Monday, January 7, 2013

A Response to the Proponents of Pension Reform at Today's Committee Hearing [Re: The State's Police Powers]


On Constitutionally-Guaranteed Contracts

In regard to the “diminishing or impairing” of a pension clause or contract that protects citizens’ rights, the United States Supreme Court has held “that the court must establish that impairment is reasonable and necessary to serve an important public purpose, such as ‘the remedying of a broad and general social or economic problem.’ To show that a change is necessary, the state must establish that no less drastic modification could have been implemented to accomplish the state’s goal and that the state could not have achieved its public policy goal without modification” (Education Sector Policy Briefs).

“Federal Contracts Clause requires the courts to determine: first, whether there is a contractual relationship between plaintiffs and the state; second, if so, the nature of the contractual promises that allegedly have been impaired; third, whether a state law (a constitutional provision) impairs any of those contractual promises and, if so, whether the impairment is ‘substantial’ and, fourth, if so, whether the state law creating the substantial impairment is justified by a significant and legitimate purpose and whether the method used by the state to advance that public purpose constitutes an unnecessarily broad repudiation of its contractual obligation to private persons.

“Under this test, once a contract is found to exist, the balancing factors are interrelated; the more substantial and severe the impairment, the greater the government’s burden to justify the impairment. Also, government actions taken to relieve the government of its own contractual obligations are viewed more stringently than governmental actions that affect only private contracts. Thus, the balancing test is applied with more bite when government seeks to alter a contract to which the government itself is a party, as courts reason that self-interest is more likely to be the motivation than public policy when the government is acting to eliminate or reduce its own financial obligations, rather than those of third parties.

“Courts applying this type of balancing analysis to amendments that alter public employees’ existing contractually protected pension benefits have almost unanimously treated these efforts as imposing ‘substantial’ impairments, and courts also have typically found governments’ justifications based on even real fiscal crises or emergencies insufficient. Most states therefore cannot readily reduce their existing pension obligations to their employees in an effort to solve a fiscal crisis, and until recently few even tried” (Greenfield, Douglas L., Lahne, Susan G. (2012). How Much Can States Change Existing Retirement Policy? In Defense of State Judicial Decisions Protecting Public Employees’ Pensions. National Council of State Legislatures Legislative Summit, 1-16).

To declare that Illinois is in an “emergency state,” without attempting revenue and debt restructuring will no doubt ignite litigation and an examination of the ethical motivations of policymakers and whether they attempted to exhaust every alternative available to them for resolving the state’s financial debts before attempting to renege on a constitutional contract.

“Budgetary relief is not a legitimate public purpose; for a severe financial crisis (Great Recession), 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… 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.

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 depend upon Illinois courts and their interpretations. “More moderate alternatives that do not violate a constitutional contract,” such as the ability to raise money [through revenue reform] 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).
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1 comment:

  1. To avoid the more difficult (not hard nor impossible) lifting, these legislators have decided that those who must pay for the state's fiscal criminality are the very victims whose pockets were originally picked. They will still face funding shortfalls and service crunches because they did not target the real culprit: an unfunded liability never addressed correctly back in 1995 when they had their first chance to do it right, and ignored again now. All of us in the public sector will be expected to pay for the state's past bill, but don't be surprised when they haven't enough and will return to get more. Once on the hook for their past transgressons, we will be expected to pay for the future inabilities to make the unfunded payments.

    Required payments to this year's retirees are less than last year, but it is the unfunded liability that pushes the limits on the state's budget and their single-minded agenda. Other revenue sources or even creative, more effective concepts to deal specifically with the unfunded liability will remain outside the ken of impatient and arrogant representatives.

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