Friday, December 7, 2012

A letter sent to Phil Ponce at WTTW regarding Gina Raimondo’s pension reform (as a model for Illinois)

Dear Mr. Ponce:

I am writing about your December 4th interview with the General Treasurer of Rhode Island, Gino Raimondo. Before becoming the General Treasurer, Raimondo ran a venture-capital firm in Providence, Rhode Island. Raimondo assumed there would not be any of the “high-risks” of her previous job when she went after public employees in Rhode Island. Her blitzkrieg 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. This 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, this is essentially a re-amortization of the “pension system debt to lower and smoothed future payments.”

As stated by the Mercatus Center at George Mason University, “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). Compare the recent Illinois pension reform proposal, HB 6258, to the aforementioned.

In a correspondence with Amanda Kass, research and policy specialist for pensions and local government at the Center for Tax and Budget Accountability, Kass 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.”

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 “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 ruling declared “the legislature cannot expect to balance the budget on the backs of state workers” (Michigan employees win case over health care cash, August 2011). Recent rulings, in Arizona and New Hampshire, proclaimed “that a law changing the contribution that state employees make to their pension funds [was] unconstitutional” (Courts Block Efforts at Public Pension Change, 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.”

“Budgetary relief is not a legitimate public purpose [either]; for a severe financial crisis (such as the 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.

The State of Illinois, however, 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).

Allow me to point out that there are at least six major differences between Illinois and Rhode Island that was not discussed in your interview:

1) The State of Rhode Island does not provide accrued benefits or contract rights’ protection either by constitutional provision or statute as in Illinois, as I indicated above. Furthermore, “The Pension Clause [Article XIII, Section 5 of the Illinois Constitution] not only makes a public employee’s participation in a pension system an enforceable contractual relationship, but also constitutionally protects the pension benefit rights contained in the Illinois Pension Code when an employee joins a pension system, including employee contribution rates. The Clause also safeguards pension benefit enhancements that are later added during employment. Further, the Clause ensures that pensions will be paid even if a pension system defaults or is on the verge of default. Finally, while the Clause bars the General Assembly from adversely changing the benefit rights of current employees via unilateral action, these rights are “contractual” in nature and may be modified through contractual principles. In sum, while welching on public pension promises is not an option for Illinois as some legal and civic commentators have suggested, legitimate contract principles provide a solution to mitigate this crisis” (Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate).

2) Many Illinois citizens are aware that for decades the past state’s governors and legislators have not fully funded the public pension systems; that instead of paying into the pension systems, they have used that money to pay for other services without restructuring revenue sources. Hence, without having to pay for services, state legislators have created an enormous pension debt or unfunded liability for the public pension systems in Illinois.

It is important to note that in Rhode Island, the state made all of its payments to the pension systems. Public employees in Illinois have been the victims of corruption, incompetence and irresponsibility for nearly 60 years.

3) The Illinois “Pension Ramp” (Public Act 88-0593), or the repayment schedule of 1995, has also greatly increased the total pension debt or unfunded liability and needs to be re-amortized, though legislators continue to ignore this most significant issue. The pension debt is exorbitant. Depending upon the discount rate and data from a given source, the debt is perhaps between $83 and $130 billion. Note that “if retirement benefits and salary increases were the only drivers of the unfunded liability, the state retirement systems would be about 94 percent funded today [because public employees’ benefits are not overly generous]” (Ralph Martire, Center for Tax and Budget Accountability). Approximately one-third of the total pension payment each year is for “normal costs” to the system; the other two-thirds of the payment is the interest owed on the debt the state incurred for not fully funding the pension systems.

4) Though state legislators appear to be quite focused like salivating pit bulls attached to the pension legs of public employees, state legislators continue to ignore the essential fact that current revenue growth does not match the state’s need for public services and for payment of debts. In other words, the State of Illinois uses a “flat, low-rate income tax that does not adequately capture income growth, and income tax revenues thus routinely lag behind economic growth. The state relies heavily on a state and local sales tax that is almost exclusively applied to goods and excludes almost all services. Rhode Island does not have an antiquated flat-rate tax system like Illinois.

“Because Illinois is chronically short of the revenues it needs to cover its expenses, it has engaged in a number of poor fiscal practices over the years. Unlike Rhode Island, Illinois has postponed payments to vendors, failed to make adequate pension contributions or borrowed money to make the contributions, securitized [sic] or sold assets, and taken other dubious actions” (the Center on Budget and Policy Priorities).

Besides the Center for Tax and Budget Accountability and the Center on Budget and Policy Priorities, Illinois revenue restructuring is recommended by the Chicago Metropolitan Agency for Planning, the Institute on Taxation and Economic Policy, the National Council of State Legislatures, the Economic Policy Institute, the Center for Policy and Economic Research, the National Association of State Retirement Administrators, the National Institute on Retirement, and United for a Fair Economy.

The Illinois General Assembly (GA) apparently does not listen to the aforementioned reputable organizations; however, the GA listens to the Civic Committee of the Commercial Club of Chicago (Illinois Is Broke), the Civic Federation, the Chicago Tribune, the Illinois Policy Institute, Americans for Prosperity, and their breed.

5) Cutting pension benefits for public employees, through so-called “pension reform,” will not solve the state’s budget deficits in Illinois. Creating and passing any bill that diminishes “promised” benefits, such as the compounded cost-of-living adjustment that is already in place for retired and current teachers, is a breach of contract and trust. It’s a discriminating and unjust forfeiture and theft of one particular group of people in Illinois, and it’s wrong.

6) Though the State of Illinois has a serious pension debt and revenue problem that must be rectified, legal and moral sense dictates that the Illinois General Assembly must align with the U.S. and State Constitutions and sanction the vested rights of its middle-class public employees. Policymakers must also understand the economic impact on Illinois if so-called “pension reform” should pass. Public employees contribute billions of dollars to the state's economy.

Two final notes, the state’s constitutional provision, Article XIII Section 5, protects current employees and retirees. So-called “pension reform” is an attempt to break a constitutional contract. It is a matter of moral and legal concern for every citizen of Illinois to pay attention to any proposed violations of rights and benefits (that are earned, deferred compensations) of the state’s 693,000 public employees. It should be of vital concern for all citizens that the government of Illinois would want to prove its contracts are worthless, especially when the “most basic purposes of the impairment [of the contract] clause [Article XIII, Section 5] as well as notions of fairness that transcend the clause itself, point to a simple constitutional principle: government must keep its word” (Laurence H. Tribe, American Constitutional Law).

"...Rhode Island... is being closely watched as a first major test of whether, and how, financially-strained states and cities can cut the benefits of their workers and retirees. Several public employee unions have sued Governor Lincoln Chafee and other Rhode island officials, accusing them of acting illegally when they pushed through a package of money-saving pension cuts last year, including suspending annual cost-of-living increases for most retirees..." (The New York Times, "Rhode Island Judge Has Stake in Pension Case Outcome," December 2012).

Glen Brown


  1. Very well stated. Now we must hope that it will be read, and be investigated as a solution to the financial mess that Illinois is in right now. We know that pensions are not the cause. Any attempts legislators make to tinker with pensions will not fix the budget woes. The problem is with the tax code and lack of revenue. Destroying the pensions of hundreds of thousands is not a solution, but rather an atrocity.

  2. Your points are all well taken and explained.
    Please ask to be interviewed on TV. We need a voice beyond Dick Ingram and his nonsense which doggedly follows previously framed arguments.
    Ken Previti