How many times do we have to sing the same old song? State public employee pensions are unaffordable. The issue is not who is funding or not funding pensions. The issue is who is going to pay for pension promises that should never have been made. There is only one answer; taxpayers either through direct tax increases or reduced services. The fact is public employee benefits are jeopardizing your financial security.
Court Pension Smackdown Toughens Job for U.S. Governors, Mayors – Bloomberg Politics on Bloomberg.com
The Illinois Supreme Court’s rejection Friday of a measure meant to make the state’s pensions solvent is the most powerful reminder yet that it’s a brutal time to be the chief executive of a fiscally challenged city or state.
The court’s ruling that the state constitution bans anyreduction in worker retirement benefits was the latest victory for an American labor movement that’s otherwise been on a long losing streak. It signals that governors and mayors, Republicans and Democrats alike, may be unable to avoid the politically unpalatable choice of tax increases or service cuts.
“It’s a problem from hell,” said Graham Wilson, chairman of the political science department at Boston University and director of the school’s Initiative on Cities project. “The only thing that works is to get everyone around the table and convince them that it’s better to make a deal now than down the road, when it’s even tougher.”
“If Illinois were a company, it would probably have to file for bankruptcy.”
Illinois Governor Bruce Rauner Just hours after learning of the ruling, Illinois Governor Bruce Rauner stood inside the Chicago Theater and delivered his assessment of the fiscal health of the third-largest state and its worst-in-the-U.S. $111 billion pension shortfall.
“If Illinois were a company, it would probably have to file for bankruptcy,” Rauner, a first-term Republican, told hundreds of employees of a management and technology consulting company gathered for their annual meeting.
Across the nation, state and local governments are grappling with pension deficits that exceed a combined $2 trillion, according to a Moody’s Investors Service report last year. Closing that gap by reducing payments to retirees would violate union contracts in many states and even constitutional guarantees.
“I don’t know what they expect citizens to do,” said David Crane, a lecturer in public policy at Stanford University who worked as a special adviser to former California Governor Arnold Schwarzenegger. “It creates a climate of desperation. Forcing them to pay an ever-growing pension debt is devastating.”
In Illinois, Chicago faces $20 billion in unfunded pension liabilities that threaten its solvency. Mayor Rahm Emanuel, a Democrat, drew a distinction between the rejected law and a separate agreement his administration negotiated with some city unions whose members will pay more for fewer benefits.
“That reform is not affected by today’s ruling, as we believe our plan fully complies with the state constitution because it fundamentally preserves and protects worker pensions,” Emanuel said in a statement Friday.
His optimism aside, those who follow the city’s financial struggles said its credit rating could very well take another hit. In February, Moody’s cut the city’s $8.3 billion of general obligations to Baa2, two steps above junk, citing the retirement costs.
Chicago still has legal arguments to defend its labor deals, said Laurence Msall, president of the Civic Federation, a nonprofit watchdog group that follows the city’s finances. Even so, he said, “The state of Illinois, the city of Chicago, and Chicago public schools now face even greater pressure on top of their worst-in-the-nation credit ratings.”
Leaders have to be careful not to cut so much that they drive off tax-paying residents and businesses, said Richard Ciccarone, chief executive officer of Merritt Research Services LLC, which analyzes municipal finance.
“You’re jeopardizing then the ability to make that city attractive to taxpayers that will be left holding that bag,” said Ciccarone, who is based in Chicago.In some cases, state constitutions weren’t enough to prevent cuts to public pensions. In municipal bankruptcy cases in Detroit and California, judges ruled that federal law can override state bans on reducing pensions.
Rauner said he wasn’t surprised by the Illinois ruling, telling reporters that the measure “violates basic contract law.” His own pension proposal, which is central to his budget for the coming fiscal year, is legal because it wouldn’t reduce currently promised benefits, he said.A coalition of public-worker unions that pressed the legal challenge applauded the decision.
“With the Supreme Court’s unanimous ruling, we urge lawmakers to join us in developing a fair and constitutional solution to pension funding,” state AFL-CIO President Michael T. Carrigan said in a statement. “We remain ready to work with anyone of good faith to do so.”
The ruling raised the prospect of further downgrades by credit-rating firms. Investors already have been punishing Illinois. Its 10-year bonds yield about 3.7 percent, the highest since November and the most among the 20 states tracked by Bloomberg.The Illinois bill was signed by former Governor Pat Quinn, a Democrat, in late 2013. A judge blocked the measure before it took effect after public-worker unions sued.
During arguments before the court in March, Solicitor General Carolyn Shapiro argued the state should be able to make laws to protect public welfare and safety during fiscal crisis.
But the judge who voided the law concluded it violated a provision of Illinois’s constitution that bars the diminishment of public-worker retirement benefits. The seven-member high court agreed.
“We do not mean to minimize the gravity of the state’s problems or the magnitude of the difficulty facing our elected representatives,” Justice Lloyd Karmeier wrote. “It is our obligation, just as it is theirs, to ensure that the law is followed.”
With the Illinois legislature’s spring session set to end in less than a month, Rauner has little time to help craft a solution. In his conversation with reporters, he expressed confidence about the prospects of passing a new pension plan before lawmakers adjourn.
“With focus, it’s very doable,” he said. “We have been at this for a while. People know the issues.”
QUINNSCOMMENTARY 
Is isn’t just Illinois that would have to file for bankruptcy. It is every government at every level (municipal county state and federal).
There was an article in the Wall Street Journal about 10 years ago about a small town somewhere in New England. The towns workforce was nearing retirement age and they were concerned about having enough funds to pay pensions and benefits. They hired someone to evaluate the situation for them and the report floored them. They were told that they would need to double the tax rate and lay off half of the towns employees to even have a chance to meet the obligations.
The article went on to say that every government entity in the country was in a similar situation with many being in far worse shape than these people. We all know that in the last 10 years nothing has been done so the situation is far worse now than it was then. And the ultra radical liberal progressives (that would be any one who calls them self a progressive) think that the Tea party folk are crazy. Unbelievable.
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Good point. Too much of a good thing usually is.
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Dick, I don’t doubt that there is an Illinois legal requirement that says that you cannot cutback the rate of accruals in the formula. However, I doubt the constitutional provisions (and I have reviewed it and similar language from other states, such as Louisiana) preclude a change in employer financial support.
The specific provision has been described as:
SECTION 5. PENSION AND RETIREMENT RIGHTS. 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.
(Source: Illinois Constitution.)
So, I would take a second run at it by cutting back employer financial support to the amount that is sustainable within the city/state budgets and in turn, raising employee contributions. I would note that as a “contractual relationship”, where the benefits (interpreted by the court as the rate of accrual) cannot be dimished or impaired, neither the employer nor the employee can avoid their responsibility to fund the benefits. The constitutional language says nothing about prospective changes in funding.
Assuming that the courts disagree with the city / state again, I would announce that there is insufficient revenue to pay for city services and I would adopt a city income tax (in Chicago, other cities, etc.) and a state income tax (in Illinois) that is limited to public employees – and is designed to generate revenue more than sufficient to fund the pension plans.
Assuming that the courts disagree with the city / state again, that they do not have the authority to raise taxes to fulfill their committment to the pension plans, I would then adopt an early retirement window – where individuals get $1,000 as the retirement incentive. I would announce massive service cutbacks coupled with dramatic layoffs/terminations to the extent the early retirement window is not successful. You prospectively change to $0 employer-paid pension accruals for individuals hired on or after today. You stop funding the pension plan – claiming the courts preclude appropriate revenue raising to fund the plan – if it defaults on its obligations, so be it. You then terminate everyone’s employment, staggered, starting with the shortest service employees (service based, which probably matches the collective bargaining agreement)and working up from there. You terminate employment (due to lack of budget). You give 60 days notice (or whatever notice is required). You then reassign those with seniority to positions they don’t want, as permitted by the CBA, to provide services they are qualified to provide – say garbage collection. Over time, probably take a decade or so, you reassign and terminate every employee. Each employee is offered new employment with a different compensation/rewards package that does not include a pension benefit accrual and does not include retiree medical.
Remember, it was the public employees/unions who refused to renegotiate their pension accruals. This iterative process is actually more targeted at gaining the acceptance of the voters and taxpayers than it is to the public employees and their unions.
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You are certainly right that unless voters feel the pinch in funding nothing will happen. It’s the same old story. Perception wise teachers, police, fire and govt workers in general get a pass from the real world. Voters rather vilify the rare politician who actually tries to fix things. I have long said that public employees total compensation package should not exceed that offered by say the 20 largest private employers in a state or something similar.
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