Thursday, April 19, 2012

A Foreshadowing of Illinois Pension Reform: An Analysis

Before becoming the controversial General Treasurer of Rhode Island, Gino Raimondo ran a venture-capital firm in Providence, Rhode Island.  Recently, Raimondo’s remedies for her state pensions were echoed at the “Fixing Illinois’ Public Pensions” forum in Chicago on April 9, 2012, by two of the four panelists.   

A few of Raimondo’s assertions that are widely publicized in her online interviews were paraphrased– “the way to solve fiscal problems is to leave politics aside; we must focus on the math of the problem; truth is in the numbers; the passage of pension reform is a great step forward as we continue to work to put our state on a secure path toward growth and prosperity.”  Most of us realize these assertions have also been parroted by Illinois policymakers as well.

Raimondo’s solutions for Rhode Island’s shortfall of $7 billion can be summed up rather simply: suspend the cost-of-living increases and offer the state’s public employees a 401 (k) savings plan; raise the minimum retirement age (for full benefits) to 67 years old; increase public employee contributions, and press for a cut in the assured return on pension investments.  

The latter would open an even wider deficit if benefits shrink or payments into the fund do not rise because of a 7.5 percent anticipated return instead of an 8.5 percent return.  According to Steve Stanek of The Heartland Institute (a conservative think tank), this is essentially a re-amortization of the “pension system debt to lower and to smooth future payments.” Indeed, it is. 

The State of Rhode Island does not provide accrued benefits or contract rights’ protection either by constitutional provision or statute as in Illinois.  Governor Lincoln Chafee of Rhode Island said after signing pension reform into law: “I take no joy in the pain this will cause for thousands of Rhode Islanders.”  Really? Are we to believe Raimondo also cares about retirees' pensions? What she wants is more money for hedge fund investments. 

What about her so-called reforms? As stated by the Mercatus Center at George Mason University (another conservative think tank), “the Rhode Island Retirement Security Act of 2011, proposed by Governor Chafee in October 2011, contain[ed] two significant reforms of the state’s pension systems –the creation of a hybrid pension plan and the suspension of the Cost-of-Living Adjustment (COLA) contribution—which would have the effect of reducing the state’s unfunded liability…”  Thus, COLA payments have been suspended “until the system reaches 80 percent funding.” 

“State workers enrolled in the current state pension systems [have now] shifted to a combined defined benefit/defined contribution plan integrated with Social Security. State workers and teachers [are] required to contribute 8.75 percent of their paychecks toward retirement. The contribution [also] represents a decrease for teachers who had currently contributed 9.5 percent. Of the 8.75 percent contribution, 3.75 percent [is] put toward the defined benefit pension, which vests after five years of service (lowered from the current vesting period of 10 years). The remaining five percent of the employees’ contributions [are] invested in the retirees’ personal accounts. The employer [matches] this contribution with an additional one percent” (Mercatus Center). 

In Illinois, every one percent increase in membership contribution equals $100 million. How much is that unfunded liability again? Are you wondering why these conservative groups like Heartland and Mercatus are so interested in public employees' retirement money?

In a recent correspondence, Amanda Kass, research and policy specialist for pensions and local government at the Center for Tax and Budget Accountability stated it was “interesting that this legislation applied to Rhode Island’s municipal retirement fund because it was in decent financial shape. Data (from the Center for Retirement Research) shows that the municipal system had a funded ratio of 73.55 percent for FY 2010. In comparison, the Rhode Island Employees’ Retirement System (for teachers, judges, employees, etc.) was only at 48.38 percent.”  

So they can't touch money protected by state constitutions, right? According to a slide presentation entitled, “Pension Reform Legal Principles and Considerations” from the Office of the General Treasurer in Rhode Island (April 10, 2012), the Federal Statutory Law, ERISA, 29 USC 1054 (g) (1) claimed that “the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan…”   

The presentation revealed that out of the 50 states, 10 states have constitutional provisions that specifically protect public pension benefits. They include Michigan, Texas, Louisiana, Arkansas, Hawaii, New Mexico, Arizona, New York, California, and Illinois. The last four states listed here “provide contract rights to benefits in place on the day of hire.” 

Though the least protected are new employees, non-vested employees, active and vested employees, active/eligible to retire employees, and retired employees– in this order, in the State of Michigan, a recent ruling declared “the legislature cannot expect to balance the budget on the backs of state workers” (State of Michigan in the Supreme Court, August 2011). Another recent ruling, in Arizona, proclaimed “that a law changing the contribution that state employees make to their pension funds [was] unconstitutional” (Arizona pension law ruled unconstitutional, February 2012).  

As divulged in the Pension Reform Legal Principles’ and Considerations’ explanations: “For a statute to constitute a contract for purposes of the Contract Clause, there must be a clear and unequivocal indication that the legislature intended to create contractual rights. The principal function of a legislature is not to make contracts but to make laws establishing the policy of the state that is inherently subject to revision and repeal.  The ‘unmistakability doctrine’ applies equally to state statutes and municipal ordinances.”  

Whether any new piece of legislation is a diminishment of Article XIII, Section 5 of the Illinois Constitution, and is deemed “reasonable and necessary” in order to carry out a “legitimate public purpose,” will first depend upon presentation before the Illinois Appellate Court and its interpretations before it reaches the Illinois Supreme Court. 

“More moderate alternatives that do not violate a constitutional contract,” such as the ability to raise taxes [through revenue reform] or to cut services, must be considered initially, as well as whether a legitimate public purpose is “an exercise of police power for a broad societal issue v. benefits for a special interest” (Pension Reform, Legal Principles and Considerations).  

Despite utilitarian principles that are emblematic of a democracy, can we effectively argue that it is just and ethically and morally right that a minority of people should suffer so that there is a net gain for the majority? Thomas Jefferson once asked this question: “Shouldn’t minorities [public employees in this case] possess their equal rights, which equal law must protect?”   

Martin Luther King eloquently stated 49 years ago that “an unjust law is a code that a numerical or power majority group compels a minority group to obey but does not make binding on itself.” Conversely, the wealthy “power minority group” (the business leaders of Illinois) will not make [an unfair statue] binding on itself.”  

Indeed, “budgetary relief is not a legitimate public purpose; for a severe financial crisis (Great Recession, for instance), courts [have been] split [on the issue]. Courts seem to be in consensus that the long-term fiscal health of a pension plan to assure receipt of future benefits is a legitimate public purpose, [nonetheless]...  If a pension benefit is diminished without ‘offsetting consideration or benefit to plan members,’ courts will typically find ‘substantial impairment’” (Pension Reform, Legal Principles and Consideration).  The plaintiff must prove the unconstitutionality of statute beyond a reasonable doubt. Once offered, historically and legally, promises that were made need to be kept. 

For public employees to believe Senate President John Cullerton’s recent remarks that “the legislature could offer public employees a contractually-binding funding schedule… [In other words,] something of real value” for reductions in public employees’ benefits and rights is to also be fooled by Orwellian gobbledygook.   

The State of Illinois has to pay what it owes to the pension systems by law. “State law empowers the Teachers’ Retirement System (TRS) [40 ILCS 5/16-158c]… Payment of the required state contributions and of all pensions, retirement annuities, death benefits…, all other benefits…, and all expenses are obligations of the State… The State of Illinois has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code. Federal law would protect all claims” (TRS Public Information Officer Dave Urbanek).  

What has been disputed in three antedated court cases is the expectation of “a particular funding percentage according to a funding schedule [Public Act 86-273]” (People ex. rel. Illinois Federation of Teachers (IFT) v. Lindberg, 1975; McNamee v. State, 1996; and People ex. rel. Sklodowski v. State, 1998). In 1975, “the Supreme Court concluded that the drafters (Delegates Helen Kinney and Henry Green) did not establish the intent to constitutionally require a specific level of pension appropriations during a fiscal year’… The plaintiffs had no basis to claim that these funding provisions created a contractual obligation on the State to make certain annual contributions to plaintiffs’ pension systems.  For these reasons, the Supreme Court affirmed the trial court decision” (Eric Madiar “Is Welching on Public Pension Promises an Option for Illinois?” 37-8). 

Questions public employees need to ask their union leaders are 1) Why bargain away any of the public employees’ “constitutionally-guaranteed” rights and benefits?  “A public employee obtains ‘vested rights’ in the Pension Code provisions relevant to pension benefits when the employee becomes a member of a pension system by making his or her initial employee contribution to the system. In addition, the Pension Clause protects pension benefit rights as an enforceable contractual relationship” (Madiar 36).  2) Why modify the “constitutionally-guaranteed” Pension Clause “through contract principles” when Speaker of the House Michael Madigan and others have made it quite clear that they want “the courts to decide” whether Article XIII Section 5 of the constitution will withstand another challenge again?  Besides, Madigan and others want to shift normal costs to the pension systems to school districts and property taxpayers. Doesn't this imply that legislators do not want to fund the public pension systems anymore? 3) If union leaders believe they are compelled to bargain in this so-called “New Reality” with Illinois policymakers, how about challenging the “non-constitutional,” self-proclaimed entitlements and exorbitant benefits of the wealthy elite and their corporations instead?  At least this ethical investigation for justice will not end up in court and waste taxpayers’ money.  4) Better yet, instead of an amendment to create a need for a super majority to increase any benefit for an individual working for the state (such as HJRCA 49), why not create an amendment to move towards a graduated (progressive) tax rate in Illinois that will "reform" the state's revenue system? Perhaps then legislators can pay the public pension systems and uphold the state's constitutional-guarantees contract instead of stealing public employees' and retirees' retirement money to finance Illinois' hedge fund thieves like Rhode Island's Raimondo and others. 

-Glen Brown

For further information regarding these issues, please also read:

“Pension Hybrid Plans, Constitutional Challenges, and the Ethical Path to Take” (November 18, 2011)

“COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois?” (March 14, 2012)

“Senator John Cullerton’s Speech” (March 24, 2012)

“An Illinois Legislator Confirmed that This Is the Constitutional Test Case” (April 5, 2012)

“Fixing Illinois’ Public Pensions…” (April 10, 2012)

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