In 2015, the Illinois Supreme Court will decide the legality of the state’s pension overhaul that reduced benefits of public workers.
But if legal challenges to similar laws in other states are any indication, the chances of Illinois’ pension reform being upheld are slim, according to a Reuters analysis.
Court rulings in Arizona show that Illinois, which has the worst funded pensions of any U.S. state, may not have much chance.
The problem is that Illinois, Arizona and New York states all provided public workers, such as police, teachers and even judges, near iron-clad pension guarantees that were embedded in their state constitutions.
Two Arizona laws enacted in 2011 to increase employees’ pension contributions, restrict certain people from receiving pensions, and institute a new formula for calculating benefit increases, floundered in the face of legal challenges. One law, challenged by teachers, was overturned by a Maricopa County judge in 2012, while another, contested by retired judges, was tossed out by the Arizona Supreme Court in February this year. The courts tied their rulings to constitutional language that membership in public pension systems is a contractual relationship, and retirement benefits cannot be “diminished or impaired.”
Illinois and its Republican Governor-elect Bruce Rauner are likely to find themselves in similar bind to Arizona where the only answer appears to be a long-shot effort to amend the state constitution.
“There aren’t many options at this point,” said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College, referring to both states. “The (pension) payments need to be made or the constitution needs to be changed.”
Altering the constitution, however, isn’t a practical option. From Reuters:
Altering the Illinois Constitution’s 1970 pension provision would be a massive undertaking, requiring a three-fifths vote of lawmakers in the House and Senate to get it on the ballot. It would then need approval from three-fifths of voters or a majority of individuals actually voting in a general election — not an easy proposition as people often don’t vote on every item on the ballot and given Illinois is a largely Democratic state with activist public unions.
Illinois’ state-level pension systems were collectively 42.9 percent funded as of June 30, 2014.
A second lawsuit has been filed against Chicago, challenging the pension cuts passed by the state this year.
The pension changes raise contribution rates for employees and employers, and reduce COLAs. The changes apply to members of the Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund.
Litigation seeking to derail changes to Chicago public worker pensions on constitutional grounds ensnared a second city retirement system on Monday.
Attorney Clint Krislov said he filed a lawsuit in Cook County Circuit Court on behalf of members of the city’s pension fund for laborers. That lawsuit followed one filed Dec. 16 by a coalition of labor unions against Chicago’s municipal pension fund.
An Illinois law enacted earlier this year for the two funds requires higher worker contributions and limits cost-of-living increases for retirees. The lawsuits contend the law violates a prohibition in the Illinois Constitution against reducing public worker retirement benefits.
Cook County Associate Judge Rita Novak on Monday set a hearing on the unions’ motion for a temporary restraining order in the municipal fund case for Jan. 28 and 30.
Like Illinois, Chicago is arguing that its so-called police powers to provide essential services to residents trump constitutional protections for pensions.
Under the law that takes effect on Thursday, Chicago’s payments to its two funds increase over five years. Workers’ current contributions of 8.5 percent of earnings rise to 11 percent over five years. Instead of receiving an annual 3 percent cost-of-living increase, retirees will receive increases tied to inflation. The increases will be skipped in certain years.
Mayor Rahm Emanuel has warned that the funds face insolvency within nine to 17 years unless changes are made. The funding shortfall is $8.4 billion for the municipal system and $1 billion for the laborers system. Police and fire pensions were not affected by the law.
The Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund manage a combined $6.7 billion in assets.
Photo by bitsorf via Flickr CC LIcense
Chicago unions and public employees filed a lawsuit Tuesday to block pension changes coming in 2015 that would reduce future COLA increases and require workers to pay more toward their retirement.
From the International Business Times:
The law in question is scheduled to take effect in the new year and will slash pension benefits for workers and retirees in Chicago’s Municipal Employees Annuity and Benefit Fund and Board of Trustees of the Municipal Employee’s Annuity and Benefit Fund, according to the lawsuit.
The lawsuit, filed in Cook County Circuit Court, argued Public Act 98-0641 violates a provision and “straightforward promise” in the Illinois Constitution that forbids the diminishment or impairment of public employee retirement benefits. The lawsuit stated that the pension reform law, which was enacted in June, unlawfully reduces pension benefits for the plaintiffs and all others who chose a public-service career.
“Unless this court strikes down and enjoins implementation of the Act, Plaintiffs and thousands of other current and retired City of Chicago and Chicago Board of Education employees will be harmed and the trust that all Illinois citizens place in the inviolability of their Constitution will be breached,” the lawsuit stated.
The plaintiffs, comprised of 12 current and former workers and four unions, requested the court declare Public Act 98-0641 entirely “unconstitutional, void and unenforceable.” Current retirees will suffer immediately, while the same “injustice” awaits current public workers when they retire, according to the lawsuit.
Chicago Mayor Rahm Emanuel said the law was created with the support of many unions and is both constitutional and necessary to ensure 61,000 city workers and retirees receive pensions. “Without this reform, these two funds will run out of money in just a matter of years, which is why we must defend this law to protect the future of our workers, retirees, and taxpayers,” Emanuel said in a statement.
At the end of 2012, the city’s six pension funds were collectively 50 percent funded.
Photo by bitsorf via Flickr CC LIcense
Eric M. Madiar, the Chief Legal Counsel to Illinois Senate President John Cullerton, has written an op-ed today opposing Illinois’ pension reform law on the grounds that the law is unconstitutional. An excerpt:
Anyone following the pension reform debate knows that Illinois has long diverted the moneys needed to properly fund its pension systems to avoid tax increases, cuts in public services or both. Some may not admit it, but they know it. They also know this practice is the primary reason why the systems are underwater.
Since much of my time over the last three years has been spent on our State’s pension problem, I wanted to find out how long it’s been that way and how long we have known about it. Well, as chronicled in an article I wrote now published by Chicago-Kent College of Law, I have an answer.
1917. No, that’s not a typo.
In 1917, the Illinois Pension Laws Commission warned State leaders in a report that the retirement systems were nearing “insolvency” and “moving toward crisis” because of the State’s failure to properly fund the systems. This nearly century old report also recommended action so that the pension obligations of that generation would not be passed on to future generations.
The 1917 report’s warning and funding recommendation went unheeded, as were similar warnings and funding recommendations found in decades of public pension reports issued before and after the Pension Clause was added to the Illinois Constitution in 1970.
…As early as 1979, Moody’s and Standard and Poor’s advised the State that it would lose its AAA bond rating if the State did not begin tackling its increasing unfunded pension liabilities. Also, in 1982, Governor Jim Thompson succeeded in passing legislation making pension funding far more dependent upon stock market returns to stave off higher State pension contributions.
Further, a 1985 task force report noted that Standard and Poor’s reduced its bond rating for Illinois from AAA to AA+ due to the State’s “deferral of pension obligations,” and that another rating agency viewed the State’s pension funding as a future financial “time bomb.” Finally, the much heralded 1995 pension funding plan was designed to increase the State’s unfunded liabilities and postpone the State’s actuarially-sound pension contributions until 2034.
Given this well-documented history, it’s extremely hard to legitimately believe that our State’s current situation is so surprising that the Illinois Constitution can be ignored and pension benefits unilaterally cut. As noted in my previous legal research, the Pension Clause does not support such a result.
The entire piece can be read here.
Photo by Mr.TinDC via Flickr CC License
Illinois’ pension reform law, passed and signed in December, remains in a legal limbo that has parties on every side of the issue uncomfortable. As a result, the attorneys behind several of the lawsuits challenging the reform law plan to submit motions that they hope will land the case in front of the Supreme Court sooner than later. From the State Journal-Register:
Lawyers challenging last year’s pension reform law said they will make another attempt to get an expedited ruling in the case in the wake of the Illinois Supreme Court’s decision in the retiree health insurance case.
[Attorney Don] Craven said this new motion could enable the pension reform case to get to the Supreme Court earlier than is now considered likely. Before the health insurance ruling, [Judge] Belz set out a lengthy schedule for lawyers on both sides to conduct preliminary work on the cases. Lawyers for the state indicated they want to use six expert witnesses to buttress their case. Aaron Maduff, another attorney challenging the law, said it involved “tremendous, tremendous” preliminary work.
“It’s a huge amount of material,” he said.
At this point, however, the schedule is still in place and a ruling at the circuit court level isn’t expected until next year.
The next hearing in the pension reform lawsuit is scheduled for Sept. 4.
The Illinois Supreme Court ruled earlier this month that it was unconstitutional to charge seniors a premium for their state-subsidized health insurance. The ruling was of particular relevance to the state’s pension reform law because the legal reasoning behind the judgment was that the state is not permitted to diminish retirement benefits protected by the state Constitution.
Some parties believe last month’s ruling was the nail in the coffin for this iteration of state pension reform. But others say the eventual ruling on the reform law won’t be influenced by the previous judgment. From the State Journal-Register:
“The Supreme Court could hardly have been clearer in destroying the police powers argument in the Kanerva case,” said attorney John Myers, who brought another of the pension reform lawsuits. “What the Supreme Court is saying is you have to fund this, now figure it out. That destroys the whole sovereign powers defense, which is, ‘We don’t have to figure it out, we can impair pensions.’ ”
Attorney General Lisa Madigan has said the ruling in the health insurance case does not affect the pension reform case because they involve different legal issues.
Pension benefits are protected in Illinois by the state Constitution. The reform law seeks to end cost-of-living-adjustment increases and raise the retirement age.
In what has become an annual tradition, ratings agency S&P has threatened to further downgrade Illinois’ credit rating, whose bonds already carry among the lowest ratings in the country.
The main factor, according to S&P, was the status of the state’s pension reform law, which sits in legal limbo until a court decides its constitutionality.
Standard & Poor’s Ratings Services on Wednesday warned that Illinois’ already low credit rating could sink further if the state is unable to implement reforms to curb its big unfunded pension liability and balance its budget.
The credit rating agency revised the outlook on Illinois’ A-minus credit rating to negative from developing, citing a recent state supreme court ruling that could derail a new pension reform law and the state’s structurally imbalanced state budget.
“If the pension reform is declared unconstitutional or invalid, or implementation is delayed and there is a continued lack of consensus and action among policymakers on the structural budget gaps and payables outstanding, we believe there could be a profound and negative effect on Illinois’ budgetary performance and liquidity over the next two years and that this could lead to a downgrade,” S&P said in a statement.
It added that Illinois could achieve a stable outlook if the pension reform law Illinois enacted in December withstands constitutional challenges and the state takes “credible action” to balance its budget.
When a state’s credit rating is under review, ratings agencies assign it to one of three categories: positive, negative or developing. Positive indicates that the rating agency holds a positive outlook for the state’s credit rating and will likely upgrade it in due time.
Illinois’ outlook was previously developing. Now, it is negative, meaning S&P will likely downgrade the rating sooner than later.
S&P added, however, that Illinois could avoid a downgrade if the state’s pension reform law passed legal muster.
It could be a long time before the constitutionality of Illinois’ pension reform law is argued in the halls of the state’s Supreme Court. But now that day might come sooner than previously thought.
The Illinois Supreme Court used its authority today to improve the efficiency of the legal battles surrounding the state’s pension reform law by consolidating all four of the lawsuits into one case.
Four separate lawsuits had been already been filed against the reform law, which was passed in December and goes into effect July 1, 2014 but could be delayed by the lawsuits.
The State Journal Register fills us in on some of the background:
State lawmakers last year approved reforms designed to save the state $160 billion in pension payments over the next 30 years and wipe out the $100 billion pension debt.
The reforms change the 3 percent compounded annual raises in pension benefits, raise the retirement age and limit the salary on which a pension can be earned.
The reform bill also cut by one percentage point the amount of contributions workers must make toward their pensions. Pension reform proponents believe that “consideration” in exchange for lowering benefits makes the reforms constitutional.
Retired teachers, retired state workers and a coalition of public employee unions all filed lawsuits contending the change violates the pension protection clause of the state Constitution. That clause calls pension benefits an “enforceable contractual relationship” between government and workers and says the benefits cannot be “diminished or impaired.”
Attorney Don Craven, who filed one of the consolidated lawsuits on behalf of the Illinois State Employees Association Retirees, told the Journal Star that the consolidation could end up producing a speedier resolution, because cases move more quickly in Sangamon County than in Cook.
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.
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.”