CHICAGO — As Illinois lawmakers face mounting pressure to ease the strains of pension funding, a new report from Senate Democrats throws cold water on the idea of reducing future benefits for current employees, contending any legislative curbs would run afoul of the state’s constitution.
The 76-page analysis, “Pensions and Illinois’ Constitution,” was written by Eric Madiar, chief legal counsel to Senate President John Cullterton. The report seeks to counter arguments put forward by the Civic Committee of the Commercial Club of Chicago and opinions endorsed by several Chicago law firms over the legality of benefit cuts.
Most lawyers and lawmakers agree that a clause inserted in the state constitution following the 1970 constitutional convention affords public workers stringent legal protection for accrued benefits.
“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 often-cited passage reads.
But in a review initially completed in 2009 and updated in 2010, Sidley Austin LLP takes the position that the constitutional language does not protect future benefits of current employees. “The only pension benefits protected from diminishment are those which had been earned at the time the pension scheme was altered,” the law firm said in its analysis, which is based on its own review of prior court rulings.
That position opens the door to allowing Illinois to cut future benefits. The analysis also suggests that the state could tie future employment to employees’ acceptance of benefit changes.
Madiar’s analysis, which was released this week, dismisses that argument.
“The General Assembly cannot unilaterally cut the pension benefits of current employees as a means to reduce the state’s existing pension liabilities based on the clause’s plain language, the drafters’ original intent, voters’ understanding of the provision, and court decisions construing the clause,” it reads.
Madiar contends that the impairment language protects an employee’s benefits in place “when the person becomes a pension system member” — based on prior court rulings — and safeguards any benefits granted during their employment. The pension clause would require the addition of “earned” or “accrued” before “benefits” in order to support Sidley’s position, according to the analysis.
Madiar concludes that because benefits are a “contractual” right, the state must negotiate any benefit reductions. (His analysis can be found at http://www.illinoissenatedemocrats.com/index.php/component/content/article/108-public-information-brochures/1517-pension.)
State lawmakers could consider additional pension reforms during their current spring legislative session, but what shape those reforms might take remains unclear. House Speaker Michael Madigan, D-Chicago, has opened the door to considering employee benefit cuts.
“We are reviewing the Senate analysis, but there are legal opinions that go both ways,” said Madigan spokesman Steve Brown. “It’s clear that the costs of pensions is affecting the state’s fiscal condition, so there’s a lot of interest in taking some further actions and there is ongoing discussions.”
Some have suggested Illinois should turn to other maneuvers to better fund pensions, such as taxing retiree benefits. Bankruptcy attorney Jim Spiotto of Chapman and Cutler LLP has suggested creating a special authority to set pension rules and provide oversight with the goal of removing politics from pension-related decisions.
Any move by lawmakers to cut current employee benefits without the blessing of state unions likely would face a legal challenge. Litigation filed by retirees is pending in Colorado, Minnesota, and South Dakota against the states for violating state and federal laws seeking to limit cost-of-living increases.
Illinois last year passed pension reforms that cut benefits for future employees. Gov. Pat Quinn said those changes could shave $100 billion off contributions needed through 2045. Those statements are now the subject of an inquiry by the Securities and Exchange Commission. While cuts in future employee benefits help reduce later contributions, they don’t affect accrued unfunded liabilities.
The state’s unfunded liability rose to $75.7 billion in fiscal 2010 from $62.4 billion in fiscal 2009. That lowered the pension system’s funded ratio to 45.4% from 51%, among the worst in the nation.
The unfunded liability has continued to rise as annual payments fall short of the actuarially required contribution — a contributing factor to the state’s fiscal crisis that has resulted in series of ratings downgrades and driven up borrowing costs. The state sold $3.7 billion of general obligation bonds last month to cover most of its fiscal 2011 payment.
Illinois carries $24 billion in unfunded retiree health care benefits that it pays about $473 million for annually to cover on a pay-as-you-go basis. A legislative commission is exploring changes to the funding formula to require higher contributions from more affluent retirees.