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Tags: Illinois | Ruling | Pension | Reform

Illinois May Have Little Chance of Overturning Ruling on Pension Reform

Tuesday, 30 December 2014 12:11 PM

The state of Illinois will likely find it difficult in 2015 to get to grips with its crippling $105 billion unfunded pension liability for government workers, pension and legal analysts warned. Judgments in another state, Arizona, are one of the reasons for their pessimism.

In March, Illinois officials will try to persuade the state's highest court to overturn a November lower court ruling that declared unconstitutional a 2013 law seeking to extend reduced pension benefits to all state workers. But the court rulings in Arizona show that Illinois, which has the worst funded pensions of any U.S. state, may not have much chance.

The problem is that Illinois, Arizona and New York states all provided public workers, such as police, teachers and even judges, near iron-clad pension guarantees that were embedded in their state constitutions.

Two Arizona laws enacted in 2011 to increase employees' pension contributions, restrict certain people from receiving pensions, and institute a new formula for calculating benefit increases, floundered in the face of legal challenges. One law, challenged by teachers, was overturned by a Maricopa County judge in 2012, while another, contested by retired judges, was tossed out by the Arizona Supreme Court in February this year. The courts tied their rulings to constitutional language that membership in public pension systems is a contractual relationship, and retirement benefits cannot be "diminished or impaired."

Illinois and its Republican Governor-elect Bruce Rauner are likely to find themselves in similar bind to Arizona where the only answer appears to be a long-shot effort to amend the state constitution.

"There aren't many options at this point," said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College, referring to both states. "The (pension) payments need to be made or the constitution needs to be changed."


Altering the Illinois Constitution's 1970 pension provision would be a massive undertaking, requiring a three-fifths vote of lawmakers in the House and Senate to get it on the ballot. It would then need approval from three-fifths of voters or a majority of individuals actually voting in a general election — not an easy proposition as people often don't vote on every item on the ballot and given Illinois is a largely Democratic state with activist public unions.

And the immediate cost for losing before the Illinois Supreme Court is significant, a potential $1 billion hit to an already precarious budget that will lose about $2 billion in revenue due to the partial expiration of higher income tax rates on Thursday.

A state legislative commission reported last month that without the 2013 law, pension payments would jump to $7.6 billion in fiscal 2016 from $6.8 billion this year, reaching $16.3 billion in 2045. The unfunded liability would climb as well, topping out at $128.7 billion in 2029.

Illinois already has the lowest credit ratings, and the highest borrowing costs of any state in the nation.

The state's five-fund system was just 42.9 percent funded at the end of fiscal 2014, and its funded ratio has lagged the 80 percent benchmark since at least 1972.

That hole persists despite the sale of $17 billion of bonds over eight years through 2011 to cover pension payments and the passage of a law subjecting workers hired from Jan. 1, 2011 onward to higher retirement ages, capped benefits and tied cost-of-living increases for retirement pay to inflation.


That law was estimated to reduce state contributions by around $71 billion through 2045. The subsequent 2013 law extended similar benefit changes to all state workers and retirees, which would have led to total savings of $137.4 billion to $145 billion over 30 years.

Rauner, who takes office in January, has contended the 2013 pension law is unconstitutional, and he favors a move to tie pay and benefits to inflation and move the state to a defined contribution system for pensions.

The labor unions behind the legal struggle against the 2013 law also contend that Rauner's approach, even if passed by a Democrat-controlled legislature, would fail to survive a court challenge.

Other options come with potentially unpalatable costs.

For instance, Rauner could get behind a plan floated previously by House Speaker Michael Madigan to unload pension payments the state currently makes for public school districts, universities and community colleges onto those institutions. But that would likely run afoul of Rauner's fellow Republican lawmakers who worry that local property taxes would climb as a result.

Unions had supported an Illinois Senate plan that would have given workers the choice between keeping retiree healthcare coverage or maintaining their current pension benefits. But a recent high court ruling in an unrelated case declared retiree health care part of promised pension benefits — essentially removing it as a bargaining chip.

© 2021 Thomson/Reuters. All rights reserved.

The state of Illinois will likely find it difficult in 2015 to get to grips with its crippling $105 billion unfunded pension liability for government workers, pension and legal analysts warned.
Illinois, Ruling, Pension, Reform
Tuesday, 30 December 2014 12:11 PM
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