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Eric Madiar: Illinois Reform Law Is Unconstitutional

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

Quinn: No Plan “B” On Pension Reform

Most experts agree that Illinois’ pension reform law, passed in December, currently stands on shaky ground after a July ruling from the Illinois Supreme Court extended constitutional protection to retiree health premiums.

But Illinois Gov. Pat Quinn isn’t ready to write off the law just yet. In recent interviews, he’s also been steadfast that he’s not ready to start drawing up a backup plan, either.

From the Associated Press:

Gov. Pat Quinn argued Friday that it makes no sense to develop a contingency plan.

The Chicago Democrat, who “fervently” believes the plan is constitutional, said in an Associated Press interview that he’d like to get feedback from the courts before proceeding despite Illinois’ urgent financial difficulties.

“You don’t exactly help your position before the court if you say, ‘Well I’ve got a plan b out here, maybe you could take that instead,’ and it’s not even passed by the Legislature,” Quinn said. “That’s a very bad strategic position …”

Quinn’s comments come as he faces a tough re-election challenge from Republican businessman Bruce Rauner (ROW-nur). He opposes the law Quinn signed in 2013.

After years of debate, lawmakers approved a plan that cuts benefits for most employees and retirees aimed reducing the state’s massive unfunded liability.

Unions sued over the law, saying it violates the Illinois Constitution.

But in a separate case on retiree health care, the Illinois Supreme Court in July ruled a law requiring retirees to pay more for health insurance was unconstitutional. The decision centered on the constitution’s strong protections for retirement benefits.

Quinn has drawn criticism for the lack of backup preparations. Last week, a columnist for the Chicago Tribune wrote:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

As Pension360 has covered, pensions are becoming a bigger part of the race for Illinois governor in light of the July court ruling that opened the door for reworked reform measures.

Do Illinois’ Candidates For Governor Need A Pension “Reality Check”?

Pensions are one of many issues taking a prominent hold in the race for the Illinois governorship.

Both candidates, Pat Quinn and Bruce Rauner, recently sat down in front of the Chicago Tribune’s editorial board for an informal debate on, among other issues, how they would each handle the state’s pension crisis.

One member of the Chicago Tribune’s editorial board, Eric Zorn, listened to both sides. Now he says both Quinn and Rauner need to stop living in their “pension fantasies”.

On Quinn, Zorn writes:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

Zorn then shifts to Rauner and his plan to shift Illinois workers into a 401(k)-style system:

Rauner owes it to us to explain why his ideas — he admits they’ve yet to rise to the level of a plan — are any more likely to survive court challenges than the bipartisan reform law, which he strenuously opposed.

…When I asked if joining such a plan would be mandatory, spokesman Mike Schrimpf echoed word-for-word the dodge Rauner employed in his Tribune candidate questionnaire: “We need to wait to see the parameters of what the Supreme Court says in order to carefully craft a plan that will pass constitutional muster.”

Mandatory enrollment of current public employees into 401(k)-style accounts by which they will ultimately fund their own retirements would likely not pass that muster. They’re generally not as lucrative for employees as plans that guarantee monthly pension payments.

Rauner knows this. It’s why he’s promised to allow police officers and firefighters to keep their “special retirement” that includes a standard pension, and why he projects “billions” in savings.

Zorn also decried the administrative costs associated with 401(k) plans. You can read his full editorial here (subscription required).

Photo by Chris Eaves via Flickr CC License

Chicago Suburb To Scrap Fire Department Due To Pension Costs

The town of North Riverside, a small suburb west of Chicago, is moving to terminate its contract with all village firefighters and hire new firefighters from a private service. The village claims it is facing a $2 million budget deficit and it cannot handle the costs of the salaries and benefits of the firefighters.

From A North Riverside press release:

Mayor Hubert Hermanek, Jr. of west suburban North Riverside, after yesterday announcing an impasse after six “good faith” negotiating sessions with Firefighters Union Local 2714, instructed the village’s attorneys to file suit today in Cook County Circuit Court asking that court to affirm North Riverside’s right to legally terminate the firefighters’ contract, which expired on April 30, 2014.

North Riverside, with a population of 6,672 in 2,827 households, derives most of its revenue from sales tax, thanks in large part to North Riverside Park Mall. However, the village is facing a proposed fiscal year 2014-2015 operating budget deficit of $1.9 million, with $1.8 million of this deficit being a direct result of the Village’s growing annual public pension obligation. All of this and more is evidence that supports the Village’s inability to sustain salary and benefits of over $200,000 per fireman and $230,000 per Lt. anymore.

Contracting firefighter services from Paramedic Services of Illinois (PSI), which has provided paramedic services to North Riverside for the past 28 years, would save the village more than $700,000 annually and vastly reduce the adverse impact of future pension obligations imposed by the state. All PSI paramedics are certified as firefighters, as well.

According to Hermanek, the village presented multiple compromise proposals to the union, including a progressive privatization plan based on an 11-year contract, during which 10 of North Riverside’s 14 current firefighters would reach retirement age and 25+ years of service. As they retired or normal attrition occurred, firefighters would be replaced with firefighters/paramedics from PSI. As a result, by the end of the 11-year contract, village fire and emergency protection services would be almost fully privatized, maintaining safe and reliable service, while achieving cost-savings necessary if North Riverside is to remain solvent.

As noted in the above paragraph, the village had previously tried to strike a deal with the firefighters’ union where the village would phase out the old firefighters and slowly phase in the private force.

The union (Firefighters Union Local 2714) then brought three of its own proposals to the table. Ultimately, however, the village and the union couldn’t agree on any deal.

Judge Hints Illinois Pension Case Could Be Fast-Tracked

It’s been a foregone conclusion that the lawsuit against Illinois’ pension reform law would eventually be heard in the halls of the Supreme Court. The question has always been how long it would take to get there.

But a judge indicated this week that he’d like to fast track the case through the lower courts and get it to the Supreme Court as quickly as possible. Reported by the Herald-Review:

Sangamon County Judge John Belz said Thursday that an earlier court decision that blocked changes to retiree health insurance premiums could provide a roadmap for how the pension case will be handled in the coming months.

In July, the Illinois Supreme Court ruled that a law requiring retirees to pay more for health insurance was unconstitutional, triggering speculation that the pension changes also would be tossed out.

Belz told attorneys gathered for a hearing Thursday that the court’s decision in the health insurance case was like “an elephant in the room.”

“I can’t stick my head in sand and act like it isn’t there,” Belz said.

When Belz and attorneys were initially laying out a schedule for the case, it was not expected to be resolved at the lower court level until sometime in 2015.

Now, with the health insurance case providing a path, Belz said he’d like to move the case to the Supreme Court quickly.

“As fast as we can move it along within reason the better,” Belz said.

“This can be wrapped up by the end of this year,” said attorney John Fitzgerald, who represents a group of retired teachers.

A speedy judgment would make both sides happy. But there was bad news for the state mixed into yesterday’s hearing; the judge indicated he’d heavily weigh July’s ruling on retiree health insurance when crafting his judgment on the pension reform law. The July ruling declared an increase in retirees’ health premiums unconstitutional.

Union Coalition Wants Illinois Court To Act Faster In Case Against Reform Law

A coalition of some of the largest labor groups in Illinois filed a motion today calling on the court to speed up its ruling regarding the constitutionality of Illinois’ pension reform law.

The coalition, We Are One Illinois, says the Supreme Court’s July decision—where the court ruled retirees’ health benefits are protected under the state’s constitution—confirms that Illinois’ pension reform law is illegal.

From CapitolFax:

Yesterday, the We Are One Illinois coalition, along with other plaintiffs, filed a motion in Sangamon County urging the Circuit Court to enter judgment in the plaintiffs’ favor on the State’s affirmative defense in light of the recent Supreme Court decision in the case of Kanerva v. Weems. The We Are One Illinois coalition and other plaintiffs assert that the Kanerva decision confirms that the Pension Protection Clause in the Illinois Constitution is absolute and without exception, even with respect to the fiscal circumstances alleged by the State in its defense.

Illinois says its dire fiscal situation gives it the authority to cut to pension benefits, even if they are constitutionally protected. From Reuters:

The state has contended that its sovereign powers allow it to act in a fiscal emergency. Illinois has a $100 billion unfunded pension liability and the country’s worst funded state retirement system. Illinois’s credit ratings are also the lowest among U.S. states.

But the court’s July decision doesn’t bode well for the state’s case. At the time, the court wrote:

“[I]t is clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired … Giving the language of article XIII, section 5, its plain and ordinary meaning, all of these benefits, including subsidized health care, must be considered to be benefits of membership in a pension or retirement system of the State and, therefore, within that provision’s protections.”

We Are One Illinois issued the following statement after filing the motion:

“The Kanerva decision confirms what we have always argued, that the state’s constitutional language guards against any diminishment or impairment of pension benefits that Senate Bill 1 imposes. We believe, then, that the State’s defense is without merit and so have asked the Court in this motion to rule in our favor on the State’s defense that seeks to justify Senate Bill 1. We maintain that the constitution protects the hard-earned and promised retirement savings of our members and remain ready to work with any legislator willing to develop a fair and legal solution to our state’s challenges.”

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen, Via Wikimedia Commons

Illinois, Kentucky Pension Funds Benefit From $17 Billion Bank of America Settlement

A handful of pension funds will be receiving large chunks of change after Bank of America agreed today to pay $17 billion to end a Justice Department probe into the bank’s sale of toxic mortgage securities.

The Justice Department alleged that Bank of America violated federal law when it marketed and sold investment vehicles tied to shoddy home loans and misled investors about the quality of the investments.

Many pension funds were major investors in such investment vehicles and sustained major losses on those investments during the financial crisis.

But some funds will be getting a chunk of that money back, including numerous Illinois funds and the Kentucky Retirement System. From Red Eye Chicago:

For Illinois, the $16.65 billion national settlement means a cash payment of $200 million for the state’s pension system, making it whole for losses sustained as a result of the risky investments.

…

The Illinois pension entities that will receive the payments under Thursday’s deal are the Illinois Teachers Retirement System, the State Universities Retirement System and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges.

Kentucky’s payout is substantially smaller than that of Illinois, but the KRS will still see some relief. From the Lexington Herald-Leader:

Kentucky Retirement Systems will get $23 million from Bank of America’s $16.65 billion national settlement with the federal government over accusations that the bank improperly dumped “toxic” mortgage-backed securities on the market, helping fuel the economic recession of 2008.

This isn’t the first major settlement stemming from toxic investments that have benefited pension funds. Earlier this year, CalPERS and CalSTRS received over $100 million combined when CitiGroup agreed to a $7 billion settlement.

Illinois was a beneficiary of the CitiGroup settlement as well, as three Illinois funds received a combined $45 million as reparations for their investment losses.

Photo by Mike Mozart via Flickr CC License

Illinois Governor, Challenger Spar over Pension Links to Cayman Islands

It’s become a tradition for politicians of either party: on the campaign trail, at some point, you need to accuse your challenger of dodging taxes. The race for Illinois governor is no exception, but there’s an interesting spin on this one.

Current Illinois Gov. Pat Quinn earlier this week accused wealthy challenger Bruce Rauner of dodging U.S. taxes by placing his money in offshore accounts in the Cayman Islands.

A Chicago Tribune investigation had previously revealed that Rauner paid a tax rate of around 15 percent on much of his fortune, even though his wealth made him eligible for tax brackets above 30 percent.

But Rauner fought back, first claiming that his offshore investments did not impact the tax rate he paid. Then, he claimed Quinn himself had money in the Caymans. His pension, to be exact.

Rauner claims that Illinois pension funds have hundreds of millions of dollars in Cayman-based investments.

From the Chicago Sun-Times:

Rauner’s campaign said the Teachers Retirement System has invested $433.5 million in Cayman Islands-based funds while the State Board of Investment has $2.3 billion in offshore holdings, which includes some Caymans-related funds though the agency could not specify how much.

Both are tax-exempt entities and, unlike individual investors, derive no direct tax benefit from investing in funds based there, spokesmen for both agencies said. TRS invests on behalf of current and retired suburban and downstate teachers. The State Board of Investment oversees pension investments for current and retired state workers, university employees, judges, lawmakers and state officials, including the governor.

“If Pat Quinn refuses to apologize and tell the truth, he should immediately move to divest all state investments from companies and funds domiciled overseas, including in the Cayman Islands,” Rauner’s campaign said.

As was bolded, pensions systems are tax-exempt and so there’s no tax benefit from putting money offshore.

Quinn’s camp, when pushed for a statement, declined to say whether Quinn would like the pension systems to stop investment in Cayman-related funds. But the Governors spokeswoman told the Sun-Times:

“The governor has no authority to direct pension fund investments, and he’s not about to start getting involved. That’s really not the issue.”

In Illinois, Public Pension Benefits Are Gaining Ground On Worker Salaries

Over the past decade, the average public pension in Illinois has been gradually catching up to the average salary of employees still working.

Critics of increased benefits say this is the result of years of generous salary increases and compounded COLA increases.

Others say that increased pensions are simply the result of higher public sector salaries, which Illinois needs to pay in order to retain good employees.

The Daily Herald reports:

The average 2013 pension was $31,674 for retirees in nine statewide and metropolitan Chicago public pension systems for government workers, teachers, legislators, judges and university professors, a Daily Herald analysis shows. That’s 60 percent of the $55,120 average salary for pension fund members who are still working.

Ten years ago, the average pension was less than half of the average salary.

…

The narrowest gap between average salary and average pension is for members of retirement systems where advanced degrees and training are required.

In 2013, the average Teachers’ Retirement System pension was 69.4 percent of the average pay for those still working, according to the system’s annual comprehensive financial report.

Judges have the highest average salary — $183,998 — and highest average pension — $105,341.

The gap between average pay and average pension is widest within retirement systems with more transient employees.

The 108,814 local government employees receiving IMRF benefits in 2013 averaged pensions of $13,243. That was 34.8 percent of the system’s $38,059 average salary. However, that’s still a big change from a decade ago when the average IMRF pension was 27.9 percent of the average salary of workers paying into the system.

One lawmaker told the Daily Herald that, although the upward trend is undoubtedly real, the decreasing gap between pensions and worker salaries has slowed over recent years.

“There was a long period of time where there were rapid (pay) raises in the public sector … (and) that growth is tied to the pension formula,” said state Sen. Daniel Biss, an Evanston Democrat who helped sculpt the state’s most recent pension reform plan. “But a lot has changed and we’ve seen a dramatic slowdown, particularly in the last five years.”

Could a “Retirement Tax” Help Illinois Climb Out of It’s Fiscal Hole?

Illinois is in a fiscal bind, and Rich Miller—founder of CapitolFax and tab-keeper on all things Illinois politics—explores in his recent column a policy that could raise $2 billion dollars.

The idea: levying a tax on retirement income.

From Miller:

Illinois is facing a $4 billion hole in its 2015 budget when the 2011 income tax increase automatically starts to roll back on Jan. 1. That’s a huge headache for whoever wins the Nov. 4 election, Gov. Pat Quinn or Republican nominee Bruce Rauner.

Illinois is leaving $2 billion on the table by not taxing retirement income, studies have shown. That missed revenue is escalating every year. Total retirement income in Illinois is growing by 6.5 percent a year, compared with just 1.9 percent annual growth for personal income that is taxed, according to a study by the Civic Federation.

Illinois is one of just three states that exempt pension income from taxation, according to the Chicago Metropolitan Agency for Planning.

Former Illinois Gov. Jim Thompson, who passed the law outlawing retirement income taxation, had this to say on the issue:

“There’s a whole lot of people in this state who are trying to exist on just Social Security or a low governmental pension,” he says. Senior citizens already pay federal income taxes, “and once they get through doing that there’s not enough left, especially when the state income tax has jumped up to the place it is.”

To that, Miller proposes an idea that might be more palatable to opponents of the tax:

The Civic Federation found that taxpayers earning less than that accounted for only about a quarter of total retirement income in the state. So taxing retirement income above $50,000 would still bring in $1.5 billion a year, which is nothing to sneeze at.

Not to mention that barely a third of Illinois seniors even know that their income isn’t being taxed in the first place, according to a Capitol Fax/We Ask America survey of 816 Illinoisans age 65 and over that I commissioned.

Both Gov. Quinn and Bruce Rauner have publicly stated they won’t support a tax on retirement income.

A tax on retirement income is overwhelmingly unpopular among seniors, as Rich Miller found out when conducting an informal survey.

When Miller asked seniors whether they would support a policy of taxing retirement income, 88 percent responded “No”.

Photo by Chris Eaves via Flickr CC License

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