CHICAGO - Unsustainable and unaffordable pension obligations that crowd out funding for essential services and infrastructure necessary for the health, safety and welfare of Illinois' citizens shouldn't override constitutional mandates on a government's purpose, said municipal restructuring expert James Spiotto.
The balancing of provisions in the state's constitution that protect public pensions and underscore the responsibilities and purposes of state government is at the heart of an article arguing the legal favor of the state's 2013 pension reform package now before the Illinois Supreme Court.
"The Illinois Pension Clause does not specifically state that pension obligations shall be paid under all circumstances even to the exclusion of the full funding of necessary services for the health, safety and welfare of the people," said municipal restructuring expert James Spiotto.
"Reasonable adjustments to make pension benefits sustainable and affordable are not a diminishment or impairment, but rather are the recognition of reality of the limited revenues," continued Spiotto, a managing director at Chapman Strategic Advisors LLC, a consulting firm Spiotto helped establish after retiring from Chapman and Cutler LLP.
State employees, retirees, and their unions successfully argued at the lower court level that the reform package approved by lawmakers in December 2013 that cut cost-of-living increases, raised the retirement age for some, and capped pensionable salaries violated the state constitution.
Sangamon County Circuit Court Judge John Belz last month voided the pension legislation, finding the cuts violated the state constitution's clause that protects pension benefits from impairment or diminishment under an enforceable contract. The opinion cited a recent state Supreme Court ruling applying those protections to state retiree health benefits.
The appeal went directly to the high court and it has agreed to expedite its review. The state's initial brief is due Jan. 12 with the unions' brief due Feb. 16. In turn, the state's reply is then due Feb. 27 and oral arguments will be scheduled for the March 2015 term of the court.
In his ruling, Belz rejected the state's defense that it acted within its police and sovereign powers to alter its contract with retirees due to the state's fiscal emergency. Belz said the state did not make the case that such powers were sufficient - or that they even existed - to ignore the "plain language" of the pension clause protecting annuities. Belz made permanent a temporary injunction banning the state from implementing the changes aimed at trimming $145 billion off state payments over next three decades.
Belz cited language in state supreme court rulings that assert the plain language of the constitution cannot be rewritten. In making his case for balancing provisions of the state constitution, Spiotto noted the state constitution's preamble that states: "The purpose of the constitution, for which the other clauses are established, is to provide for the health, safety and welfare of the people."
Article VIII provides that the state budget shall be balanced and appropriations for any fiscal year shall be no greater than the estimate of funds available and that the appropriations for a fiscal year shall not exceed the funds estimated by the General Assembly to be available for that year.
"These provisions of the constitution cannot be ignored in favor of the Pension Clause. The terms of the constitution must be interpreted to give meaning to each provision," Spiotto argued. "Accordingly, unsustainable and unaffordable pension obligations, which crowd out the funding of essential governmental services and infrastructure necessary for the health, safety and welfare of the state's citizens, cannot alter or override the mandate for the existence of the government."
Employees, retirees, and their unions argue the state has shorted the pension system while employees paid their mandated share and so the state must shoulder the burden for making good on a constitutionally protected commitment.
A spokesman for the union coalition, We Are One, said in a recent statement: "We will make our case that the constitutional pension clause is absolute and that the circuit court's ruling should be upheld," said Anders Lindall.
Spiotto raised concerns over the negative impact raising taxes and cutting services could have on the populace that, in turn, would make it all the harder to stabilize the state's pension system through higher payments alone.
"To raise taxes and reduce services to fund that which is unaffordable only causes corporate and individual taxpayers to leave the state with resulting reduction of tax revenues and the ultimate death spiral of the government," he warns in the piece recently published on MuniNetGuide.com, an online resource specializing in municipal-related research that he co-owns.
Spiotto also argued that it's not an unwillingness on the state's part to fund but an inability to fund without a devastating impact on state services.
"The failure to address this underfunding issue now will have dire consequences the longer dealing with the problem is delayed," he argued.
Unions have countered similar assertions made by lawmakers in the preamble to the pension reform legislation that the pension system's woes were long in the making and the state cannot now argue that it lacks the funding to meet a commitment.
Spiotto tackled the "contract" argument in citing U.S. Supreme Court rulings "permitting reasonable adjustment of a contract in order to balance the overriding mandate of a higher public interest against a claim of impairment of contract."
Lawmakers trimmed employee contributions hoping the courts might find that reasonable "consideration" for altering its pension contract with employees and retirees.
"The wisdom of the U.S. Supreme Court cases should reinforce the appropriate interpretation of the Illinois Pension Clause that unaffordable pension benefits whose funding would interfere with the appropriate funding of governmental services and infrastructure must be reasonably adjusted for the sake of all concerned," Spiotto said.
Spiotto highlighted widespread action across the country on pension reform. More than 40 states between 2010 and 2012 undertook pension reform. Elements of the Illinois package have been upheld elsewhere although most of those states lack the same firm language as the Illinois constitution.
If the lower court ruling holds, it will fall on Gov.-elect Bruce Rauner, a Republican, and a Democratic led General Assembly to find a new fix for a pension system that's just 39.3% funded and saddled with $111 billion of unfunded obligations.
The state, knowing a legal challenge loomed, didn't build any savings on pension contributions from the pension into its fiscal 2015 budget that runs through June 30, so there's no immediate fiscal impact.
Illinois' pension woes have driven deep declines to the state's bond ratings, now at the A-minus and A3 level, the lowest among states. All three rating agencies assign a negative outlook.
Rating agencies have said the state's weak credit rating could stabilize if the pension changes are upheld and the state shores up its budget. Investors have penalized the state for its credit woes by demanding steep yield penalties.
In a recent weekly outlook piece, Municipal Market Advisor offered a bleak assessment if the state's high court agrees with the lower court, warning it "would have widespread financial and societal consequences including lower government employment, higher taxes, reduced social services, lower education spending, constrained investment in infrastructure, etc."
Bondholders would pay a price. "Negative rating and price implications would likely follow for bondholders of the state and perhaps other Illinois municipal issuers," the piece warned.