is true that consideration must just be adequate-not equal. this is because courts cannot be expected to protect contractors from their own bad judgement. That is not the case here. Pension members have a current set of benefits, and they are being forced to choose between two entirely different systems. One based on the current system, but with no health benefits and no future raises being counted, the other the governor’s proposal. There is no consideration. It is akin to having a dollar and someone offering a nickel or a dime. No one would make that deal.

Comment by SIUPROF Monday, May 7, 12 @ 2:18 pm
SIUProf is correct. The test of “consideration” is one of “fairness.”. Employees cannot be coerced out of their current benefits.

At the same time, we must also acknowledge that there are intangible and subjective considerations for individual members as well. Younger employees with new families probably will weigh their decisions much more differently than an older employee nearing retirement who’s not gonna see too many more COLA’s any way.

Comment by Yellow Dog Democrat Monday, May 7, 12 @ 2:31 pm
…Iron clad guarantee..

You mean like passing a law or something? Like the 90% funding guarantee now on the books? I don’t know how many of us are going to believe any “guarantee”.

Comment by Joe from Joliet Monday, May 7, 12 @ 2:37 pm
Only guarantees I’m seeing are pensions and benefits–the best too—to legislators. And I don’t hear any discussion about outrage at that. In the interest of fair and shared, we need to be looking at the entire picture. Why the myopic focus on teachers?

Comment by Inactive Monday, May 7, 12 @ 3:18 pm
No the test of consideration is agreement not fairness. Too many non legal terms thrown about like “promise” instead of “contract.” The court has ruled the benefits cannot be diminished.

Read the court rulings here. http://www.ilga.gov/commission/cgfa2006/Upload/2008%20JANUARY%20Handbook%20of%20Illinois%20Pension%20Case%20Law.pdf

Comment by LIberty_first Monday, May 7, 12 @ 3:24 pm
Wishbone - the Illinois Supreme Court has ruled that the pensions are a contract based on the Pension Clause of the Illinois constitution. When an employee is hired in a postion covered by a public pension the contract is between the state and the employee. Read the two posted links for all the details.

Comment by LIberty_first Monday, May 7, 12 @ 3:30 pm
“Cullerton wants to let workers decide between an altered pension, which would cost the employee more but be better funded, and the current system, which would cost workers the same but could have other consequences, such as not having future raises counted when pensions are calculated.” How is not having a future raise not counted toward your pension a consequence if you work in a job that doesn’t get raises?

Comment by SAP Monday, May 7, 12 @ 3:45 pm
“The concept is called “consideration” by Cullerton and the Senate Democrats’ legal counsel, Eric Madiar.”

“Consideration” under contract law means, in simple terms, “something of value”.

I am dubious of the idea that the state could offer two different sets of diminshed benefits, and force the employees to choose between them. This would be no different in concept from offering each pensioner the “choice” of a flat $1.00 or a flat $1.50 upon retirement - both are diminishments of the employees pensions, and giving them a choice between two doesn’t make it OK.

Comment by titan Monday, May 7, 12 @ 3:56 pm
Its not just the pension clause in the constitution, its the “Pension and Retirement Rights” clause. So if “retirement rights” are included in the title, wouldn’t ending the healthcare premium subsidy be a diminished benefit of retirement?

Comment by Choice? Monday, May 7, 12 @ 4:01 pm
Cullerton and his staff seem to have done the most research and serious consideration of what can and can’t be done. Their analysis should be required reading for every Illinois citizen and mandatory before writing letters to the editor / politican / blogosphere. Since I was gone most of today, I’m glad someone else posted a link to the document. Thanks Anonymous @ 12:35 pm

Foxfire,

As others have noted, you can’t come up with an iron clad guarentee for funding in the normal way of operating. There is one, and only one, way I know of: to bond the whole thing. And when I say bond the whole thing, I’m not talking just the pension fund deficit of today ($83B more or less) but I’m also talking pre-paying the next 30 - 40 years (up to the $200B - $300B neighborhood). In order to make that big of a bond offering fly, it would need a new revenue stream (read tax increase) dedicated to paying back the bond offering. You on board for raising the income tax just for that??

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 4:07 pm
I can tell you that as a member of SURS, I have never been in a union, and they certainly don’t represent me, so Mikey can negotiate as much as he’d like with “the unions”, but they don’t represent me, and I’d be glad to make that clear in court at the state’s expense.

Comment by PublicServant Monday, May 7, 12 @ 4:12 pm
I got a $2 a month invitation to join AFSCME’s Retirees Chapter 31 today. They say they will fight for retirees. In my career I was the leader of a State local and belonged to another, neither AFSCME. Still, I am considering it…

Comment by Mouthy Monday, May 7, 12 @ 4:18 pm
And expense it will be…………not sure how much the state will be saving no matter what the outcome. As I said, it’s just a matter of how the taxpayers want to spend their money.

Comment by Inactive Monday, May 7, 12 @ 4:20 pm
re Consideration / Choice,

If we refer to the past, there is an example that apparently passed Constitutional muster.

Prior to 1970, SERS employees did not participate in Social Security. That system, now called non-coordinated, had a bit more generous retirement benefit and timeline that what is now referred to as ‘tier 1′. New hires were not given a choice, they went into the “new” pension system starting in 1972 (if memory is correct).

In the 1970 - 1972 period, the pension reform gave current vested employees a choice: (a) stay with the original non-coordinated system at the then current contribution rate of 8% and be assured of your State benefits and retirement timeline or (b) switch to the new system (tier 1 today) that would be coordinated with Social Security with a slight reduction in maximum State benefits (75% vs 80%), a lower employee contribution to the State (4% vs 8%), while having to start making the FICA payment (roughly the 4% saved on the State side) which entitled the State employee to also get a Social Security benefit at age 60/65 in those days.

The vast majority of then current employees decided to switch to the coordinated (tier 1) plan, presumably because they were worried about the State funding the pension systems and figured they were spreading their risk between the State and the Feds.

A real choice with roughly equal real consideration offered.

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 4:21 pm
Mouthy @ 4:18 pm:

A lot of non-union people are members of RSEA (Retired State Employees Association of Illinois).

Personally, I don’t care which one you join, but join one and help fund their lobbying and lawyers.

As I’ve noted other days, these bills are the perfect recruiting tool for the unions and associations.

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 4:26 pm
==I’d be glad to make that clear in court at the state’s expense. ==

Do you have any idea how much it would cost you to even get this near the first courtroom, let alone the supreme court? If the unions cave, you are all cooked.

Comment by Bill Monday, May 7, 12 @ 4:29 pm
Choice? @ 4:01 pm:

The State has always said the health insurance ‘benefit’ could be changed. Court rulings in various States with identical and similar pension clauses have arrived at different answers.

It all hinges on whether the health insurance after 20 years is considered deferred compensation for making a career in state government. Courts have generally considered deferred compensation as being protected. If it is not deferred compensation, then it is most likely not protected.

While the State has maintained it can be changed, the one time it was changed doesn’t offer a clear example. About 20 or 25 years ago, the time required to ‘earn’ the health insurance was changed upward from 8 to 20 years of service. As I remember, it applied to everyone, not just new hires. So that says the State can change the requirements to receive it. But the State did not do away with the ‘benefit’, so you can infer it was considered to be deferred compansation of a sort that could not be totally eliminated.

Until it gets argued and decided in an Illinois court, all we can do is speculate.

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 4:41 pm
Retired Non-Union Guy - the key to the earlier switch was that the emplyees could stay with the origianl prgram without their benefits beign diminished at all - or - go to the new, somewhat different system.

That is rather different than purporting to give a choice between two different new systems, both of which are dinimshments of the current system.

Comment by titan Monday, May 7, 12 @ 4:44 pm
Titan @ 4:44 pm

Exactly. Back in 1971 or so they had a real choice: stay with no penalty or change for something that could be perceived as equal or better.

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 4:48 pm
Didn’t the state recently cancel the dental subsidy without negotiating with the union? How does that differ from healthcare premium subsidy?

Comment by Choice? Monday, May 7, 12 @ 4:57 pm
Is there maybe just a little bit here of Madigan reminding Cullerton who has the votes? It passed unanimously in the House.

Comment by wordslinger Monday, May 7, 12 @ 5:15 pm
Inactive @ various times,

@ 2:05 - follow the link posted at 12:35 pm and read the analysis prepared for Cullerton. It cites the various court cases. It is something like 78 pages long; if you don’t want to read the entire thing, it is well organized and you can skim the headings / sections for your particular item of interest.

@ 3:18 - follow the money; teachers are the biggest pile owed. Also the easiest to dump on the school districts since teachers are not perceived as “state” employees but as local school district employees by a large poortion of the public.

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 6:43 pm
Thanks Liberty first. We are screwed. Apparently the Constitution is a suicide pact.

Comment by wishbone Monday, May 7, 12 @ 7:02 pm
@Wishbone -

More like “mutually assured distraction.”

Before going any further, ask yourself these questions:

1) Under Illinois law, members of the Illinois General Assembly have up to 24 months after they begin serving to opt out of the state’s defined benefit system and into a defined contribution system. How many members of the Illinois General Assembly crying for a 401k-style system for all public employees have chosen that for themselves?

Answer: Zero.

2) Presuming all of the members of the Illinois General Assembly who profess that we need to retroactively change pensions are sincere in their belief that it is not only right but also Constitutional, what’s preventing them from introducing and passing legislation to impose that change on themselves?

Answer: Nothing. They could start with Mayor Daley’s pension if they wanted.

I’m no Schnorf, but this ain’t my first time at the rodeo. Back in 1995, Republicans were adamant that we needed to move Illinois’ poor people out of a Medicaid’s traditional fee-for-service model and into an HMO-style managed care model. As it turned out, every single one of them had chosen traditional insurance for their taxpayer-funded health care and not HMO coverage.

“For the leaders of this people cause them to err; and they that are led of them are destroyed.

Therefore the Lord shall have no joy in their young men, neither shall have mercy on their fatherless and widows: for every one is an hypocrite and an evildoer, and every mouth speaketh folly. For all this his anger is not turned away, but his hand is stretched out still.”

Isaiah 9:16-17

Woe unto Israel.

Comment by Yellow Dog Democrat Monday, May 7, 12 @ 7:31 pm
Thanks for posting that info on the insurance benefit Retired NUG- I’ve looked for an answer to that question and it appears someone needs to file a court challenge!

Comment by LIberty_first Monday, May 7, 12 @ 7:46 pm
wishbone,

No, actually a requirement that the State live up to it’s obligations. But they haven’t done a real good job of that … and you can say that about almost any State funded activity, be it welfare, education, natural resources, and even the pensions.

The one common thread is the General Assembly; I sometimes wonder if Quinn’s successful campaign to reduce the GA size by 2/3’s was really a good idea. I find it ironical that now it is Quinn having to deal with a GA where all the power has become concentrated in just a few hands.

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 7:47 pm
Liberty_First,

Unfortunately, no one has any standing to bring a law suit until it is actually changed and in effect. That’s one of the Catch-22’s in the law; most of the time, the harm has to have already occurred before you can sue. For a very relevant example, see the IFT pension funding law suit decision …

Comment by Retired Non-Union Guy Monday, May 7, 12 @ 8:15 pm
In response to Schnorf’s question at 12:54, would it be possible for the State to sell “generous” bonds to the pension funds as a way of obligating future contributions?

Comment by Wookiiee Rookiiee Monday, May 7, 12 @ 9:51 pm
@Bill - You ever hear of a class-action lawsuit, dude?

Comment by PublicServant Tuesday, May 8, 12 @ 6:24 am
Apologies to Niemoller for the tongue-in-cheek misuse of his poem.

First they came for the raises, and I did not speak out because I had a job. Then they came for the healthcare subsidies, and I did not speak out because I had a job. Then they came for the pensions, and I did not speak out because I had a job. Then I came to my senses and found a different job.

Comment by thechampaignlife Tuesday, May 8, 12 @ 7:05 am
I agree with the concept of the “contractual relationship” and offering something as consideration for reduced benefits. However, as far as SERS goes (I am not sure about the benefits for the water district in chicago.), freezing wages for the calculation of benefits is not constitutional. The formula is part of the pension code. From the SERS website: “Final average compensation is the 48 highest consecutive months of service within the last 120 months of service.” That is part of the formula and part of the pension code. They can’t unilaterally freeze current employee wages when it comes to calculating benefits. It would be diminishing benefits.

Comment by KurtInSpringfield Tuesday, May 8, 12 @ 7:43 am
@ KurtInSpringfield - and who would come to work for the state if the ultimate pension was to be calculated on their starting salary (rather than their ending salary)?

Comment by titan Tuesday, May 8, 12 @ 8:50 am
@titan

I think all this talk about freezing wages for calculation of benefits is for current employees as opposed to new hires, and only if they choose to keep the level of benefits they currently have which I think is unconstitutional. Actually the proposal by Quinn for SERS to freeze wages if employees keep current benefits was only for employees hired before Jan. 1, 2011. Employees hired after that date already have pension benefits similar to the reduced benefits Quinn proposed. However can you imagine if you were hired in December 2011 and are just starting out your career?

Comment by KurtInSpringfield Tuesday, May 8, 12 @ 12:57 pm