Illinois Supreme Court Ruling Casts Bad Omen on State’s Pension Reform

While the rest of the country celebrated Fourth of July weekend, members of the Illinois pension sphere got to watch some fireworks of their own. A key Illinois Supreme Court case was decided over the weekend, and the decision does not bode well for the state’s landmark pension reform. (The full court opinion can be read at the bottom of this page.)

According to the 6-1 decision, the pension protection clause — which says that retirement benefits are a contractual agreement that “cannot be diminished or impaired” — applies to other retirement benefits, not just pensions. That overrode the state’s argument that its emergency powers, in dealing with its budget crisis, justified an increase in what retirees must pay for their health benefits.

The court rejected the state’s argument that health care benefits are not covered by the pension protection clause, finding that there is nothing in the state constitution to support that. The only question now is whether the reduction in the state’s health care subsidies constituted an impairment or diminishment of those benefits.

Although the ruling doesn’t directly apply to pensions, the writing seems to be on the wall.

“If the justices can read the pension clause of the constitution to protect health benefits, they certainly would use it to protect pension benefits,” former state Budget Director Steve Schnorf said.

“This bodes very, very ill” for the pension cuts the Legislature approved for state workers, and for a similar set of trims Mayor Rahm Emanuel wants for his workforce, he added.

Time after time, without finally resolving the issue, the court seemed to go out of its way to knock down any changes not agreed to by workers unions, and perhaps by each individual worker.

For instance, one argument defenders of the new pension law have offered is that unfunded pension liability now is so large — $100 billion in the state funds, and at least $32 billion in the city funds, for instance — that government has a right to order changes, using its so-called police powers, to set spending priorities. But, said the court, “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.”

In other words, pony up.

And as far as Cost-of-Living Adjustments:

Another argument offered by reform proponents is that annual cost of living adjustments in pensions are not protected by the state constitution in the same way that a person’s original pension is. In other words, a worker who initially got, say, a $3,000-a-month pension is entitled to get it and no more in the future, regardless of inflation. COLAs are far and away the biggest element in the retirement-funding crisis.
But, ruled the court, “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. ”
So, the current 3 percent guaranteed annual COLA would appear to be here to stay.
Ironically, such an interpretation would apply both to the pension reform bill pushed by Gov. Pat Quinn that’s working its way up to the Supreme Court and to an alternative plan offered by his opponent Bruce Rauner. The GOP gubernatorial candidate proposes moving workers to a defined-contribution system that caps state funding.

Many believe lawmakers should now be scrambling to come up with a Plan B to reform pensions in a way allowed by the courts:

State and local lawmakers had better get working on a Plan B. Illinois needs alternatives to the state pension-reform law passed in December and to the Chicago pension-reform law passed in May. The options are limited — it may come down to a constitutional amendment — but the state’s best minds better get cracking.
It isn’t an exaggeration, even in the slightest, to say Illinois’ future depends on it.

There is now but one key question: Does a viable pension reform alternative exist? A bill pushed by Senate President John Cullerton, considered an alternative by many, is now almost certainly off the table. That bill gave workers a choice between full pension benefits or subsidized health care — choose pension benefits and health care would be cut. Given Thursday’s ruling, that now seems highly dubious.
One possibility would be to amend the constitution to modify the pension protection clause — not eliminating it but weakening it some. However, this is a lengthy process and may still not protect the state legally if it reduces benefits already promised.

Read the court’s entire opinion here:

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