5/11/2015

Illinois Supremes Unanimously Reject Pension Reform Law

 

Necessity may be the mother of invention, but economic necessity isn’t enough to trump pension benefits, at least not in the Land of Lincoln.

Necessity may be the mother of invention, but economic necessity isn’t enough to trump pension benefits, at least not in the Land of Lincoln.

On May 8, the Illinois Supreme Court unanimously ruled unconstitutional a landmark state pension law that aimed to scale back government worker benefits to erase a massive $105 billion retirement system debt. “Our economy is and has always been subject to fluctuations, sometimes very extreme fluctuations," Justice Lloyd Karmeier wrote on behalf of the court. “The law was clear that the promised benefits would therefore have to be paid and that the responsibility for providing the state's share of the necessary funding fell squarely on the legislature's shoulders.”

The 2013 legislation, signed into law by then-Governor Pat Quinn (D), attempted to reduce the gap in a variety of ways, including reducing cost-of-living increases for retirees and raising the age at which state workers can retire with full pensions. Labor unions and retirees who challenged the law said that ran afoul of an Illinois constitutional provision that said state pensions were a contract right that can't be “diminished or impaired.” Last November Illinois Circuit Court Judge John Belz agreed with that premise, rejecting the law as unconstitutional, noting in a six-page opinion that, “Any attempt to diminish or impair pension rights is unconstitutional.” Friday’s decision by the state’s highest court affirmed that conclusion.

Finding Faults

As for the financial crisis now confronting that state, Karmeier’s opinion acknowledged, but didn’t seem to have much sympathy for the financial dilemma this sets in motion: “The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and ... it is a crisis for which the General Assembly itself is largely responsible.”

Indeed, the justices said that, “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.”

According to published reports, Illinois Gov. Bruce Rauner (R) agreed with Friday's ruling. “I don't think we should ever reduce a retiree’s benefit after they're retired, under any circumstance. A deal’s a deal. When somebody’s retired they should have their benefits, no reductions," Rauner said after speaking at an awards dinner for the Illinois Innovation Celebration for high school students in Urbana. 

On the other hand, he didn’t care for the high court’s suggestions in the 38-page opinion on how to deal with the state’s financial dilemma. “I’m not sure it makes sense for the judiciary to comment on government policy. I think it’s their role to interpret the law, the existing law,” Rauner said, going on to observe, however, that “…there's no reason a new contract can't have different compensation in the future.”

What’s Next

In its ruling, the court restated that state worker retirement benefits that are promised on the first day of work cannot be later reduced during their term of employment, only increased. However, it is unclear whether a change in the constitution could be applied to existing state workers. 

The ruling means that Rauner and the Democrat-controlled General Assembly will have to come up with a new solution. Earlier this year Rauner unveiled a proposed $6 billion in budget cuts that includes $2.2 billion in pension reductions immediately and more than $100 billion over the next 30 years by freezing all benefits as of July 1, 2015 and moving workers to a new plan in which cost-of-living hikes would be cut from the current 3% a year to the lesser of either 3% or half the inflation rate, non-compounding. The proposed budget also calls for raising the normal retirement age to 67 and no longer counting overtime in calculating pension benefits, although those changes would apply only to benefits earned after July 1.

However, the Illinois legislature is now looking at a scheduled May 31 adjournment, and, with the Supreme Court’s ruling, the size of the pension funding gap is now larger than it was.