Options for a pension reform Plan B may be limited

By Jamey Dunn

The Illinois Supreme court issued a ruling Thursday on state employee health care that bodes ill for supporters of the recently passed cuts to public employee retirement benefits.

The court ruled that health care benefits for retirees fall under the pension protection clause—the very sentence of the state’s Constitution that many supporters of pension reform had hoped the justices would be willing to overlook. The pension clause states: “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 ruling indicates that the justices are inclined to side with public employees and retirees. In the 6-1 opinion, Justice Charles Freeman wrote: “Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner.” Justice Anne Burke wrote the dissenting opinion. In it, she did not question the protection of the pension clause, but she argued that retiree health care benefits did not fall under that protection.

Some lawmakers seem to see the ruling as writing on the wall for the pension reform law, which is still working its way through the legal system. “Today, the Illinois Supreme Court made it very clear that the Pension Clause means what it says,” Senate President John Cullerton said in a prepared statement. “The court cannot rewrite the Pension Clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve. The clause was aimed at protecting the right of public employees and retirees to receive their promised benefits and insulate those benefits from diminishment or impairment by the General Assembly.” Cullerton added: “If the court’s decision is predictive, the challenge of reforming our pension systems will remain. As I have said from the beginning, I am committed to identifying solutions that adhere to the plain language of the constitution.”

Kent Redfield, an emeritus professor at the University of Illinois Springfield, said that while the ruling pertains to a different case, the language used is clear. “You could find some way to parse some of it, but it’s really, really difficult. There’s no logical way to get to upholding Senate Bill 1 (the pension reform legislation) based on the clear content of this ruling and the way they’ve construed the pensions clause.”

Others disagree that the ruling is a harbinger of the pension law’s death. Rep. Elaine Nekritz, who was key player in getting SB 1 passed, said that the justifications the law makes for reducing benefits were not part of the retiree health care case. She said that the court has yet to consider those points. The law lays out the dire fiscal situation that the state is in and claims that state elected officials need special powers to curtail the estimated $100 billion unfunded liability and save the state from a budget disaster. However, one line in today’s decision seems to blow a hole in that argument. “In light of the constitutional debates, we have concluded that the [pension] provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.” 

Supporters also claim that a reduction in the amount that employee would pay into the system represents a consideration they are being given for a change to the contract that is their membership in a pensions system. Nekritz said that the ruling is clear that benefits are protected, but she says it is unclear if that protection is absolute. “Does it really mean that we can do nothing, or are there some things that we can do based on the legal arguments that we make under Senate Bill 1?”

Those arguments aside, if the Illinois Supreme Court rejects the new pension law, what options do legislators have?

Cullerton had proposed offering employees a choice between receiving subsidized health care coverage or keeping their current pensions benefits. If they had chosen health care, they would have seen a reduction in their retirement income including a cut to the expensive compounded interest cost of living adjustments (COLAs) retirees currently receive. Cullerton said that this scheme could potentially fulfill a legal standard of giving employees consideration for a reduction in benefits. The Senate approved the plan, but it was never called for a vote in the House.

However, that plan was based on the idea that health benefits were not protected by the Constitution—a concept that runs counter to today’s ruling. “The concept of consideration is still viable. The court has not rejected it or defined what the limits are. It’s just hard to see what you can give up in exchange,” Redfield said. “It’s hard to see what other major carrot you can offer to people in terms of giving up their COLA.”

Skokie Democratic Rep. Lou Lang introduced legislation that would extend the current income tax rates, which are due to start rolling back on January 1, to pay down the unfunded liability.

But Lang’s plan also calls for larger contributions from employees and an increase in the retirement age. Both of these provisions could be seen as a reduction in benefits by the court. Much of the revenue from the temporary income tax increase has gone toward making the required annual pension payment after lawmakers voted to skip payments and short payments for several years in the past.

There have also been proposals to change the pension payment schedule to even out the cost of the annual payment. The state is currently on a system that resulted in large balloon payments, much like a subprime mortgage. Some such plans also call for funding the system at 80 percent as opposed to 95 percent or 100 percent. Redfield said that a proposal that changes the payment structures would need to be combined with changes to the state’s revenue structure, such as expanding the sales tax base to some services, budget cuts or both. “As a stand alone, then it looks like an excuse to keep doing what we’re doing,” he said.

Republican candidate for governor Bruce Rauner has advocated for moving employees’ future benefits to a system that looks more like a 401-K. That plan would go even further than SB1, so it is unlikely that it would be upheld if SB 1 were rejected. But it is possible that the court’s ruling might strengthen his case for offering a defined contribution plan to newly-hired employees. “It may embolden Rauner to say well we’ve got to get everybody going forward into a defined contribution [plan],” Redfield said. However, such a proposal would have no impact on the unfunded liability for current employee and retiree benefits. It also means the state would likely have to start contributing to Social Security benefits for positions that do not currently offer them.

Meanwhile Gov. Pat Quinn is emphatically sticking by his opinion that SB 1 is constitutional. “We believe the pension reform law is constitutional. This landmark law was urgently needed to resolve the state’s $100 billion pension crisis. It was also urgently needed to ensure that teachers, university employees and state workers who have faithfully contributed to the pension system have retirement security,” said a written statement from his office. “We’re confident the courts will uphold this critical law that stabilizes the state’s pension funds while squarely addressing the most pressing fiscal crisis of our time by eliminating the state's unfunded pension debt.”

Redfield said that there will likely be many suggestions for a Plan B on pension reform in the coming months. “I think people will be floating lots of ideas that probably aren’t feasible and really won’t address the short-term problems—between now and November,” he said. “There’s nothing politically to be gained by standing up and saying ‘you know, we really, really screwed up, and we have no options but to raise your taxes.’”

 But he said that new revenues and cuts to state services to cover the cost of the pension systems might be the only real option available to address the problem if the court rejects SB 1. If that happens, the state will almost certainly face another credit downgrade if it fails to act to address the liability. The current budget is based on $650 million in borrowing that has to be paid back. In Fiscal Year 2016, the tax rate will be lower for the entire fiscal year instead of just half of it. FY16 could turn out to be one doozy of a budget for lawmakers and whomever is the governor to sort out. “You want to be around for a historic session for the General Assembly? I think everybody has a front row seat,” Redfield says.