IL Supreme Court strikes down pension reform

The Illinois Supreme Court today ruled that the pension reforms in Public Act 98-599, approved in 2013 for state employees, including teachers outside Chicago, were unconstitutional.


Illinois Supreme Court in Springfield (Randy von Liski via Flickr)

Under Illinois’s pension reform, retirees’ benefits would have been less than what those retirees were promised, because the annual cost-of-living adjustment the state would be required to pay would have been cut. The reforms would also have phased in an increase in the retirement age, capped the pensions for the highest earners, and made a few other changes. In exchange, current employees would see a small reduction in the contributions they would be required to pay into their retirement plans.

The problem has always been reconciling the gap between what those retirees were promised when they were first hired—i.e., a certain annual increase in their pension payments—and what the state could pay based on the amount of money that would be in the state’s bank account when they reached retirement age and were able to collect on those promises.

The recent recession caused some difficulty in that the value of the pension funds decreased, just as the net worth of people who owned stock decreased during the recession when the stock market dropped. But state officials, including former governors and legislatures for about 20 years, also share in the blame, as they regularly failed to put the required money into the pension funds.

Pension fund deficiencies have long loomed over the state. By 2014, Illinois had, by some estimates, more than a $100 billion shortfall in its pension liabilities. If nothing changed, the state wouldn’t be able to pay this bill when it came due. So, because they worried about not being able to make anticipated pension payments, state officials declared a crisis and passed the pension reform law a year and a half ago, making it possible to save money by paying retirees less than they had been promised.

Before the law could be implemented, though, unions filed lawsuits, charging that the reforms were unconstitutional and violated Article XIII, Section 5 of the 1970 Illinois constitution:

Membership in any pension or retirement system of the State shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

The decision today had long been expected, as the above section in the state’s constitution is quite clear and written in plain language. But the state acted as if the constitution were some sort of suggestion, rather than the law of the land. Even in their arguments before the Illinois Supreme Court, the state’s lawyers said the financial crisis in which the state found itself gave it “police powers” and enabled changes to the contractual relationships it had approved, regardless of what the constitution said.

This was, of course, not a wise course of action. Police powers may be invoked in times of true crisis, giving the government the power to restrict people’s actions. But here, the people asserted the right to restrict action by the government. Furthermore, elected officials themselves—not the teachers outside Chicago, police officers, firefighters, etc.—were directly responsible for the fiscal crisis, as they had kicked the proverbial can down the road by failing to make the required payments into the pension funds for years.

“[T]he authority of the legislature does not include the power to diminish or impair the benefits of membership in a public retirement system. This is a restriction the people of Illinois had every right to impose,” the court wrote, ultimately saying the reforms were unconstitutional:

Retirement annuity benefits are unquestionably a “benefit of contractually-enforceable relationship resulting from membership” in the four State-funded retirement systems. Indeed, they are among the most important benefits provided by those systems. If allowed to take effect, Public Act 98-599, would clearly result in a diminishment of the retirement annuities to which Tier 1 members of [the four retirement systems:] GRS, SRS, SURS and TRS became entitled when they joined those systems. As described earlier in this opinion, the new legislation directly reduces the value of retirement annuities for those members in no fewer than five different ways. While we presume statutes to be constitutional and must construe enactments by the legislature so as to uphold their validity whenever it is reasonably proper to do so, there is simply no way that the annuity reduction provisions in Public Act 98-599 can be reconciled with the rights and protections established by the people of Illinois when they ratified the Illinois Constitution of 1970 and its pension protection clause. Those provisions contravene the clear requirements of article XIII, section 5, as set forth in the provision’s plain and unambiguous language and construed by the legion of cases we have just discussed. In enacting the provisions, the General Assembly overstepped the scope of its legislative power. This court is therefore obligated to declare those provisions invalid.

The pension funds are still running out of money and need to be fixed, but today’s ruling means the legislature and new governor will have to go back to the drawing board and come up with a (constitutional) way to keep the pension funds solvent. They can’t:

  • Reduce the benefits promised to current or former employees
  • Enact any other changes that violate the state constitution

It’s not clear whether an amendment to the constitution, which could give the General Assembly the authority to reduce pension benefits, would be applicable to employees who had already been promised a certain array of retirement benefits. That is, it might be possible to change the promises made to future employees of the state, but the promises of the past with regard to pension benefits must be honored.

But I essentially believe a fiscal crisis, in which spending is higher than revenue, needs to have a fiscal or an accounting solution, not one that involves a change to the state’s constitution. Either spending must decrease, which isn’t going to happen unless the constitution is amended, or revenue must increase, most likely from new or higher taxes.

A few suggestions come to mind, but Gov Bruce Rauner, a Republican, isn’t likely to approve any of them. First, the state could institute a progressive income tax, a system where people who have higher incomes pay taxes at a higher rate. The state’s income tax is currently flat: everyone pays 3.75 percent, regardless of income, and corporations pay 5.75 percent. Second, certain financial transactions are not taxed in the state, such as some that take place through the Chicago Mercantile Exchange. Taxing these transactions could provide an additional source of revenue. Third, the state could spend more responsibly, investing in its workers rather than, say, a basketball arena at a private university.

The state could also, I suppose, issue bonds to raise the revenue, but again, this just kicks the can of changes to the tax code down the road. The state will eventually have to pay for those bonds, but the increase in taxes could be phased in over a longer time.

Other options exist, but the state doesn’t have a Plan B yet. Laws that would increase economic activity or business in the state would also bring in additional revenue, but laws that do that aren’t likely to pass a Democratic-controlled General Assembly. I remind those legislators, though, that Illinois has a fiscal crisis. You can’t solve it by running roughshod over the constitution, but you can begin to fix it by passing constitutional laws that bring in revenue.

“The financial challenges facing state and local governments in Illinois are well known and significant,” the court wrote. “In ruling as we have today, we do not mean to minimize the gravity of the state’s problems or the magnitude of the difficulty facing our elected representatives. It is our obligation, however, just as it is theirs, to ensure that the law is followed.”

About the Author

Paul Katula
Paul Katula is the executive editor of the Voxitatis Research Foundation, which publishes this blog. For more information, see the About page.