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Illinois Asks Supreme Court to Fast-Track Pension Reform Hearing

Illinois’ Attorney General on Thursday requested that the state supreme court hold hearings on the state’s pension reform law as soon as January and no later than March.

From Reuters:

Attorney General Lisa Madigan filed a motion to accelerate the state’s appeal of a Nov. 21 Sangamon County Circuit Court judge’s ruling that the law aimed at easing Illinois’ huge pension burden violated protections in the state constitution for public worker retirement benefits.

“A prompt resolution of those issues is critical because the state must either implement the act, or in the alternative, significantly reduce spending and/or raise taxes,” the motion stated.

At stake is an approximately $1 billion cut in Illinois’ contribution to four of its pension systems in fiscal 2016 under the law. Republican Governor-elect Bruce Rauner, who takes office next month, has a Feb. 18 deadline to present a budget to the Democrat-controlled legislature, which has until May 31 to pass the spending plan with simple majority votes. A three-fifths majority vote on bills would be needed after that date to have a budget in place by July 1, the start of fiscal 2016.

[…]

The reform law was enacted in December 2013 to help save Illinois’ sinking finances. It reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits salaries on which pensions are based. Employees contribute 1 percent less of their salaries toward pensions, while contributions from the state, which has skipped or skimped on its pension payments over the years, are enforceable through the Illinois Supreme Court.

Illinois had $104 billion of unfunded pension liabilities at the end of fiscal year 2014.

How Credit Rating Agencies Reacted to Illinois Pension Ruling

None of the three major rating agencies changed their outlook on Illinois’ credit in the wake of a lower court ruling that deemed the state’s pension reform law unconstitutional.

But rating agencies are certainly keeping a close watch on the state as the reform law moves up to the Supreme Court. And all three agencies had something to say after the ruling.

Moody’s had the harshest take, calling the ruling “credit negative” that leaves the door open for a rating downgrade. Summarized by Governing:

[Moody’s] issued an analysis on Nov. 24 that said the “state’s negative outlook indicates the possibility that factors such as further growth in the state’s pension liabilities will drive the rating lower still.” The state is appealing the decision to the Illinois Supreme Court but Moody’s was wary of its chances and pointed out that the top court this summer indicated in a separate case on retiree health benefits that would adhere strictly to the pension protection clause.

A top Moody’s official commented further in a WUIS report:

“The average state from our perspective or the expected rating for a state is AA1, which is our second highest rating. And so Illinois is A3, so that’s five rating notches below that,” said Ted Hampton, a Vice President at Moody’s Investor Service. “Which is to say, it’s still an investment-grade rating. It’s still a strong rating in the context of every kind of security that we rate. But it’s far below all of the other states.”

Hampton says Moody’s saw Illinois’ passage of the pension overhaul as beneficial, but not enough to move the credit ratings needle – because a court challenge was suspected. The recent court ruling likewise wasn’t not enough to prompt a change, though Moody’s called the decision “credit negative” in a notice sent out Tues., Nov. 24.

“We do get a lot of inquiries about states, particularly Illinois where there are problems that are in the news, and where the situation is in flux. And publishing these comments helps us get our opinion out to those investors, or to the general public,” Hampton said.

Fitch and S&P said the pension ruling didn’t move the needle much as far as the state’s credit rating. From Governing:

Fitch Ratings and Standard & Poor’s were far more forgiving. Both said they had already factored in the likelihood of court challenge into their current ratings for Illinois. “More importantly, from a credit perspective,” S&P added, savings from the pension reform are not included in the fiscal 2015 budget.”

Interestingly, Fitch’s main concern wasn’t the pension ruling. Instead, the agency said the real concern was the expiration of several tax increases. From Governing:

Fitch did note another trouble spot for Illinois’ credit lurking just ahead: the scheduled expiration of temporary tax increases in 2015. “The state passed a placeholder budget for the current fiscal year with a stated intent to revisit the issue after the November elections,” Fitch said. “Taking steps to address the long-standing structural mismatch between revenues and spending would put the state on more solid financial footing, while failure to take action would be a return to past practices and leave the state poorly positioned to confront future downturns.”

Reeder: Pension Ruling Puts Illinois in a Bind

Last month, a circuit court struck down Illinois’ pension reform law, deeming it unconstitutional.

Scott Reeder, a journalist who has covered politics across the country for 25 years, wrote about what could happen if the Supreme Court upholds the circuit court’s ruling in his column in the Journal Standard:

Belz’s ruling sets the stage for the crisis to deepen.

While government worker unions were touting the ruling as a victory, it’s actually sowing despair for many current employees and sets the stage for generational warfare.

If the high court upholds this ruling, tax dollars that would be go to support schools, prisons and other state services will be diverted to fund pensions.

Look for teachers, prison guards and other state workers to receive pink slips to free up money for increased pension payments.

Who else but government workers routinely retire in their 50s, have guaranteed cost of living adjustments and pensions guaranteed to grow until the day they die?

Not most of us in the private sector, that’s for sure.

Things won’t be pretty during the 2015 legislative session, which begins in January.

Don’t be surprised if deep cuts are made in state spending, less money flows to schools and more government workers head toward the unemployment line.

And things could get worse when summer comes. That’s when the labor contract with the largest state workers’ union expires.

One should expect Gov.-elect Bruce Rauner to demand wage concessions.

It’s simple math.

With more money going to pensions, less will be available for wages and other benefits.

Of course, the Illinois Supreme Court could rule that the crisis is so extreme that the state’s emergency powers allow it to reshape pensions on their own.

Just how severe is the crisis?

If all of state government were to shut down and its entire operating budget were diverted to fund pensions, Illinois pensions would still be in the hole three years from now.

Now, that’s a crisis.

Read the entire piece here.

Bruce Rauner Softens Stance on Pension Cuts, Calls For Protection of Vested Benefits

When talking pensions on the campaign trail earlier this year, Bruce Rauner said that new hires, current workers and retirees all would need to be on the receiving end of pension benefit cuts.

But Rauner has softened that stance this week; the Illinois governor-elect now says the benefits accrued by current workers and retirees need to be protected.

The change is perhaps due to a recent circuit court ruling overturning the state’s pension reform law; the ruling makes it increasingly unlikely that pension reforms can legally come in the form of benefit cuts for retirees.

More on Rauner’s comments from NBC Chicago:

Gov.-Elect Bruce Rauner changed his tune to defend retired state employee’s pensions on Monday, remarking that it’s most important to “protect what is done—don’t change history. Don’t modify or reduce anybody’s pension who has retired, or has paid into a system and they’ve accrued benefits. Those don’t need to change.”

[…]

“What we should change is the future—the future accruals, the future benefits for future work,” he said, according to the Chicago Sun-Times. “That is constitutional. It’s also fair and appropriate for the taxpayers and the workers themselves.”

“Hopefully (the state Supreme Court) will give us some feedback that will help guide the discussion for future modifications as appropriate for the pensions,” noted Rauner.

[…]

The Republican investor said on the campaign trail earlier this year that he’d slash benefits to retirees and current workers and lead a transition into a corporate-esque 401(k) arrangement. But as he prepares to take over the governorship, and see his ambitious election-season statements clash with political realities, Rauner has apparently softened his views on pension reform to pardon those who’ve invested income—placing money (and trust) in a dysfunctional system.

The Illinois pension reform law, which will soon head to the Supreme Court, froze cost-of-living-increases and increased the retirement age. But a circuit court judge ruled last week that the benefits of current and retired workers are protected under the Illinois constitution.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Former Illinois Governor Jim Edgar Weighs In On State’s Pension Problems; Calls Pension Reform Law A “Huge Mistake”

Jim Edgar, former Illinois governor from 1991 to 1999, sat down with Reboot Illinois this week to discuss the state’s pension crisis and the court ruling that deemed Illinois’ pension reform law unconstitutional.

Edgar talked about the ruling and placed fault on lawmakers for not drafting a bill that would pass the scrutiny of the courts. From Reboot Illinois:

I thought they made a huge mistake passing a clearly unconstitutional proposal. It just delayed trying to figure out something that we can do for three years and we went through a lot of anguish we didn’t need to go through that scared a lot of people. I’m not a lawyer, but it’s pretty plain if you read the constitution, if you read the debates of the convention, they put that language in exactly to keep the Legislature from doing what they did two years ago. I expect courts will throw it out and we’re going to have to start over.

Then, I don’t think there’s any silver bullet. It’s obvious you can’t say we’re going to solve this on the backs of the retirees or the employees. I don’t think it’s going to get done overnight. Whatever plan gets put in place will be like the plan we put in place back in the mid ‘90s and, unfortunately, they got away from it.

He talked about the funding ratio Illinois should be shooting for:

I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.

Edgar also touched on Bruce Rauner’s stated plan of moving new hires into a 401(k)-style plan:

That’s something they’re going to have to work out with the Legislature and if they do that, they have enough money to take care of the commitments. The constitution says the pension benefits already granted have to be honored. You can’t cut those. You’re going to have to balance those two things off.

[….]

unfortunately we won’t have that much growth in the number of new people coming in and if they’re not paying into the system, it’s like Social Security. Same thing with state workers. You had a growth in state workers that occurred from about ’68 and a lot of those people are now retiring, so I doubt if we’re going to keep seeing the growth in state government, so you’ve got to be careful on that.

That’s all his suggestion. I don’t think he’s said it’s this way or no way. I think he knows he’s going to have to negotiate it.

Read the entire interview here.

Judge: Illinois Pension Reform Law Is Unconstitutional

A Circuit Court judge ruled Friday afternoon that Illinois’ sweeping pension reform law is unconstitutional.

Judge John Belz said in his ruling that the Illinois constitutional makes a promise to protect employee pension benefits.

The ruling will be appealed and will soon head to the state Supreme Court.

From Crain’s Chicago Business:

Sangamon County Circuit Court Judge John Belz ruled today that the state’s pension reform law is unconstitutional, setting up an immediate appeal to the state’s highest court.

“The State of Illinois made a constitutionally protected promise to its employees concerning their pension benefits,” Belz said in his seven-page ruling. “Under established and uncontroverted Illinois law, the State of Illinois cannot break this promise.”

While the state lost this round, the constitutional question ultimately has to be resolved by the Illinois Supreme Court. The longer the case takes to get there, the longer state finances remain in limbo and the longer any “Plan B” for pension reform goes undiscussed.

“Seven people will decide this at the end of the day,” said Illinois Sen. Daniel Biss, D-Skokie, one of the principal co-authors of the pension reform law. “It’s a victory for the state to get it to the Supreme Court faster. The state suffers from uncertainty. Ultimately what matters most is how we resolve this problem eventually.”

The decision was widely expected, given the state Supreme Court’s ruling in Kanerva vs. Weems, a similar case in July testing whether retiree health care benefits can be reduced. The justices ruled that the state constitution’s pension protection clause is “aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Proponents of the reform law called today’s ruling “significant”, but not a be-all-end-all judgment by any means. That’s because the Illinois Supreme Court, who will hear arguments on the law at some point in the coming months, will have the final say.

The state has 30 days to appeal the ruling up to the Supreme Court.

First Ruling on Illinois Pension Reform Law Expected Friday

Sangamon County Judge John Belz spent Thursday hearing arguments for and against Illinois’ major pension overhaul.

On Friday, he is expected to release his ruling on the law. If he declares it unconstitutional, the debate could move to the halls of the Supreme Court sooner than later.

Video: Pension Limbo Spurs Early Retirement in Illinois

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The legality of Illinois’ pension reform law is up in the air, and may remain so until year’s end. That puts many soon-to-be-retirees in an unusual position: they can retire early and lock in their benefits, or they can wait to see the outcome of the state’s pension legal battle.

Many are choosing the former, according to ABC 20 .

Teacher Group: Illinois Pension Reform Is “Direct Violation” of Lawmakers’ Oath of Office

Last week, the Illinois State Journal-Register published a piece by Ty Fahner exalting the state’s pension reform law and detailing the consequences that would face Illinois in the wake of a court rejection.

Now, the newspaper has published a rebuttal from Bob Pinkerton, president of the Illinois Retired Teachers Association.

The letter reads:

“What if pension reform is rejected?”

These words were written by Ty Fahner, president of the Civic Committee of the Commercial Club of Chicago, sometimes referred to as the Millionaires’ Club.

The question should be, “What happens when the Supreme Court reminds us what the Illinois Constitution says in Article 13, Section 5, ‘… benefits, of which, cannot be diminished or impaired?’”

What does the legislature do when it is forced to acknowledge the pension reform lawmakers voted for is in direct violation to their oath of office?

Mr. Fahner writes, “A decade ago, only a small fraction of state revenues went to fund the pensions.”

This is the problem. Over the years, the legislature violated the laws they passed by skipping or reducing pension payments so they could afford new projects.

The state cannot expect retirees to fill the pension gap left by irresponsible lawmakers. It is not right that the legislature is now attempting to reduce benefits to pay for the past negligence of the state.

Over the years, no one complained when new programs were implemented without new revenues because stealing from the pensions seemed harmless to them at the time and these were available dollars already allotted in the state budget.

The bill is coming due for all those years of pension holidays. Illinois has the fifth-largest economy in the country. I believe we can figure out a way to pay our bills.

Read Ty Fahner’s original column here.

Former Illinois Attorney General Pushes For “Plan B” On Pension Reform

In all likelihood, a judgment on the constitutionality of Illinois’ 2013 pension reform law will in the next six months.

Former Illinois attorney general Ty Fahner doesn’t want the state to be blindsided by the result. If the law is overturned, he says, there needs to be another plan in place.

Fahner is asking lawmakers from around the state to start developing alternate reform ideas. From the News-Gazette:

“I still hope and expect, I truly do, that the court may find Senate Bill 1 constitutional. Whether that’s a false hope or not, I need to make the point that even if they do, after all of that, we’re still in terrible shape as a state,” Fahner said. “If they overturn it, there will be incredible hardship, which is what we are trying to get people to focus on now, not because it will change their decision, but I think there has to be a debate, a discussion, right now, because if you wait until the spring when the court finally rules, it’s going to be a little bit too late.

“They’re going to be in the middle of the budget at the end of the session. Whether it’s Quinn or Rauner, they’re going to have a difficult time. I think they need to talk now.”

He’s encouraging candidates for governor and the Legislature to address the question, and wants voters to ask them about it.

“That’s all we’re trying to do with this,” said Fahner, whose group is pushing what it calls a “What If?” initiative. “It’s so profound and the damages could be so terrible that people have to think about it now and not just give a political reaction later that, ‘We’ll have to sort it out.'”

State Rep. Adam Brown, R-Champaign, said he was “more than happy to be a part of the conversation” about an alternative pension plan.

“But at this point, there are just too many unknowns,” he said.

[…]

[Senate President John] Cullerton’s spokesman John Patterson advised patience.

“It has been a long struggle to get a law through the General Assembly and now a case to the courts,” he said. “Given the complexity of the issue and the difficulty in gettting to this point, we should now see what the courts have to say. There are a lot of people with a lot of opinions, but they aren’t on the Illinois Supreme Court, and it is the justices who will ultimately tell us what can and cannot be done.

“At this point the case is still before the trial court, so it seems a bit premature to already be predicting its demise. Let’s let the judiciary do its job.”

As for Republican gubernatorial candidate Bruce Rauner’s proposal that state employees be moved into 401(k)-style, Fahner said, “The idea of a 401(k) is great, but I’m not sure it would work in the current situation.”

Fauher also questions whether the reform law goes far enough. From the News-Gazette:

“[The law] only scratches the surface of the state’s problems. We also have to look at what drives jobs from the state. We’ve got to do a lot to make this a more jobs-friendly state.”

This year, he said, 26 percent of the state budget is devoted to pension payments. By 2024, pension payments would eat up a third of the budget.

He said that would lead to higher property taxes, fewer teachers and less money for social services.

“A lot of people say this isn’t a problem, all you do is just raise more taxes. This goes back to the jobs issue. We could raise taxes again, but we already know what the job losses have been,” Fahner said. “We’re losing jobs because it’s a very hostile work environment with regulations and everything else. If you have less jobs, you have less people to pay the taxes which fund all of these needs, and that’s what is happening to us.”

Governor Pat Quinn has said he doesn’t have a “plan B” in place if the law is deemed unconstitutional.

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