The Real Culprits in Illinois’ Pension Disaster

The price the state's voters will end up paying for decades of electing irresponsible policymakers is likely to be very high.
December 2, 2014
By Charles Chieppo  |  Contributor
Principal of Chieppo Strategies and former policy director for Massachusetts’s Executive Office for Administration and Finance

Like a slow-motion train wreck, Illinois' worst-in-the-nation state pension crisis continues to move inexorably toward an unpleasant conclusion. In the latest installment, a circuit court judge granted plaintiffs' motion for summary judgment and struck down the state pension reform law enacted last December.

It's easy to dump all of the blame for the pension underfunding jam that Illinois is in on bad decisions made by generations of elected officials. But in a democracy, it's voters who have the final say. That's why, angry though they may be, Illinois' citizens ultimately have only themselves and their predecessors to blame for the state's pension troubles.

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Not long after World War II, it became apparent that Illinois' pension system wasn't sustainable. But more than 20 years later, nothing had been done about it. In 1969, delegates to a state constitutional convention attempted to prod legislators to act by adding a clause to the constitution that prohibited pension benefits from being "diminished or impaired." The delegates assumed the legislature would never be so irresponsible as to let the system get completely out of hand if the option of cutting benefits was foreclosed.

That turned out to be a political miscalculation with disastrous consequences: Legislators continued to routinely skip or underfund annual pension payments. And voters either returned them to office or replaced them with representatives who were equally irresponsible.

Last year's fix was designed to save $145 billion and fully fund the state pension system by 2044. While it does cut employee contributions by 1 percent, it limits cost-of-living adjustments (COLAs), caps pensionable salaries, raises the retirement age for some employees and shifts to a far more actuarially sound method of calculating annual pension fund contributions. In a classic example of barring the gate long after the horse has left the barn, it also gives pension funds access to the courts to compel lawmakers to make the required annual payments to the system.

Even from my perch near the bottom of my law school class, it seems pretty clear that slashing COLAs and pensionable salaries violates the Illinois constitution's unequivocal "diminished or impaired" clause. In a sign of desperation, the state was reduced to arguing that its police powers give it the authority to reduce pension benefits. But Circuit Court Judge John Belz disagreed, writing, "The pension protection clause contains no exception, restriction or limitation for an exercise of the state's police powers or reserved sovereign powers."

Attorney General Lisa Madigan quickly appealed the case to the Illinois Supreme Court and was expected to ask the court to act on an expedited basis, in which case it would rule on the matter in six months or less. But the tea leaves don't look so promising there either. In a 6-1 decision this July that Judge Belz cited in his opinion, the court sided with retired state employees who argued that retirees' health insurance is a protected benefit.

If the state Supreme Court doesn't reverse the Belz decision, Illinois taxpayers will be faced with the fallout from a pension system that is underfunded by an estimated $111 billion. Officially, it has just over 39 percent of the money needed to meet its obligations, and that falls to 34.3 percent if you use more realistic assumptions about the pension funds' investment performance. The state's retirement-fund mess has already driven downgrades in Illinois' bond rating, which is the lowest of any state.

Unless the state Supreme Court finds a very well hidden exception to the Illinois constitution's pension-protection clause, incoming Gov. Bruce Rauner, who supports moving to a 401(k)-type retirement system, and the legislature will have to go back to the drawing board to fix the pension system. With benefit cuts off the table, what they come up with will likely result in cuts to other areas of state government.

And whether it's through higher taxes, service reductions or a combination of the two, Illinois voters will likely pay far more for far longer than they would have had they not allowed their elected representatives to shirk their pension responsibilities for over half a century.