Last December, Illinois Gov. Pat Quinn signed an overhaul of the state’s pension system into law to gradually remedy the state’s $110 billion shortfall in public pension payments – the highest deficit of its kind in the United States. Quinn’s legislation increased the retirement age for government workers 45 and younger while decreasing the annual 3 percent cost-of-living increases applied to retirees’ benefits. Legislators projected that Quinn’s pension reform would lower the pension deficit to $21 billion by 2044.
Labor unions immediately sued, arguing the law violated the Illinois Constitution, and Sangamon County Circuit Court Judge John Belz agreed. Specifically, Belz pointed to a clause in the state constitution that dictates state pension benefits “not be diminished or impaired.” Belz’s ruling threw Quinn’s progress on pensions into limbo. Illinois Attorney General Lisa Madigan, hoping to overturn the judgment, is appealing the case to the state’s supreme court.
But if the higher court affirms the unconstitutionality of Quinn’s law, the Illinois legislature will find itself between a rock and a hard place. The obvious question facing lawmakers: How can Illinois dig itself out of this hole?
The harsh reality is the public will likely have to foot the bill, according to a spokeswoman for the National Association of Public Pension Attorneys. “As a state they have the option to raise taxes,” she said. “They have the option to do away with corporate tax credits and cut funding for particular programs.”
The spokeswoman, who did not wish to be named, said those decisions are at the discretion of the legislature. In order to pay for promised pension payments without changing the structure and requirements of those plans, the state will have to impose the aforementioned “revenue raisers” and do away with “revenue reducers.” If the state were to pay all of its obligations today, it would only be able to cover about 45 percent of that tab, according to a 2012 study by Pew Research Center.
The Illinois legislature’s reluctance to face the pension funding shortfall has now come back to haunt it, says Keith Brainard, research director of the National Association of State Retirement Administrators. Illinois had a “culture for decades of not taking their pension benefits seriously” and is now “paying for past sins.”
He referenced a meeting with Richard Ingram, director of the Illinois Teachers Retirement System, who told Brainard that the agency had never received an actuary calculate benefit contributions needed to keep the teacher’s pension plan sound. Brainard was startled. “Having an actuary estimate the optimal employee and employer contributions is standard procedure for pension systems,” said Brainard.
Brainard underlined that there are three revenue sources in play when it comes to finding a solution to the pension crisis: “money in,” “money holding” and “money out.” If the Illinois courts rule that Quinn’s overhaul is unconstitutional, the revenue that the state pays to its pensioners, or money out, must be left unaltered. There’s not much that the state can do with the money sitting in pension funds, which grows by about 7 to 8 percent annually because the legislature can’t change financial markets.
The number that has to change, then, is money in. Illinois will have to require more contributions from employers, such as school districts and state universities, since the constitution dictates that employee contributions remain unchanged. And that will trickle down to taxpayers in the form of higher state taxes and college tuition.
Rauner, who will be sworn in next month as Illinois’ first Republican governor in more than a decade, welcomed the circuit court ruling on his predecessor’s law. Regardless of how the higher court rules, he’ll have plenty of pension policy to go over with the state legislature in January.
Rauner and Quinn both avoided discussing concrete solutions while on the campaign trail in October. Crain’s Chicago Business went as far as reporting that neither candidate seemed “to have a complete grasp of the problem, let alone a realistic solution.”
Rauner’s vague plan only addressed future payment obligations, not the giant liability of past and present benefits. His suggestion was something similar to a 401(k) plan, where employees choose how much to contribute to their retirement and employers match part of that amount. However, the transition to that system would cost around $100 billion, Crain’s pointed out. When pressed on how the state could pay for that, the businessman-turned-politician ambiguously pointed to economic “growth.”
One option that isn’t on the table is for Illinois to file for bankruptcy protection as Detroit did. Detroit was facing an $18 billion shortfall in pension payments but it was able to cut that amount by $7 billion as part of its financial reorganization under the bankruptcy code. Although the Motor City has a pension protection clause in its constitution similar to Illinois’, U.S. Bankruptcy Judge Steven Rhodes approved the 4.5 percent decrease in payments after 73 percent of retirees voted in favor of the cuts. A state can’t file for bankruptcy and even if Chicago tried to go that route to reduce its pension shortfall, it is doubtful that city workers would go along with it, political experts say.
James McNamee, director of the Illinois Public Pension Fund Association, doesn’t think Chicago will file for bankruptcy protection and says the key to the problem lies in the hands of the people who created the mess: politicians. “A lot of this is politics,” said the retired policeman. “The politicians who are calling for reform now, who’ve made all of their money off pensions, will start living within their means. Anything else would be dangerous.”