Latest Pension Play Is No Guaranteed Fix

If Illinois’ Constitution prevents lawmakers from curbing rising pension costs, then change the Constitution, advocates say. But experts warn a voter-approved rewrite may lead to a lengthy legal challenge and end, once again, without a permanent solution.

Illustration: Jim Siergey for BGA

This story appeared in Crain's Chicago Business as part of its "Crain's Forum" series.

Backers of the latest drive to slash Illinois public pension benefits may want to take note of the fate of a similar effort in San Diego, which won strong voter approval years ago but was nonetheless blocked in the courts and now will not go into effect.

The recent collapse of the 2012 San Diego pension fix is a cautionary tale for Illinois because the fatal flaw cited by California courts — with the U.S. Supreme Court declining to get involved —was the failure of city officials to negotiate with employee unions before putting the proposal to voters.

The growing call in Illinois, from the Civic Federation fiscal watchdog, conservative think tanks and newspaper editorial pages, is to ask voters next year to do away with strong protections for promised pension benefits contained in the state constitution adopted in 1970.

The idea seems simple enough. The 1970 charter has a pension clause that makes it all but impossible to reduce the mounting cost of retiree benefits. So, if those protections are undone, the reasoning goes, lawmakers will be freed to reduce pension costs now consuming close to 25 percent of the state’s general funds spending.

But nothing is simple when it comes to pension reform, with advocates of the amendment bypassing union input in arguing to place it before voters on the November 2020 ballot. What’s more, experts say other federal and state constitutional safeguards, including those protecting contracts and barring the taking of property without just compensation, could make it difficult for an amendment that authorizes pension cutting to pass legal muster.

“Everyone has to agree that it’s the right thing because changing the constitution is not easy,” warned Pete Constant, chief executive officer of the Retirement Security Initiative, a San Jose, California-based pension advocacy group that argues for “fair and sustainable” public pensions.

“If you want to get things fixed, if you don’t want to drag it out another decade,” Constant said, “you need to get some sort of buy-in or a solution that everyone can at least not be happy with but be willing to put up with.”

Constant is no sideline commentator in the national debate over managing public employee pensions. He helped negotiate benefit-reducing retirement amendments for public safety, corrections officers and elected officials in Arizona, which, like Illinois, has a similarly worded pension protection clause in its state constitution. The negotiated Arizona agreement between officials and public worker unions was approved by voters in two steps during 2016 and 2018 elections.

There’s no such chemistry at work in Illinois, yet the constitutional change in Arizona has been seen by some as a potentially hopeful route for Illinois to whittle an unfunded liability for five state-administered pension funds that currently sits at $134 billion.

“It’s unsustainable,” said Laurence Msall, executive director of the Civic Federation, citing mounting financial pressure on not just the state, but also Chicago, which has its own debt-laden municipal worker pension funds, as well as hundreds of other financially fragile retirement funds for suburban and downstate police and firefighters.

“It’s not reasonable to be providing the current retirees 3 percent compounded automatic pay increases when the current employees and the rest of the state are not basically being able to pay their bills,” said Msall, referring to a formula for cost-of-living increases in benefits that has been in effect since 1990 and has driven up pension costs.

In Illinois, the political narrative behind changing the Constitution emphasizes the growing financial burden of pension costs while downplaying the primary cause — decades of significant underfunding by public officials.

The legislature’s bipartisan fiscal forecasting arm says much less than half of the $8.5 billion the state was required to pump into its five big pension funds in the fiscal year that ends June 30 went to cover the costs of benefits actually earned by workers that year. The agency projects the annual price-tag of funding the pay-as-you-go portion of state pension costs has essentially plateaued and will actually be slightly lower 25 years from now than it is today.

However, the costs of making up for the chronic underfunding of the past will continue to soar, the agency projects.

“It’s not a crisis, it’s not bankrupt,” is how state Senate President John Cullerton described the pension underfunding in a recent interview on WTTW-TV. “It’s just that it’s a lot of money we’re having to pay for past mistakes we’ve made by not putting enough in.”

The San Diego pension reform, which voters approved by an almost 2-to-1 margin in 2012, dictated that all new employees, except police officers, hired by the city would be placed in a tax advantaged 401(k)-style plan instead of the pension plan covering veteran workers.

Unlike in Illinois and Arizona, California’s state constitution does not contain specific protections against reducing public pension benefits. But the state’s Supreme Court upheld union objections to the San Diego vote, ruling that the city should have tried to work out a deal with unions representing the affected workers before placing the question on the ballot.

The U.S. Supreme Court declined a request in March to intervene, and San Diego’s city council, effectively waving the white flag of surrender, voted in early June to invalidate the public vote. The courts directed the city to place the newer employees in the pension plan for others.

More than four years have passed since the Illinois Supreme Court unanimously struck down a pension-cutting measure approved by lawmakers over the objections of employee unions in 2013, ruling such actions were barred by the state constitution’s pension protection clause. The court squarely placed blame on lawmakers themselves for leading pension systems into crisis by failing to take steps such as tax hikes or a debt refinancing to remedy a problem “for which the General Assembly itself is largely responsible.”

The year after that ruling, Eric Madiar, the former chief counsel for the Democratic-run state Senate, wrote an analysis that concluded justices had also determined the invalidated pension cutting law was “tantamount to a taking of private property.”

That same argument would likely doom future legislative attempts to cut Illinois pensions, Madiar wrote in a 2016 paper for the Kent College of Law and the University of Illinois School of Labor and Employment.

Embracing that line of reasoning is the Civic Committee of the Commercial Club of Chicago, one of the state’s most influential business groups. The Civic Committee had been a driving force behind the 2013 law, but last February reversed course in advocating a bitter-medicine fix to pay for the state’s pension woes: raising income tax rates, broadening the sales tax to apply to more consumer services and ending a blanket exemption from taxation for retirement income.

“The options to reduce the unfunded liability are limited due to constitutional constraints,” the committee said in a 104-page budget report titled: “Restore Illinois: A Foundation for Growth.”

In a recent press conference, Democratic Gov. J.B. Pritzker said it is “important to me that we address pensions,” but added it is something that will be undertaken “over the next several years.” The top priority for Pritzker is to obtain public approval next year for a different constitutional amendment that would allow lawmakers to replace the state’s current flat rate income tax with a system of graduated rates that charge more to the wealthy.

Pritzker claims the change would bring in an additional $3 billion in revenue for the state, which would ease, but not eliminate, the financial pressure posed to the state by wobbly retirement funds.

The inability to shake that financial pressure is an argument seized on by those advocating for undoing the state’s pension clause. But Jean-Pierre Aubry of Boston College’s Center for Retirement Research said pleading poverty is often questionable when it comes to addressing pension funding shortfalls.

“The thing about ‘Can’t afford it’ is not technically true, in terms of solvency,” explained Aubry, the center’s associate director of state and local research. “Sometimes it is, like we can’t afford the cash flows, like Detroit. But a lot of it is they have an unfunded liability that, in point of fact, is a stream of benefits being paid out over the next 75 years. They don’t need all that money today.”

Illinois, Aubry said, is paying the price for “poor management,” but “in a pure fiscal sense, it’s not as acute as some are trying to make it.”

Constant argues that states have an obligation to step in to fix pensions before they collapse upon themselves. “Voters have the right to change the constitution,” he said, but noted there are other constitutional protections that apply to contracts that represent potentially significant legal hurdles to reducing pension costs.

“Changing the constitution is not a simple fix,” Constant said.