What Are Illinois's And Chicago's Options After The Latest Pension Ruling?

Last May I reported on a decision from the Supreme Court of Illinois that struck down as unconstitutional (under the Illinois State Constitution) a pension reform law that the Illinois legislature had enacted in 2013 in an attempt to rescue the state's woefully underfunded employee pensions.  A few days ago another Illinois statute, this one enacted in 2014 and intended to effect a similar rescue of various pension plans of the City of Chicago, reached the Illinois Supreme Court, and promptly met the same fate.  Here is a copy of the court's new decision.    

How badly funded are Illinois's employee pension plans?  Even though they put out regular annual reports, it's hard to get an exact handle on that because the reports are so lagged.  This article from Crain's Chicago Business from October 2015 takes numbers from the then-recently-issued annual reports for 2014.  According to the article, as of the end of 2014 the Illinois pension plans were the worst-funded of any state's in the country, at 39.3%.  That's the most recent number we have, now about 15 months old; but that was after the big run-up of the stock market in 2014.  From the beginning of 2015 to now the market has been nearly flat (as against assumed annual returns of 7-8%), and Illinois and its municipalities have continued to fail to put in so-called "actuarially required" contributions.  The funds could easily be less than 35% funded today, maybe even closer to 30%.  At that level, no amount of a booming stock market by itself will ever rescue these funds.

The hurdle that the rescue statutes need to clear is the provision of the Illinois Constitution (Article XIII, Section 5) that reads as follows:

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.

As I pointed out in the May 2015 article, the best hope the legislature would have of trying to meet the constitutional test would be to pass a statute that explicitly protected all benefits accrued up to the effective date of the statute, and altered only benefits going forward from that date.  But, for reasons that I don't understand, the legislature did not attempt to meet that criterion in its initial 2013 statute, nor did it try to meet the criterion in the 2014 statute at issue in the new case.  For example, as set forth in the Supreme Court's decision,

The provisions in Public Act 98-641 . . . reduce the value of annual annuity increases, eliminate them entirely for certain years, postpone the time at which they begin, and completely eliminate the compounding component. The Act expressly states that these changes “apply regardless of whether the employee was in active service on or after the effective date of this amendatory Act."

In other words, they tried to cut pension payments even for those who had already retired, and therefore whose pension benefits, like it or not, were already fully accrued.  In partial defense of the legislature, this statute had already been enacted at the time of the Illinois Supreme Court's prior decision in 2015.  But still, I would have thought they would at least have made an effort to segregate out those cuts that only applied to as-yet-unaccrued benefits, in an effort to get those sustained; but they did not do that.

And now, with two rather angry and impatient, and unanimous, Illinois Supreme Court decisions on the books, the prospects for getting the court to recognize the already-accrued versus yet-to-be-accrued distinction have to be diminished.  Pension crises move with agonizing slowness, but some are predicting that the earliest of the Illinois funds to run out of money and start bouncing checks could hit that point in the early 2020s.

So Illinois has now lost three full years in its attempts to reform its pensions, and with each passing year its options get fewer and worse.  Of course, what the employee unions want is massive tax increases.  Short of that, what's left?

  • A reform that recognizes the already-accrued/yet-to-be-accrued distinction.  At this point, such a reform would basically have to end future accruals, perhaps by replacing the defined benefit plans entirely with defined contribution plans.  The Illinois Supreme Court should approve this, but that doesn't mean that they will.
  • Massive firings of senior employees and replacing them with new employees who have only defined contribution plans.
  • Or, Illinois and Chicago can just stop putting money into the plans and see what happens.  When New Jersey recently tried that approach, its Supreme Court upheld the governor.  Will Illinois's do the same?

Meanwhile, Chicago's population, after what had seemed to be a turnaround, appears to have resumed its long-term decline.  Chicago's population reached its peak in 1950 at 3,620,962, and then went into an extended decline.  By 1990 it was 2,783,911.  After a small recovery in the 90s, decline resumed.  By 2010 the population was 2,695,598.  The Census Bureau has not yet released a 2015 estimate for Chicago, but just a few days ago it released an estimate for Cook County (the county that includes Chicago) that showed the entire county losing population.  Previously, Chicago's losses had been more than offset by gains in the remainder of Cook County. 

If you move your business into Illinois or Chicago, you voluntarily agree to take on the burden of the underfunded pensions, meaning that you agree to pay taxes now and in the future for services that were rendered in the past when you weren't around.  Now, why would rational people do that?