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New Jersey pension ruling won’t impact Illinois

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* From Senate Democratic spokesman John Patterson…

Rich,

Yesterday, the New Jersey Supreme Court ruled that the state can freeze retirees’ cost-of-living adjustments.

The New Jersey Supreme Court ruled on Thursday that retired public employees do not have a contractual right to receive increasing cost-of-living adjustments, a decision that is expected to save the state billions of dollars.

Governor Chris Christie’s administration suspended the COLA payments, which are tied to inflation, as part of reforms in 2011 aimed at curtailing the ballooning cost of public pensions.

I asked our pension expert Eric Madiar to weigh in.

The short answer is that the Illinois Constitution is different than the New Jersey Constitution.

Here’s Eric’s summary:

The New Jersey court held that because of the New Jersey Constitution the legislature lacked the power to create a binding contractually enforceable pension right. The creation of such a right was tantamount to taking on state debt in violation of the state constitution. The court stated that the legislature can only take on state debt and commit itself to the needed appropriations to fund that debt with voter approval. Since that did not occur when the pension right was passed, it was not a binding promise when the legislature enacted it.

…Adding… More from Patterson…

Eric re-read the opinion this morning and offers this addendum noting that the New Jersey court looked at what the Illinois court had done and drew a distinction between the two constitutions.

The New Jersey Supreme Court held that COLAs are not protected pension benefits and are distinct from the pension annuity that a retiree is entitled to receive under New Jersey pension law. The New Jersey court focused on the lack of clear and unmistakable statutory language conferring COLA increases as a protected pension benefit. This is unlike what occurred in Illinois where the Illinois Supreme Court found that COLAs are part of the protected benefits that cannot be unilaterally changed. Indeed, in footnote 7 of the decision, the New Jersey Supreme Court notes how the statutory system regarding COLAs in Illinois is different from New Jersey.

posted by Rich Miller
Friday, Jun 10, 16 @ 9:14 am

Comments

Welcome back Eric. He is spot on. In approving the 1970 Constitution, whether they fully understood the consequences or not, Illinois voters chose to make pensions (and their associated rights subsequently granted by the General Assembly) a binding contract.

Comment by RNUG Friday, Jun 10, 16 @ 9:21 am
Thank you for the insight. Unfortunately, I think that the New Jersey ruling will just give ideas to 1.4% and the GA to try a pension lawsuit.

Comment by Huh? Friday, Jun 10, 16 @ 9:26 am
==
- Unfortunately, I think that the New Jersey ruling will just give ideas to 1.4% and the GA to try a pension lawsuit. ==

The IL SC was pretty clear the last time. Lower courts should follow that ruling and deny such a case. And I suspect the IL SC will probably give such a case the attention it deserves … none.

Comment by RNUG Friday, Jun 10, 16 @ 9:38 am
Time to move on. The state made a series of bad deals for the people in increasing pension benefits (as far back as Thompson with his 3% annual “adjustment”) to paying for retiree health insurance. It paid off politically for pols of both parties then, but they left a ticking time bomb they knew would go off now.

We HAVE to pay it, and can’t reduce benefits for current employees. Unfortunately, since this benefit IS part of compensation, much of the cost will have to be taken from any increases in other compensation such as salaries and health care contributions employees in the pension funds. Since most of state aid for schools goes to salaries and benefits, and since the state has no say in contracts negotiated by local school districts, the state will either have to cost shift to the locals or reduce state school aid wealth redistribution. While the primary beneficiaries of the pensions should do most of the heavy lifting, at least some of the burden should be put on taxpayers who elected the crooks that failed to properly fund state pension obligations.

The pensions will remain intact, but it will take major pain to remedy the mess that’s been created in Springfield.

The only question is the distribution of pain to meet the state’s obligation.

Comment by Illinois Bob Friday, Jun 10, 16 @ 9:39 am
Q: Recently, an Arizona Superior Court overruled an attempt to lower cost-of-living-adjustments for existing employees. Arizona also has a constitutional impairment clause similar to the one in Illinois. What, if anything, can we conclude from this precedent?

Reynolds: Each state is the “master” of its own law. Illinois courts do not have to follow the decisions of courts in other states and the court decision in Arizona is technically irrelevant to Illinois. While courts of one state do occasionally cite decisions from another state, there are remarkably few cases in which one state court uses a different state’s court opinion as a persuasive precedent. On the other hand, state courts routinely parrot federal constitutional and statutory interpretation cases in developing their own jurisprudence, which is another reason why we would not be shocked to see Illinois following the U.S. Supreme Court’s line of analysis with regard to the contract impairment issue.

https://news.illinois.edu/blog/view/6367/198513

Comment by Poolhall Richard Friday, Jun 10, 16 @ 9:41 am
just curious, Rich. When posters see parts of their posts lined out before posting, does that just mean you’re reading it, or does it mean that those sections should be removed or revises in order to get posted?

Comment by Illinois bob Friday, Jun 10, 16 @ 9:41 am
Cue the Administration singing Happy Days in 3-2-1.

Comment by Sir Reel Friday, Jun 10, 16 @ 9:44 am
- Poolhall Richard -

As history has shown us, the IL SC since 1975 has consistently chosen to follow the strict literal interpretation of the pension clause language.

In fact, the court rejected the fiscal emergency / police powers argument saying, in effect, the Legislatures and Governors deliberately created this mess so you can’t argue it is an emergency or was unforeseen.

Comment by RNUG Friday, Jun 10, 16 @ 9:57 am
For gosh sakes just make the required payment to the pensions systems. Time (we’ll croak soon enough) and tier 2 will take care of it.

Comment by Leave a Light on George Friday, Jun 10, 16 @ 9:59 am
Doest this mean along with the Il SC ruling that t
o have an enforceable ckntract with the state it had better be a provision in the state constitution? I dont see anything stopping NJ from jusr cancelling all its pension bond or other contractor obligations?

Comment by illinois manufacturer Friday, Jun 10, 16 @ 10:03 am
Time (we’ll croak soon enough) and tier 2 will take care of it.

Not before everyone else has to pay a massive income tax increase, on top of paying the second highest property taxes in this country and highest sale taxes in this country.

Comment by atsuishin Friday, Jun 10, 16 @ 10:06 am
atsuishin

Not before everyone else has to pay a massive income tax increase..

Its called paying back the tax break we got over many years from using the pension funds from state employees pension account

Comment by anon Friday, Jun 10, 16 @ 10:19 am
== I dont see anything stopping NJ from jusr cancelling all its pension bond or other contractor obligations? ==

You raise an interesting point, but I think it will only affect certain things in NJ, not all contracts.

I’m reading it to mean that NJ requires voter approval of future / long term debt. The court, I think, is saying the COLA “contract” was not a legal contract because the GA, in this case, did not have the authority to take on long term debt. The big difference between NJ and here, as Eric noted, is our Pension Clause clearly states the pension (and it’s benefits) are a contract.

The NJ court was apparently walking in the gray area of the law … and, IMO, may live to regret this ruling.

Comment by RNUG Friday, Jun 10, 16 @ 10:26 am
==Not before everyone else has to pay a massive income tax increase, on top of paying the second highest property taxes in this country and highest sale taxes in this country.===

This may be true, but so it goes as in other real life examples. I foolishly bought a timeshare once, and paid a lot more than I should have, but eventually got out of it, and learned my lesson the hard way.

Comment by Six Degrees of Separation Friday, Jun 10, 16 @ 10:28 am
The GA and various governors created and exacerbated this pension mess let them fix it. The Illinois Supreme Court cold not be more clear. Also the 3% is NOT a cola bu a negotiated benefit and less of an increase historically tha the cola for social security. Read the opinion

Comment by DuPage Saint Friday, Jun 10, 16 @ 10:31 am
***Not before everyone else has to pay a massive income tax increase, on top of paying the second highest property taxes in this country and highest sale taxes in this country***

This is what I was referring to yesterday when I said we would eventually have to pay the piper.

Our pension benefits were affordable if the State had just met it contribution responsibilities all along. While Illinois pension benefits are not spartan, the failure of the state to make actuarially required contributions is a major factor in the shortfall.

We have enjoyed decades of artificially lowered taxes in this state and the pension funds have suffered.

Time to pay the piper!

Comment by Ole' Nelson Friday, Jun 10, 16 @ 10:32 am
RNUG You are as usual right. There is a NJ.COM story that reports it better. Colorado ruled in their case it’s a COLA and as such can be adjusted with inflation. I think NJ may regret this because….social security?

Comment by illinois manufacturer Friday, Jun 10, 16 @ 10:45 am
atsuishin

Pension recipients are tax payers, property owners, and purchasers as well. No social security nor medicare, but pay towards your medicare.

You’re welcome.

Comment by Now What? Friday, Jun 10, 16 @ 11:02 am
A strong Republican principle hinges on state rights. So the fact that each state can write pension laws for their state and their courts render separate decisions should support this principle. It is time for everyone to accept the pension payments promised is the reality. What is owed has to be paid. It is time to move on and figure out a way to pay what is owed.

Comment by illlinifan Friday, Jun 10, 16 @ 11:08 am
I believe they arrived at the 3% figure because that is the historical average inflation rate over time. How can you pay someone in future dollars without adjusting for inflation? Would bankers go for a deal like that? Even Social Security adjusts for inflation.
And don’t forget that since public workers don’t qualify for Social Security, the state didn’t have to make any payments into S.S.

Comment by TinyDancer(FKA Sue) Friday, Jun 10, 16 @ 11:12 am
== And don’t forget that since public workers don’t qualify for Social Security, the state didn’t have to make any payments into S.S. ==

Actually, that depends on which pension system you belonged to and what job title you held. As a GENERAL rule, teachers did not pay into SS; most actual State employees did … but there are exceptions both ways.

Comment by RNUG Friday, Jun 10, 16 @ 11:18 am
It’s not COLA and it’s not based on inflation. It’s an annuity and part of the compensation package. Stop trying to tie it to anything but that…

Comment by Consideration Friday, Jun 10, 16 @ 11:19 am
Does anyone know what percent of pension payments go towards actually paying pensions and what percent goes to the banks to pay interest on the debt?
Anyone?

Comment by TinyDancer(FKA Sue) Friday, Jun 10, 16 @ 11:25 am
Now What? +1

Comment by leave a Light on George Friday, Jun 10, 16 @ 11:25 am
@Tiny Dancer

Most private pensions are annuity based and aren’t adjusted for inflation, Tiny. Since you can’t predict it, you don’t obligate yourself to pay it. It should have been provided at rate of inflation or 3%, WHICHEVER IS LESS. Sensible precautions for obligations created through perpetuity are what good leaders do, I guess that’s yet another reason I’m no fan of Big Jim.

Comment by Illinois Bob Friday, Jun 10, 16 @ 11:27 am
Tiny- as usual you have no idea of what you are talking about. No portion of pension payments go to banks to pay “interest on the debt”. The unfunded liability is an accounting issue there is no third party debt other then maybe the pension bonds issued under Blago.

Comment by Sue Friday, Jun 10, 16 @ 11:31 am
Trump gets a nice SAG pension. I assume it is a regular annuity but even at his age it must be worth over a million. He didn’t put a value on it in his disclosure form. He puts some whopper values on his golf courses. I would like to know if he is proud of his buddy Chis cutting teacher pensions and how he would feel about his being cut.

Comment by illinois manufacturer Friday, Jun 10, 16 @ 11:37 am
=Most private pensions are annuity based and aren’t adjusted for inflation=
Right. They’re invested in the market and get the upside of the market instead of COLA - unless, of course, you happen to retire at a time when the market is tanking, which is why that model doesn’t work in the real world.

=at rate of inflation or 3%, WHICHEVER IS LESS=

So, the banks will be giving us that same deal on bonds?

Comment by TinyDancer(FKA Sue) Friday, Jun 10, 16 @ 11:37 am
== Does anyone know what percent of pension payments go towards actually paying pensions and what percent goes to the banks to pay interest on the debt? ==

With the exception of a couple of pension bonds taken out under Blago to make the equivalent of 2 years pension payments (and then handing the bill to the pension funds who have to pay off the bonds with interest, and exactly how much is complicated), all the rest of the pension debt is just IOU’s the State owes the 5 pension funds. The “interest” associated with those IOU’s is the lost earnings from the money not being paid into the pension funds when it should have been. So it’s just money the State owes itself …

The $110B of pension debt will never be borrowed from a real bank that would demand actual and regular payments, nor would it be bonded out for the same reason. It would remove the flexibility the State has to reduce or skip the pension payments when the State doesn’t have enough revenue to both pay current bills and the pension funds. Yes, that is how we got into this mess …

For what it is worth, the State is paying about $1.7B - $1.9B annually for the current pension cost, plus about $5B - $6B in combined back principal and interest. Because of the back-end loaded Edgar Ramp, that principal and interest will increase (like a variable rate mortgage ballooning) for years to come unless the State were to, in effect, re-fi it by setting a new “fully funded” date and a new target percentage. If the State were to do that on actuarial principles (like a level payment mortgage), the immediate FY cost would increase by about $2B (equivalent of 0.5% of the current flat tax) but stay at that same level from here on out. It would be the smart thing to do but would require a tax hike.

Comment by RNUG Friday, Jun 10, 16 @ 11:47 am
It is amazing to me that everyone keeps saying we are going to have to have a tax increase to pay these pensions; which is probably true; when maybe everyone should be saying thanks to the pension systems’ money to fund things all these years to keep our taxes down. There are 2 sides to the coin folks.

Comment by Crispy Critter Friday, Jun 10, 16 @ 11:49 am
Private anuities are not tled to market fluctuations. The simple ones are you pay a lump sum and get x dollars a month for life.There are a lot of variants some will give you some market exposure.Some function like CDs and can be anuitized. Variable annuities are really more mutual fund than an annuity. I was a pat owner of an insurance agency once a long time ago.

Comment by illinois manufacturer Friday, Jun 10, 16 @ 11:55 am
== when maybe everyone should be saying thanks to the pension systems’ money to fund things all these years to keep our taxes down. There are 2 sides to the coin folks. ==

That’s true, and should be made CRYSTAL CLEAR by whoever has to sell the tax increase (it should be Rauner but he doesn’t appear to be willing to stand up and say so) … but it doesn’t raise the cash needed now.

Comment by RNUG Friday, Jun 10, 16 @ 11:55 am
=Variable annuities are really more mutual fund than an annuity.=

Right. Except for all the hidden fees.
And most 401(k)s are in the market - not annuities.

Comment by TinyDancer(FKA Sue) Friday, Jun 10, 16 @ 12:12 pm
A shame the Illinois constitution was drafted in the manner that it was. If ours was more similar to interpretation as New Jersey’s we could be following a similar method to solving the problem. New Jersey people must be quite pleased they are now working their way out of the pension problem. Illinois is still stuck in it.

Comment by Maximus Friday, Jun 10, 16 @ 12:57 pm
Also the 3% AAI (not a COLA) that is provided to retirees is funded in part by the employees themselves. During our working years we paid an extra .5% more into the pension over the required contribution to help cover the cost of the AAI.

Honesty about this annual increase is needed.

Comment by illlinifan Friday, Jun 10, 16 @ 12:59 pm
RNUG, your a genius ( seriously). Anyone who received DCEO handouts now must pay back or be taxed an equivalent amount. Put that money back into the pension systems. Finally a tax old Blue can stomach. Let’s roll.

Comment by Blue dog dem Friday, Jun 10, 16 @ 1:50 pm
I worked for state of Illinois and contributed to my retirement every paycheck… I make a small retirement… With no hope of of ss… I need my 3 percent to live…I would give back maybe 500 a year to help and that’s generous…. I can’t even afford that… Stop blaming pensioners for being greedy…. I’m not… I did everything I was told to do… Learn to live on a budget … And go without like I did all those years …

Comment by Jen Friday, Jun 10, 16 @ 1:58 pm
Maximus – 12:57
How would you like for your Retirement plan or Social Security to say, well we don’t have enough money to pay you what we promised and you planned your retirement around, so we are not going to give you any raises? This does not stop the prices you pay for everything from going up. While you may be able to pay your bills now, it is only a matter of time till you cannot. Then you have to go on some sort of costly Public Assistance in order to survive. How can anybody in their right mind be proud of that? We want people to be self-sufficient, so they are not a drain on society. The fact is we have the money!!! Some people just want all of the benefits, without paying for the bill when it comes due. I think there is a word for that.

Comment by Common Sense Republicain Friday, Jun 10, 16 @ 3:11 pm
==A shame the Illinois constitution was drafted in the manner that it was.==

Yes. It would be so much easier if we could just stiff all those public retirees. Who do they think they are? Bankers? I mean, public employee contracts aren’t sacrosanct like those corporate/banker contracts.

Comment by TinyDancer(FKA Sue) Friday, Jun 10, 16 @ 3:20 pm
RNUG:

Thanks.

Is CPS debt similarly structured?

Comment by TinyDancer(FKA Sue) Friday, Jun 10, 16 @ 3:34 pm
The fact that employees contribute a specific, dedicated percentage of their salaries (0.5% of salary in SURS, as much as 1% in some other systems) to receive the AAI in retirement is crucial. Cutting something that someone has paid for up-front is not merely a violation of the pension protection clause, but of basic contract law in general. For example, if a corporation sells a 30-year bond with a 3% coupon rate, it cannot unilaterally cut the coupon to 2% or 1% ten years later on the grounds that interest rates have declined since the bond was issued.

I am willing to bet that the New Jersey COLAS were structured very differently than the Illinois AAIs, i.e. that the former did not require an increase in employee contributions while the latter did.

Comment by Andy S. Friday, Jun 10, 16 @ 3:53 pm
== Is CPS debt similarly structured? =

- TinyDancer(FKA Sue) -

I’m not up to speed on it, but I believe so. Someone else here should know better than I do.

Comment by Anonymous Friday, Jun 10, 16 @ 4:21 pm
Just realized I left RNUG off the 4:21pm post.

Comment by RNUG Friday, Jun 10, 16 @ 4:47 pm