Illinois Pension Blowup

Illinois Pension Blowup

State judges tell taxpayers to pay for political-union failure.

From the Wall Street Journal

The Constitution is not a suicide pact—except maybe in Illinois. On Friday the Illinois Supreme Court struck down modest pension reforms as a violation of the state constitution in a decision that tees up state taxpayers for years of tax increases.

The court ruled unanimously that pensions are inviolable under the plain text of the state constitution, which holds that “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

The law isn’t that simple, and the practical damage will be great. State pensions are underfunded by $111 billion—a 500% increase from 1995 and up 75% in the past five years. About one in four state tax dollars already finances pensions, which is more than Illinois spends on education. Yet the court accuses politicians of shortchanging pensions.

Politicians are to blame for the state’s fiscal woes, but mainly because they colluded with unions to promise unsustainable benefits in return for political support. Less than 40% of the increase in the state’s unfunded liability since 1995 is due to inadequate payments. The rest is due mainly to benefit growth and faulty actuarial assumptions such as investment rate of return.

The 2013 reforms at issue capped salaries of current workers that are used to calculate pensions at $110,600 (with a carve-out for collectively bargained increases) and raised the retirement age for workers in their 20s to the ripe, old age of 60. Compounded 3% annual cost-of-living increases were also tweaked for younger workers, a modification that courts in nearly every other state have upheld.

In toto, the changes were projected to shave a mere $20 billion off Illinois unfunded liability. Pension payments would still constitute nearly 20% of the state budget.

This is legally relevant because the U.S. Supreme Court in 1934 ruled that states can invoke their police powers to impair contracts in an emergency. The High Court has since established a balancing test that requires judges to consider whether state contractual impairments are substantial, serve an important public purpose and can be achieved through less drastic means.

Yet the Illinois court blows right through this judicial standard. Based on its prior rulings, the court opines that “neither the legislature nor any executive or judicial officer may disregard the provisions of the constitution even in case of a great emergency” or “for economic reasons.”

If pensions can be modified, the court opines, then “no rights or property would be safe from the State. Today it is nullification of the right to retirement benefits. Tomorrow it could be renunciation of the duty to repay State obligations. Eventually, investment capital could be seized.” This irony of this slippery-slope fallacy is that by shielding pensions the Illinois judges are making it more likely that the state will renege on debt or other obligations.

The justices cavil that politicians “made no effort to distribute the burdens evenly among Illinoisans” and could “have sought additional tax revenue.” Yet Illinois raised taxes by a record amount in 2011. The judges even suggest that it is unconstitutional to require government workers, rather than taxpayers, to shoulder the pension burden.

All of this means that Illinois and its municipalities may soon have little choice but to raise taxes or restructure debts to pay for pensions. Chicago, whose credit rating is two notches above junk, faces a $20 billion unfunded liability for pensions and $1.1 billion balloon payment next year. Unions (and perhaps investors) were counting on a state bailout, but now they will probably beg Washington for a rescue.

Republican Governor Bruce Rauner has floated an alternative: a state constitutional amendment allowing pension modifications, which would require a public referendum and two-thirds vote of the legislature. Barring that, Illinois taxpayers may want to start contemplating Indiana or Florida residency.

Poster’s question: Do we change the government method or do we change many of the people in government with the vote?