Last week, the Illinois Supreme Court ruled that Public Act 98-641 of 2014 violated the state constitution’s pension protection clause which states: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
The Act tried to do three things. First, it increased employee contribution rates by 0.5 percent per year for five years, capping the contribution rates at 11 percent of the employee’s salary. Second, it curtailed employee annual annuity increases. And, third, it increased the city’s contributions to the pension system. The Act was also supported by 28 of the 31 represented unions.
Though the reform increased the pension fund’s financial stability, the court found that increased financial stability is not an offsetting benefit. According to the court, members gain nothing from the funding boost since they already have a constitutional right to receive their pension benefits under the state’s pension protection clause. The court reached this conclusion despite the General Assembly’s determination that employee contribution rate increases and cost of living reductions were necessary to avert pension insolvency. Union support for the reform was brushed aside by the court because, as the court’s opinion put it, “the unions were not acting as authorized agents within a collective bargaining process.” Instead, the court determined the unions were acting more like legislative advocates than the workers’ representatives.
The court’s ruling exacerbates Chicago’s pension woes. The city’s pension funds have a funding ratio of 50 percent and have over $26 billion in unfunded liabilities — pension promises made to workers that the state doesn’t have the money to pay for. Two of the city’s pension funds are projected to become insolvent by 2029. Pension liabilities have already caused Chicago to slash public services and raise taxes, which may be contributing to the number of people moving away from the Chicago metropolitan area in such large numbers.
Many analysts think the court’s decision leaves Chicago with two ways to fix its pensions. One, as the court hinted at in its opinion, is “bargained-for exchange.” A top mayoral aide stated this would allow employees to choose between salary increases and keeping their current pension benefits. The other option is bankruptcy. The Detroit bankruptcy court stated that state pension clauses “impose no constraint on the bankruptcy process.”
The lesson from the court’s decision is that states should avoid passing future laws, like the Illinois pension protection clause, that lock states and municipalities into unsustainable pension systems. Governments must be able to adjust their pension systems to changing circumstances in order to avoid insolvency because pension guarantees are not worth much without the money to back them up.