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Illinois has had its pension day of reckoning. Now what?

Saturday, May 09, 2015
Crain's Chicago Business
by Greg Hinz

At its core, the state Supreme Court's big pension decision was pretty simple: Pay what you owe, Illinois.

If only the solution were that simple.

Despite assertions from Gov. Bruce Rauner and Chicago Mayor Rahm Emanuel that their proposed pension fixes still will work—the unanimous Supremes notwithstanding—both leaders likely are whistling past the graveyard. And both now face the same challenge: Find the money without causing taxpayers and job creators to stampede out of state or slashing vital services so deep that Indiana will look generous in comparison.

The task is not impossible. Nothing involving money ever is. But your wallet is about to get lighter, maybe a lot lighter.

Let's start with what the court said. Effectively, the state argued in the case that in a fiscal emergency, it has the right to break a pension promise offered to public workers and teachers when they were hired. Such an emergency exists now and existed in 2013, when Gov. Pat Quinn and the Legislature enacted pension reform, so workers will have to accept reduced benefits, it asserted.

You could almost hear the justices snicker. In their opinion, they noted that government was required to pay full salaries during the Depression, that the General Assembly and Rauner just allowed individual income tax rates to drop to 3.75 percent from 5 percent, and that tough language was inserted into the 1970 Illinois Constitution specifically because the state's politicians have a long, long history of blowing pension money on more popular items, such as roads and schools.

“Other alternatives were available” to pay for pensions, the court said in its May 8 opinion. One obvious one: paying what is owed. The overturned law “was in no sense a last resort. Rather, it was an expedient to break a political statemate.”

Sounds clear to me.

Rauner wants to move workers to a new pension system in which benefits will accrue from now on at a lower rate.

But that would require amending the constitution, and I can't see this court upholding retroactive changes in employment contracts.

Emanuel offers a different protest: Unlike the state law that got tossed, his recent changes in municipal pensions were bargained with labor unions, which agreed to take less in exchange for more city contributions. But by the Supreme Court's logic, that doesn't matter. As it wrote, “Once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the pension (law) that would diminish the benefits . . . cannot be applied to that individual.”

So we gotta pay. But the court didn't say how fast we have to pay. Indeed, so long as every retiree gets his or her full check each month, the court indicated that the state could amortize unfunded pension liability over many decades.

How much would that cost?

According to Ralph Martire, head of the progressive-leaning Center for Tax and Budget Accountability, the state's five main pension funds could be filled to meet 76 to 78 percent of their obligations in 30 years if taxpayers contributed a flat $7.4 billion every year. That's more than the $6.4 billion we're paying this year, and a lot more than the $4.6 billion Rauner wants to spend next year. But once we bite the bullet, the relative hit 10 or 15 years from now would decline thanks to the effects of inflation. To get to 100 percent funding, we'd have to keep making that payment 12 more years, for a total of 42.

Not everyone will like that solution. But Martire's numbers are “absolutely credible,” former Illinois Budget Director Steve Schnorf says.

A different proposed solution comes from the right-leaning Illinois Policy Insitute. It wants to allow municipalities like Chicago and the state itself to declare bankruptcy and walk away from its IOUs.

No American state has done so, and it by no means is clear that state bankruptcy is possible without amending the U.S. Constitution. But that gives you an idea of the new world we live in.

Maybe Rauner will fire thousands of workers or slash their pay 20 percent and dare them to strike. Maybe he'll put some new revenue on the table. Who knows? Only two things are for sure: This “paying up” stuff isn't going to be easy, and it's going to hurt.

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