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Pension news update on Senate Bill 1... Courts taking a close look at politicians' claims while Quinn, Illinois leaders are trying to declare a 'State of Emergency' rather than improve revenues to meet obligations

Glen Brown - May 14, 2014

Preamble to Senate Bill 1: �At the time of passage of this amendatory Act of the 98th General Assembly, Illinois has both atypically large debts and structural budgetary imbalances that will, unless addressed by the General Assembly, lead to even greater and rapidly growing debts and deficits. Already, Illinois has the lowest credit rating of any state, and it faces the prospect of future credit downgrades that will further increase the high cost of borrowing.

�The State has taken significant action to address these fiscal troubles, including, but not limited to, increasing the income tax and reducing pension benefits for future employees. Further, the State has enacted a series of budgets over the last several fiscal years that resulted in deep cuts to important discretionary programs that are essential to the people of Illinois.

�At the time of passage of this amendatory Act of the 98th General Assembly, the State�s retirement systems have unfunded actuarially accrued liabilities of approximately $100 billion. Meanwhile, the State�s annual pension contribution has increase [sic] in coming years. The General Assembly recognizes that without significant pension reform, the unfunded liability and the State�s pension contribution will continue to grow, and further burden the fiscal stability of both the State and its retirement systems�� (Senate Bill 1, Public Act 98-0599). COMMENTARY

The Reasons for the State�s �Fiscal Troubles,� �Cuts to Important Programs,� �Unfunded Actuarially Accrued Liabilities of Approximately $100 Billion� and Increases in State Contributions that Madigan Did Not Acknowledge:

Since 1953, Illinois policymakers have consistently failed to make the annual required contributions to the state�s pension systems, primarily because they could then pay for services and their �pet projects� without raising taxes; moreover, they created a flawed re-funding schedule ("Pension Ramp" Public Act 88-0593 in 1995), and they have refused to correctly re-amortize the pension systems� unfunded liabilities.

�Since it passed, Illinois funded the �Pension Ramp� as required every year, except FY2006 through 2007. However, the annual increases in the required contribution under the intended �Pension Ramp� vastly outpace natural growth in the state's tax revenue. This reality, coupled with the constitutional requirement that Illinois balance the budget, meant the state would have to cut spending significantly on services to fund the �Pension Ramp,� particularly in out years. The net result, Illinois' fiscal system simply could not accommodate the significant contribution increases contemplated under the �Pension Ramp.� The first major threat to the �Pension Ramp� was averted with the sale of $10 billion of pension obligation bonds. Then, reverting to past poor fiscal practices, the state significantly underfunded pensions in FY2006 and FY2007, to maintain, and in some cases expand, services� (the Center for Tax and Budget Accountability).

Abiding by the unfortunate tradition of corrupt politics and fiscal irresponsibility in Illinois, the 98th General Assembly�s passed Senate Bill 1 and will continue to sabotage the public employees� retirement plans and the State of Illinois� future economic solvency. Instead of protecting public employees� pension rights and benefits, which have a legal basis under Illinois State Law; instead of restructuring the state�s revenue base to pay for the state�s growth in expenditures and its injudiciously-accumulated debts and obligations, current policymakers have chosen to challenge the Illinois constitutional provision (Article XIII, Section 5) and diminish the Pension Clause. For most teachers, their defined-benefit pension and Cost-of-Living Adjustments are their only retirement subsidies. Since most teacher retirees cannot receive Social Security benefits, thousands of them will become disenfranchised.

Emergency Police Powers:

�Emergency does not create power. Emergency does not increase granted power or remove or diminish the restrictions imposed upon power granted or reserved. The Constitution was adopted in a period of grave emergency. Its grants of power to the Federal Government and its limitations of the power of the States were determined in the light of emergency, and they are not altered by emergency. What power was thus granted and what limitations were thus imposed are questions which have always been, and always will be, the subject of close examination under our constitutional system� (U.S. Supreme Court, Home Building & Loan Assn. v. Blaisdell, 290 U.S. (1934)).

In regard to the �diminishing or impairing� of a pension clause or contract that protects citizens� rights, the United States Supreme Court has held �that the court must establish that impairment is reasonable and necessary to serve an important public purpose, such as �the remedying of a broad and general social or economic problem.� To show that a change is necessary, the state must establish that no less drastic modification could have been implemented to accomplish the state�s goal; and that the state could not have achieved its public policy goal without modification� (Education Sector Policy Briefs).

A state�s option to exercise its police or eminent domain powers, however, has seldom been brought to the test for obvious reasons. To declare that Illinois is in an �emergency state,� without attempting revenue restructuring, for instance, will ignite an examination of the ethical and legal motivations of policymakers and whether they attempted to exhaust every alternative available to them for resolving the state�s financial debts before attempting to ignore a constitutional contract.

�Budgetary relief is not a legitimate public purpose; for a severe financial crisis (Great Recession), courts [have been] split [on the issue]. Courts seem to be in consensus that the long-term fiscal health of a pension plan to assure receipt of future benefits is a legitimate public purpose� If a pension benefit is diminished without �offsetting consideration or benefit to plan members,� [lowering the contribution rate one percent was not a legally negotiated consideration,] courts will typically find �substantial impairment�� (Pension Reform, Legal Principles and Consideration). Once offered, historically and legally, promises that were made need to be kept.

Whether Senate Bill 1 is a diminishment of Article XIII, Section 5 of the Illinois Constitution, and is deemed �reasonable and necessary� in order to carry out a �legitimate public purpose,� will depend upon Illinois courts and their interpretations. �More moderate alternatives that do not violate a constitutional contract� such as the ability to raise revenue through a graduated income tax rate structure must be considered, as well as whether a legitimate public purpose is �an exercise of police power for a broad societal issue v. benefits for a special interest� (Pension Reform, Legal Principles and Considerations). What will also be considered is �At the time of the 1970 Illinois Constitutional Convention, the State pension systems were no better funded than they are today. This circumstance, coupled with the fact that the legislature already had a poor track record of making its actuarially-required pension contributions, caused public employee groups to lobby Convention delegates to include the Pension Clause. These groups reasoned that constitutional protection was necessary because the Illinois General Assembly would renege on its pension obligations to public servants during a financial crisis. Convention delegates agreed and included the Pension Clause to foreclose that result� (Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John Cullerton and Parliamentarian of the Illinois Senate).

Ten states have constitutional provisions that specifically protect public pension benefits. They include Michigan, Texas, Louisiana, Arkansas, Hawaii, New Mexico, Arizona, New York, California, and Illinois. The last four states listed �provide contract rights to benefits in place on the day of hire� (Pension Reform Legal Principles and Considerations, Office of the General Treasurer in Rhode Island (April 10, 2012), the Federal Statutory Law, ERISA, 29 USC 1054 (g) (1).

Though the least protected are new employees, non-vested employees, active and vested employees, active/eligible to retire employees, and retired employees� in this order, in the State of Florida, �The legislature's decision to cut public employee salaries 3 percent, without renegotiating their contracts, was an �unconstitutional taking of private property without full compensation� that violated the rights of public employees �to collectively bargain over conditions of employment. The governor and Republican legislative leaders cut salaries 3 percent, eliminated cost of living adjustments and shifted savings into the general revenue fund to offset the state's contribution to their retirement account" (Judge rules Florida pension changes unconstitutional).

Another ruling, in Arizona, proclaimed �that a law changing the contribution that state employees make to their pension funds [was] unconstitutional� (Arizona pension law ruled unconstitutional, February 2012).

�[It is true] Illinois fiscal problems have been growing over the last 30 years� The state�s fiscal crisis is due largely to the structural deficit which has been created by an unfair, outdated tax system. A �structural deficit� exists when a state�s mix of taxes do not generate enough revenue growth annually to continue funding current service levels into the future, adjusting solely for inflation and population growth and assuming a normal economy. This is the problem in Illinois. It means that, even if the current budget were balanced, the economy expanded as it did pre-Great Recession and Illinois did not improve or increase any existing services or provide any new services, the state would still run a deficit in its General Fund� (Center for Taxation and Budget Accountability). It is significant to note that the Chicago Metropolitan Agency for Planning, the Institute on Taxation and Economic Policy, the Center on Budget and Policy Priorities, the National Council of State Legislatures, United for a Fair Economy, the Economic Policy Institute, the Center for Policy and Economic Research, the National Association of State Retirement Administrators, and the National Institute on Retirement also advocate reforming the State�s outdated tax system to raise revenue.

Conversely, so-called �pension reform� or breaking a constitutional contract with public employees and retirees has been unethically propagandized by the Civic Committee of the Commercial Club of Chicago, the Civic Federation, the Chicago Tribune, the Illinois Policy Institute, Americans for Prosperity and their ilk�avaricious alliances that wield through power and money.

There is no justice in diminishing the benefits and rights of public employees and retirees in order to award financial welfares for the wealthy among us; there is no justice in granting tax breaks for wealthy corporations and, at the same time, legislating cuts to public employees� constitutionally-promised compensation. It is legally and morally wrong to perpetuate the victimization of public employees and retirees, especially when Illinois legislators give �undeserved weight to highly-organized wealthy interest groups, [those groups] tending to �drain politics of its moral and intellectual content�� (Laurence H. Tribe, American Constitutional Law). We might assume the government of Illinois would not want to prove that its contracts are worthless, especially when the �most basic purposes of the impairment [of the contract] clause [Article XIII, Section 5] as well as notions of fairness that transcend the clause itself, point to a simple constitutional principle: government must keep its word� (Tribe).

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