Illinois Pension System and Changing the State’s Constitution

June 29, 2015
 

Depending on how you measure, Illinois has either one of the worst-funded public pension systems in the United States, or the worst. Public pension plans cover people who work for state and local governments, including teachers, police officers, and state university employees like me.

In early May of this year, the Illinois Supreme Court struck down as unconstitutional a law adopted in 2013 that would have reduced the underfunding somewhat by cutting pension benefits. Now, Governor Bruce Rauner and others want to amend the state’s constitution to make it easier to limit benefits.

Under the constitution as the state courts have interpreted it, once a particular worker starts participating in a public pension plan, that worker’s benefit formula can never be reduced for as long as he or she participates, even for future work. So, for example, if you start working for the state at age 25, with a given pension formula in place, that formula can never be reduced for you, even if you work for the state for another 40 years or more.

Governor Rauner wants to amend the constitution so that the formula can be changed, but only prospectively. Under such an amendment, if you’re 35 and have been in a public pension plan for 10 years, your government employer could reduce the rate at which you’d accrue benefits going forward, but it still wouldn’t be allowed to reduce the benefits you’d already earned in the 10 years you’d been working. That approach would be identical to the rule that federal law imposes on pension plans sponsored by private-sector employers; it’s called the “anti-cutback rule,” and it’s part of a law known as ERISA that Congress adopted back in 1974.

There’s something to be said for putting state employees on the same footing as private workers, although there are also arguments against it—including that, unlike their private-sector counterparts, many government workers in Illinois don’t earn Social Security retirement benefits. But amending the constitution, as Governor Rauner wants to do, would be a slow and uncertain path toward addressing pension underfunding.

First, Rauner would have to convince some Democrats to vote for the amendment; it needs 60 percent approval in the General Assembly before it could even be put to a public vote. Then, it would also need 60 percent approval from voters. Even then, any changes to current workers’ pensions would still be challenged in court, both under a different provision of the state constitution and under the U.S. Constitution. The resulting litigation would extend the uncertainty for at least another couple of years, and there would be nothing close to a guarantee that the pension changes would survive.

So, while a constitutional amendment might be a good idea for the long term, it would do nothing to address underfunding for at least several years. There are other ideas out there, such as paying down the pension underfunding over a longer period, so each year’s payment would take a smaller chunk out of other spending priorities. And, of course, the General Assembly could always raise more tax money, for instance by extending the state’s sales tax to service transactions like, say, haircuts and home repairs.

Any real solution to pension underfunding, though, will ultimately depend on a commodity that tends to be in short supply in Illinois government: political courage. Each year, the General Assembly and the Governor will have to actually pony up the money to fund pensions and reduce the underfunding. Otherwise, all the fighting about constitutional amendments, tax increases, and the like will be just a lot of sound and fury, signifying nothing.

I’m Sean Anderson