CHICAGO - Nearly two weeks after the Illinois Supreme Court struck down the state's 2013 pension overhaul legislation, state lawmakers, local government leaders, and legal experts alike are struggling for an alternative the court would accept.
"The only roadmap they laid out was to tell lawmakers to make the appropriation to pay for the pension obligations," said one Chicago-based pension lawyer.
That's about the only consensus reached among those who've combed through the unanimous, 38-page opinion the court delivered May 8 voiding the reforms for violating the state constitution's pension clause.
Even Gov. Bruce Rauner, who initially stood by his proposal to cut pension benefits earned going forward while protecting workers' accrued benefits, has expressed doubt.
"I hope and believe that our recommendation that we've had for a long, long time is constitutional. But when you look at the language, unfortunately, their ruling was broad and tough and not crystal-clear about what can change and what can't," Rauner said at a recent public appearance.
He wants lawmakers to "pursue several options simultaneously" to narrow the state's $111 billion pension funding gap and see which ones can pass legal muster. Rauner had said his proposal would shave $2.2 billion off the state's projected $6.2 billion deficit in fiscal 2016.
The overturned law would have trimmed the state's fiscal 2016 payment by about $1.1 billion and cut more than $20 billion from the unfunded tab. It cut cost-of-living adjustments, capped pensionable salaries, and raised the retirement age for some.
Unions opposed it and sued.
The high court sided with a lower court decision as justices gave full weight to the words of the pension clause.
"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," the clause says.
"There is simply no way that the annuity reduction provisions [of the law] can be reconciled with the rights and protections established by the people of Illinois when they ratified the Illinois Constitution of 1970 and its pension protection clause," the opinion said.
"Given the stridency of the court's opinion, we believe that the opportunities for benefit reform are now significantly more limited," Moody's Investors Service said in a comment after the ruling.
Moody's called the opinion a negative for the state's credit profile but took much harsher action on Chicago, stripping the city of its investment grade rating over the challenges to the city's efforts to tackle its $20 billion of unfunded obligations.
Standard & Poor's put Illinois' A-minus rating on CreditWatch with negative implications.
"In our view, the Supreme Court ruling, along with the earlier ruling on other postemployment benefits, casts doubt on future pension and OPEB reform initiatives," said Standard & Poor's analyst John Sugden.
The Opinion
The court flatly rejected the state's position that it was within its rights to cut benefits after raising taxes and cutting spending to stabilize the state's faltering finances, underscored by its battered credit ratings.
The state "made no effort to distribute the burdens evenly among Illinoisans," the opinion said, citing debate among lawmakers as they considered the 2013 package. "It did not even attempt to distribute the burdens evenly among those with whom it has contractual relationships."
The court's opinion agreed with union arguments that the state's pension crisis was of its own making.
"The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid," it said.
The justices acknowledged the deep fiscal mess facing the state but said those concerns don't override their interpretation of the law. "Crisis is not an excuse to abandon the rule of law. It is a summons to defend it," the opinion said.
The opinion quoted debate during the 1970 constitutional convention underscoring delegates' aim.
"This matter of the amount the state has appropriated [for pensions] has been made a political football, in a sense," it quoted delegates as saying. "The party in power would just use the amount of the state contribution to help balance budgets, and this had gotten to the point where many of the so called pensioners under this system were very concerned."
The justices also took past lawmakers to task for the backloaded payment schedule struck in 1995 that is supposed to put the funds on a path to reach a 90% funded ratio in 2045, citing the Securities and Exchange Commission's filing of civil fraud charges against the state in 2013 for misleading investors.
"The SEC recently pointed out: the Statutory Funding Plan's contribution schedule increased the unfunded liability, underfunded the state's pension obligations, and deferred pension funding. The resulting underfunding of the pension systems enabled the state to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the state," the opinion said.
New Proposal
Illinois Senate President John Cullerton, D-Chicago, is promoting a revamped version of legislation he carried in 2013, which fell by the wayside when its more modest savings were compared to the now overturned legislation.
Supporters of the Cullerton option believe it stands a chance due to a footnote reference in the opinion that suggested the court might consider a plan that was negotiated with unions and offered some form of "consideration" for any changes. That could come in the form of a perk in exchange for a change that would cut the unfunded liabilities.
Cullerton's proposal would offer employees an option to pick how future pay raises are calculated toward their future annuity with one offering higher cost-of-living increases and the other offering higher upfront payments.
Some lawyers stand behind Rauner's proposal.
It also would offer an optional buyout for employees who started before 2011 who agree to lower a lower COLA and move to a 401(k)-style defined benefit plan.
In a
"We recognize that the Illinois Supreme Court's recent decision contains language broadly stating that benefit calculation formulas are entitled to constitutional protection. Nonetheless, Illinois courts never have squarely addressed whether pension formulas can be modified only as to future years of service," they wrote.
"Rauner's pension compromise thus is not only sensible but also legally and politically defensible. Lawmakers should give it a chance," they wrote.
Others say language in the opinion protects benefits in place when an employee begins his or her career.
The Center for Tax and Budget Accountability is promoting an alternative it says would leave benefits intact, though skeptics say it would place long-term strains on the state government balance sheet.
The proposal calls for a re-amortization of the 1995 pension funding schedule that the SEC and other have blamed for hastening the growth in liabilities.
The center - with a mission of promoting "social and economic justice" - says the state could limit its annual payments to slightly more than the $7.6 billion owed to the system next year if it adopts a schedule that relies on level annual payments over a new 45-year period with the goal of reaching a more modest funded ratio of about 80 %.
"It is the only viable and constitutional path forward," said the center's executive director, Ralph Martine. The center suggests an income tax hike, expanding the state's sales tax base and taxing retirement income to help generate more revenue to cover the payments.
State Rep. Elaine Noritz, D-Northbrook, who helped craft the failed 1995 package, said the path forward remains clouded and most of the choices, absent new reforms, have negative consequences.
"Whatever road we take, the choices do not get any easier," she said, raising concerns that reamortizing the burden would "risk drawing the ire of bond agencies that already have seen a decades-long track record of delay."
Rauner has floated the idea of a constitutional amendment to make clear what benefits are protected but that's a lengthy process and would also face a legal test.
Lawmakers may try to push off the state's pension contributions for school districts outside Chicago and for public universities down to those employers.
"What history has shown us is the best solutions have been where the government employer and the workers have come together," said municipal restructuring expert James Spiotto.
City plan
The impact of the state ruling on Chicago's path forward is clouded, with legal experts divided over whether reforms that overhauled the city's municipal and laborers' funds can survive their own legal challenge. Arguments are slated for July in the Cook County Circuit Court. The reforms took effect Jan. 1
The city's reforms differ from the state's in that the city is actually increasing its contributions. Employee contributions also will go up while cost-of-living increases are trimmed.
The city is arguing its reforms don't impair the funds but save them from insolvency. The city contends its hands were previously tied by the state funding formula and the reforms were struck through collective bargaining.
"Far from diminishing or impairing pension benefits, the city's reform plan strengthens and protects benefits that were endangered," wrote Mayer Brown LLP attorney John Schmidt in a published opinion piece. "Obviously the justices are not happy about the way the state tried to deal with the pension issue. But the city's approach has been different — and it remains constitutionally defensible."
Municipal Market Data reported in a market post Tuesday that Illinois general obligation 5s were trading at a 175 to 190 basis point spread to the MMD benchmark on five and 15 year maturities.
