Illinois’ sweeping pension reform law, passed earlier this month, was bound to rustle some feathers. Now, the first lawsuit against the new legislation has been filed in the Cook County Circuit Court.
The Illinois Retired Teachers Association filed a class-action lawsuit Friday challenging the constitutionality of the law, which limits cost-of-living increases, caps the amount of salaries eligible for retirement benefits and raises retirement ages for many current workers.
The challenge centers on a provision in the Illinois Constitution which states that public pensions represent “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Illinois is one of seven states that protect pensions via constitutional provisions, and one of only a handful that constitutionally protect both accrued and future benefits—which makes it nearly impossible for the state to curb its unfunded liabilities.
This lawsuit is likely only the first of many to be filed against the law. The Illinois Education Association and the Illinois Federation of Teachers have said they both plan to file lawsuits in 2014 on behalf of their members.
The law, titled SB1, is designed to save Illinois $160 billion over the next 30 years and proponents claim the law will lead to a fully funded pension system by 2044.
The Rhode Island Retirement Board was presented with a progress report on the state’s pension reform law last week. The state’s actuary, Joseph Newton, prepares a report every year to help lawmakers determine how much money needs to be set aside for future pension benefit payments, among other things.
The report shed light on the pension fund’s performance in fiscal year 2013.
The Providence Journal summarizes the findings:
The fund, with a market value of $7.6 billion, had an 11-percent rate of return for the year that ended June 30, 2013 — far better than the 1.4-percent rate of return the previous fiscal year and exceeding the fund’s 7.5-percent target. (Nationwide, the median return for public funds with more than $5 billion in assets was 12.4 percent.)
But when averaged over the last five years, the rate of return for the Rhode Island fund is 6.17 percent. Over 10 years: 7.24 percent.
The number of active state employees — whose contributions are important in keeping the pension fund healthy — has dropped slightly (1.6 percent) since 2003 to about 11,280 as of June 30, 2013. Meanwhile, the number of retirees has increased by about the same number to 11,139.
Annual cost-of-living adjustments were suspended under the 2011 pension overhaul law until the fund is 80 percent funded. Combined, the state employees and teacher pension plans are 57.3 percent funded. Annual COLAs are currently projected to remain suspended until 2032.
Rhode Island’s sweeping pension reform became law in 2011, and immediately decreased the state’s unfunded liabilities from around $7 billion to $4.5 billion, where it stands now.
Joseph Newton said his report “confirms that all the [reform] strategies put in place then are working right down the line of what we were expecting.”
There have been a suspicious number of retirements this year in the Chattanooga Fire and Police Departments—and the city’s Fire and Police Pension Board says it’s not a coincidence.
Chattanooga Mayor Andy Burke recently put together a task force of lawmakers to come up with “concrete proposals” for reforming the city’s Police and Fire Pension Fund, which is currently only 51.8% funded.
The proposals have started rolling in, and many high ranking Police and Fire officials have begun rolling out—retiring to protect their pensions from being altered.
Forty-two officers and firefighters have retired in 2013—including Police Chief Bobby Dodd—which is double the number of retirees in an average year.
The latest proposal from the city would increase retirement ages, reduced cost of living adjustments, and raise minimum employee contributions from 9% to 13%.
Chris Willmore, President of Pension Board said the city’s proposal “will likely lead to a mass exodus from people of all ages and ranks.”
From the looks of it, the exodus has begun.
Mayor Burke will decide on a reform plan by December 31st, although that timeline could be extended.
Alaska Governor Sean Parnell is pushing to transfer $3 billion out of the state’s rainy day fund and into its pension funds, which rank among the unhealthiest in the country. The plan, released today as part of Parnell’s 2015 budget, aims to pay down a portion of the unfunded liabilities which plague the state’s retirement system.
Pensions & Investments reports:
Under the governor’s proposal, $1.88 billion would go to the $14.3 billion Alaska Public Employees’ Retirement System and $1.12 billion to the $6 billion Alaska Teachers’ Retirement System. Both pension funds are administered by the Alaska Retirement Management Board, Juneau. The contributions would increase the funded status of the plans by 10 percentage points each to 73% and 63%, respectively. It also would lower the overall unfunded liability to $8.9 billion.
If the Legislature approves the injection of assets, future contributions through 2035 would be $500 million per year, reducing annual payments by an average of about $400 million per year through fiscal year 2030.
The plan is radical, but the state’s retirement system is in dire straits: Alaska’s pension funds are only 59.2% funded, according to a MorningStar report. The same report found that Alaska has racked up $10,325 in unfunded liabilities for every person living in the state, a liability per capita ratio that ranks as the worst among all 50 states.
Illinois’ pension crisis has been decades in the making, but lawmakers for years seemed content to push the politically sensitive issue further down the road. While other states were grappling with solutions, Illinois was shorting its payments to the state’s five pension systems—or skipping them altogether.
Those decisions proved costly, as the state’s credit rating was repeatedly downgraded and now sits as the worst in the country. In the meantime, annual pension payments ballooned to $6 billion in 2013, representing 20% of the general fund’s budget and siphoning money from education and social services.
Then, late last month, after months of meetings, closed-door negotiations and special sessions, lawmakers emerged with a proposed solution: Senate Bill 1, a sweeping pension reform law which aims to save the state $30 billion over the next 30 years and fully fund its pension system by 2044.
Illinois Governor Pat Quinn signed the bill into law during a private ceremony Thursday.
The specifics of the law, according to The Associated Press:
Under the new law, automatic, annually compounded 3 percent cost-of-living increases for retirees — considered to be the biggest driver of pension costs — would be replaced with smaller annual adjustments for the highest earners. Some workers would have the option of freezing their pension and starting a 401(k)-style defined contribution plan. Also, the retirement age will be pushed back for those 45 and younger.
Additionally, the law requires that Illinois make its full annual contributions, and allows the state’s retirement systems to sue if the payments aren’t made.
“Illinois is moving forward,” Quinn said after signing the bill. “This is a serious solution to address the most dire fiscal challenge of our time.”
When a federal judge ruled today that Detroit could legally cut pensions as part of its bankruptcy proceedings, it was akin to putting a bullseye on the back of pension funds that had previously been heavily protected by constitutional and contract law.
It didn’t take long for the nation’s largest public pension fund to weigh in on the matter: California’s Public Employee Retirement System (CalPERS) has taken the unmistakably forceful stance that the Detroit ruling is not only misguided, but that it doesn’t affect their system at all.
From a CalPERS statement released just hours after the ruling:
“The Detroit court failed to recognize the difference between a two party contract and the unique nature of a state public employee retirement system…In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case law.”
The statement goes on to state why CalPERS is confident the ruling doesn’t apply to its system:
“Unlike Detroit, CalPERS is not a city pension plan. CalPERS is an arm of the state and was formed to carry out the state’s policy regarding public employees. The Bankruptcy Code is clear that a federal bankruptcy court may not interfere in the relationship between a state and its municipalities. The ruling in Detroit is not applicable to state public employee pension systems like CalPERS.”
Although Michigan’s ruling isn’t legally binding in California, the judge’s decision sets the precedent that cities in bankruptcy proceedings can “impair” pensions just as they can traditional contracts, constitutional provisions not withstanding.
In a pension shot heard ‘round the world, a ruling has come down in Detroit’s bankruptcy case that will have implications far beyond the city’s limits: in a surprise decision, U.S. Bankruptcy Judge Steven Rhodes has ruled that pensions can legally be cut during the city’s bankruptcy process.
Kevyn Orr, Detroit’s emergency manager, has said in the past that significant pension cuts for both current and retired workers will be necessary to dig the city out of its financial hole. But pensions are heavily protected in Michigan, thanks to a provision in the state constitution that categorizes public pensions as “contractual obligations” which are protected from being “diminished or impaired” under any circumstances.
But now that’s changed.
“Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy,” Rhodes said in his ruling.
Detroit is facing the financially toxic reality of having twice as many pensioners as active employees. It remains to be seen whether (and to what extent) the city will move forward with the cuts, which are sure to be politically painful. But now, for the first time, the city has the legal go-ahead to do so.