Illinois Likely Faces Long Odds on Pension Reform Ruling

Illinois flag

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.

From Reuters:

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.

Bruce Rauner Named Most Important Player in U.S. Pensions

Bruce Rauner

Institutional Investor magazine has released its list of the 40 most influential people in U.S. pensions. Topping the list is the man who now governs a state with one of the worst pension problems in the country: Bruce Rauner.

From Institutional Investor:

Republican Bruce Rauner, the victor over Democratic incumbent Pat Quinn in the recent Illinois gubernatorial race, may regret he ever wished to win elective office. Rauner, onetime chairman of Chicago private equity firm GTCR, has had no real profile on retirement policy but finds himself staring at what may be the most serious pension mess among the states.

As of June 30, 2014, Illinois’s pension debt had reached $111 billion; Moody’s Investors Service reported in September that the state’s three-year average pension liability over revenue was 258 percent, five times the median percentage for all 50 states.

In 2013, Quinn persuaded the legislature to pass a bill raising the retirement age and cutting cost-of-living increases for beneficiaries. But the Illinois constitution holds that pensions cannot be “diminished,” and a coalition of public employee unions sued. And on November 21, Sangamon County Circuit Judge John Belz found the law unconstitutional, declaring, “Protection against the diminishment or impairment of pension benefits is absolute and without exception.”

Depending on various appeals, Rauner, 57, could try to implement his campaign agenda for pensions, which includes capping the current program and shifting members to a defined contribution plan — though he has begun to talk of just shifting new employees to avoid legal problems. Rauner has said he’d seek to keep benefits from rising faster than inflation and would eliminate employees’ ability to receive large pay hikes before retirement to beef up their pensions.

The odds of pushing these reforms through a Democratic-controlled state senate remain long, made worse by allegations that Rauner (and separately, Chicago mayor Rahm Emanuel [No. 4]) accepted contributions from executives affiliated with firms that manage Illinois pension plans. Rauner has not publicly responded to the allegations.

The ranking clearly reflects not what Rauner has already done, but the power he will have in the coming years. If the Illinois Supreme Court strikes down the state’s pension reform law, lawmakers will have to start from scratch – and Rauner will be at the helm.

 

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

For Bond Buyers, Illinois is “Problem State” Until Pension Limbo Resolved

Illinois map and flagIllinois has been in a state of pension limbo since July, when a state Supreme Court ruling on healthcare premiums hinted that the state’s pension reform law would be struck down by the courts.

Now, bond buyers are watching closely how the Supreme Court rules on the state’s pension reform law – but until then, investors are marred in “uncertainty” and are calling Illinois a “problem state”.

From The Street:

Municipal debt investors are watching the appeals process that will decide whether or not the State of Illinois’ pension reform bill ends up in the wastebasket, which would send the Land of Lincoln back to square one in its attempts to battle its pension funding crisis.

“There’s so much uncertainty there,” Daniel Solender, the lead portfolio manager for municipal bonds at investment manager Lord Abbett & Co., said by phone Wednesday. “It’s hard to know what the right valuation is [for the state’s bonds].”

So far, investors are waiting and watching. Solender noted that there hasn’t been much trading in Illinois’ bonds in response to a Nov. 21 Circuit Court decision that said the reform bill was unconstitutional. If the Illinois Supreme Court upholds that decision, Solender expects a negative effect on the state’s bond values.

“For investors to get comfortable, there has to be some idea of a plan [for pension reform], and there doesn’t seem to be one [now],” he said.

Still, he is confident that Illinois has time to work out its pension issues one way or another.

Solender and other sources are looking optimistically to Governor-elect Bruce Rauner, a Republican, to address the issue. Rauner will replace Pat Quinn, a Democrat, on Jan. 12.

Illinois’ unfunded pension liability has ballooned to $111.2 billion, according to a November report by the Illinois Commission on Government Forecasting and Accountability. The Teachers’ Retirement System accounts for about half of that at $61.6 billion, the report said.

A June 24 report by Standard & Poor’s revealed that Illinois has, by far, the lowest level of pension funding in the country at 40.4% funded, followed by Connecticut (49.1%).

As part of a Dec. 1 panel in New York City that discussed municipal debt restructuring, William A. Brandt Jr., president and CEO of Development Specialists Inc., said that Illinois holds 43% of the public pensions in the U.S. According to Brandt, who is also the chair of the Illinois Finance Authority, those amount to some 652 public pensions.

“Illinois is your problem state,” he warned.

Moody’s gives Illinois’ credit an A3 rating – the lowest of any state.

Fast-Tracking of Illinois Pension Case Could Be Blocked

Illinois flag

Last week, Illinois asked the state Supreme Court to expedite the hearing over the state’s pension reform law.

But on Sunday, attorneys representing the state workers and retirees said they could block the attempt to fast track the case. Such a move could drastically change the timeline for the lawsuit’s hearing.

From the Southern Illinoisan:

In a move that could play a significant role in how Gov.-elect Bruce Rauner crafts his first budget this spring, the lawyers say Illinois Attorney General Lisa Madigan’s bid to put the case on a fast track is unwarranted.

“We do not believe there is any need to impose an emergency schedule,” said attorney John Fitzgerald, who is among a team of lawyers representing retirees. “We see no need to depart from the rules.”

On Thursday, Madigan asked the high court to move quickly in hearing the case because of the financial ramifications the pension changes will have on the state budget.

[…]

Madigan suggested the court schedule oral arguments for as early as Jan. 22 or no later than mid-March.

Attorneys for the retirees, who say the expedited schedule is unnecessary, have until Tuesday to file their objections to the motion.

Without the expedited schedule, the deadline for filing the first significant set of records in the case wouldn’t occur until the final week of January.

After that, the typical court schedule calls for both sides in the lawsuit to trade paperwork for nearly three months. Once that is completed, the high court would then schedule oral arguments.

Under that scenario, the court could hear the case as early as May. If they miss the May docket, the next time the judges are scheduled to hear oral arguments is September.

Following the argument phase, the court could take months to issue a ruling. In a similar case regarding health insurance costs, the court took nearly 10 months to overturn the state’s attempt to force retirees to pay a portion of their pensions toward that expense.

Sangamon County Circuit Judge John Belz ruled last month that the law was unconstitutional.

Illinois Asks Supreme Court to Fast-Track Pension Reform Hearing

Illinois flagIllinois’ 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.

Reeder: Pension Ruling Puts Illinois in a Bind

Illinois capitol

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

Bruce Rauner

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”

Illinois flagJim 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.

First Ruling on Illinois Pension Reform Law Expected Friday

Illinois capitol

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.

More from the Chicago Tribune:

[Judge Belz] could move to hold hearings in the case, or he could declare the measure unconstitutional, which would likely send the matter directly to the state Supreme Court.

Even then, it could take several more months before the justices make a final decision, meaning Rauner may not get the clarity he’s seeking in time to drive cost-saving pension changes during the spring legislative session.

Belz held a hearing Thursday, and Illinois Attorney General Lisa Madigan’s office argued the pensions could be modified in times of emergency — such as the financial straits caused by the state’s worst-funded pension system in the nation.

A battery of attorneys for state employees and retirees argued strenuously the law should be tossed out because it is unconstitutional — a move that would put it on a likely path to the Illinois Supreme Court.

In July, the high court threw out a different law that cut health-care benefits that had been guaranteed to retirees, saying lawmakers had overstepped what they were allowed to do. That decision alone buoyed the hopes of state pensioners — as well as the city of Chicago retirees who don’t want their own pensions plans reduced.

Friday’s ruling is key because it is the first step toward determining whether officials can scale back public pensions in any way once they are set.

Unions believe the law represents an unconstitutional breach in contract. From the Chicago Tribune:

Unions representing government workers are asking Judge John Belz to declare unconstitutional a law approved nearly a year ago that aims to rein in costs of a retirement system reeling from more than $100 billion in debt.

At the heart of the pension issue is a clause in the Illinois Constitution that says membership in any state pension system is an “enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Employee unions argued that the pension law, which curbs annual cost-of-living pension increases for current retirees and delays the age for retirement for many current public workers, clearly violated those protections.

Illinois governor-elect Bruce Rauner believes the law will be overturned by the Supreme Court. Rauner has said in the past that the law doesn’t go far enough to reduce pension liabilities.

Watchdog Report: Bruce Rauner Adviser Is Triple-Dipping “Prince of Pensions”

Bruce Rauner won the Illinois governorship, in part, by campaigning as a reformer and a political outsider who would “shake up Springfield.”

Rauner targeted the state’s underfunded pension systems as a prime candidate for reform in at least one campaign ad, when he noted that Illinois carries “$8,000 of pension debt for every man, woman and child.”

The governor-elect recently appointed Glenn Poshard to his transition team, which spurred an investigation by the Better Government Association and CBS 2 News.

The investigation found that Poshard “triple dips” – or, pulls in pensions from three separate retirement systems, netting him nearly $200,000 annually in pension benefits. Poshard is breaking no laws, but the situation demonstrates the “loopholes” in the Illinois pension system that can sometimes lead to ballooned benefits.

Andy Shaw, CEO of the Better Government Association, told CBS: “Governor-elect Rauner could probably learn a lot about how to reform the pension system by looking at the ways in which Glenn Poshard used loopholes to enrich his own pension.”

More from the Better Government Association:

Poshard collects $189,979 a year in state pensions from three separate public-sector retirement systems, more than the $177,412 salary currently paid to Gov. Pat Quinn, the BGA found. Among former governors, only Jim Edgar gets more in retirement: $205,425, having recently picked up a second pension from his days teaching at the University of Illinois. Former Gov. Jim Thompson gets $143,181 in state pension benefits, records show.

In addition to his state-government pensions, Poshard collects a $15,000-a-year federal pension for his 10 years in the U.S. Congress representing a southeastern Illinois district, bringing his total retirement package to slightly more than $200,000 annually, according to records and interviews.

To date, he’s collected more than $1.4 million in state pension benefits, and if he lives until he’s 80, that $200,000 he’s now getting could increase to an estimated $280,000 a year.

[…]

The cornerstone of Poshard’s generous state pension is the five years he served as a state senator. Of all state pension systems, the General Assembly Retirement System, or GARS, has the most deluxe features, designed and passed by members of the General Assembly.

Chief among those features is a formula that allowed him to collect a pension starting at 85 percent of his final state-government salaries – which averaged $165,000 as an SIU administrator during his first of two stints at the state government-run college.

Poshard also was allowed to increase his years of state service and thus boost his state pensions by counting unused sick time, un-served state Senate time, and credits purchased for past jobs in the military and while working his way through college, the BGA found. Overall, Poshard’s state pensions are based on 30 years of service and credit.

Poshard commented on his pension benefits to CBS:

“I am very appreciative for the retirement benefits I now receive which were determined by the laws in place at both the state and federal levels. If some of those laws need to be changed in order to more fully fund the pension system, as I myself have advocated before the legislature, then I am more than happy to see a reduction in my own retirement benefits.”

He also gave a phone interview to the Better Government Association:

In a telephone interview, Poshard said he has done nothing unethical and “never tried to game the system.”

“I can tell you, I worked hard my whole life,” said Poshard, 69. “I never shortchanged the state.”

[…]

“I’m grateful for what I got. I’m happy with it. I can’t pass judgment on whether the overall pension was too generous,” said Poshard.

A spokesman for Bruce Rauner said the Poshard’s role on the transition team will not be focused on pension issues.

The entire BGA investigation can be read here.

The corresponding CBS investigation can be read here.