Wednesday, January 22, 2014

Illinois Senate Bill 1: An Interview with Daniel Biss/ with Commentary

Chad Aldeman: First, can you say why you are interested in pension reform, and what made this bill important?

Daniel Biss: I’m interested in pension reform because the first two years of my service in the Illinois General Assembly were years that followed a very significant tax increase and yet saw extremely deep cuts in discretionary spending to areas of public service that I cared deeply about, the reasons that I entered public service in the first place. The size of our pension payments was so large that if we tried to address our budget problems without looking at pensions, we would be signing ourselves up for deep and never-ending impacts on the rest of state government. I just couldn’t get to a place where that seemed acceptable. I sought out changes to the pension system that ultimately strengthened and preserved it for those who rely on it the most…

[“By far and away, the main reason the state’s contributions to its pension systems are increasing so much annually is the unrealistic, heavily back-loaded schedule the legislature set back in 1995 for repaying the debt the state owes to its pension systems. Of the $6.19 billion General Fund contribution to the five pension systems for FY2014, about $1.02 billion is attributable to the normal cost of the benefits being earned by current workers, while $5.17 billion constitutes debt repayment” (Analysis of FY2014 Illinois General Fund Budget from the Center for Tax and Budget Accountability). Furthermore, impairing a constitutional contract does not “strengthen and preserve it for those who rely on it the most”; breaking a contract with public employees will not address the revenue and debt problems in Illinois]…

Aldeman: Am I reading correctly that the changes apply to legislators? Was that a complicating factor in the negotiations?

Biss: It is true. Whatever the bill does for other pension systems—for state employees, teachers, and state university employees—the bill either replicates the same policy for legislators or asks more of them.

[“Leaving the judges out of pension reform: ‘I would call this buying off the judges…’” (Ann Lousin, a professor at the John Marshall Law School in Chicago who helped draft the Illinois Constitution in 1970)]…

Very few of us were prepared to do something like this to teachers, state workers, and university employees unless we were prepared to do it to ourselves as well.

[Approximately 80 percent of public employees have only one pension. How many pensions will the average Illinois legislator have?].

As an example, in 2010, Illinois created a new “Tier 2” of benefits for employees hired after January 1, 2011. It’s a relatively stingy plan. This bill didn’t change anything for those workers at all. The only exception is that the bill did have a cut for Tier 2 legislators. I just couldn’t look myself in the mirror and sponsor a bill that left me off the hook.

[Regarding Tier 2: Illinois legislators have failed to address the flaws in the newly-hired public employees’ pension plan. The “Tier 2” benefit structure for employees faces problems because the benefit is worth less than employees are paying for it. Tier 2 is a looming issue that must be resolved, but SB 1 will possibly create the same problem for the Teachers’ Retirement System (TRS) and, likely, the State Universities Retirement System (SURS)].
Aldeman: One component of the bill is a gradual increase in the retirement age for current employees. For example, if an employee is 46 years or older as of June 1, 2014, they face no change, but if they’re between 45 and 46, their retirement age will increase by 4 months. The law creates tiers like this, adding four months to the retirement age a year until the employee is less than 32. Anyone 32 or younger would have their retirement age increased by 60 months (5 years). What was the rationale for creating this tiered system?

Biss: This is probably one of the parts of the bill that feels the fairest to some people. If you’re close to retirement, moving the retirement age is a lot to ask. If someone is 59 and planning to retire at 60, changing their retirement age is changing their life in a really extreme way. On the other hand, telling someone who’s younger, say 40, just doesn’t seem as much to ask, particularly in a climate where other workers in the private sector are retiring later.

[“A plain language reading of the Pension Clause’s text makes clear that governmental entities may not reduce or eliminate a public employee’s pension payments and other membership entitlements once the employee becomes a pension system member. At the same time, the plain language also indicates that an employee’s pension payments and other membership entitlements are ‘contractual’ rights that may be presumably altered through mutual assent via contract principles. Further, the Clause’s prohibitory language against the diminishment or impairment of pension benefits is cast in absolute terms and lacks any exceptions…” (Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate)].

I have always felt you need to protect those close to retirement [But not public retirees?]. In a bill I introduced a year ago, we had somewhat crude bands. Those bands were larger than what emerged in the final bill. The bigger bands worked ok, but they unfairly penalized people depending on when their birthday fell in relationship to the bands. The Senate Republicans came up with the idea we compromised on. It may be difficult to write it out, but it’s phased in smoothly and doesn’t make someone say, “I can’t believe I was born only two days late.” It’s less capricious and arbitrary. We wanted to phase it in over a reasonable time period while sheltering those who are close to retirement. However, part of the challenge for a place like Illinois, because we have so much debt, is that an unbelievably large portion of our liability is associated with workers and retirees who are over the age of 60. In other words, the vast majority of our unfunded liability is to retirees. What this means is that changing the retirement age just can’t move the needle significantly enough on the cost side.

We were asked, “How can you possibly touch retirees?” but once you realize that two-thirds of our liability is associated with people over the age of 60, it doesn’t seem plausible to make a significant fiscal change while leaving retirees untouched.

“The significance of any modification of the “Pension Clause” is “the extent to which [retirees] will be deprived of the benefit [they] reasonably expected; the extent to which [retirees] can be adequately compensated for the part of that benefit [COLA] of which [they] will be deprived; […and] the extent to which the behavior of the party [Illinois General Assembly] failing to perform or to offer to perform [or] comports with standards of good faith and fair dealing… The promise to honor commitments and pay for the public employees’ pension is of ‘sufficient importance’ to all citizens of Illinois. To pass pension reform is ‘an unequivocal manifestation of intention not to perform… legal duties…under a contract… When there is a duty of immediate performance of a promise, failure to perform in full is a breach’” (Professor of Law, Emeritus, Claude D. Rohwer and Professor of Law, Emeritus, Anthony M. Skrocki, Contracts in a Nutshell)].

Aldeman: There’s been quite a bit of questioning about the legality of the changes. Article XIII, Section 5 of the Illinois State Constitution says, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency of instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” The last part, “shall not be diminished or impaired” has been seized on as prohibiting changes like what’s in this bill. Can you explain the counter argument for why these changes are legal?

Biss: There are a number of different arguments. I would lay out two here. First, there is consideration given to the class of affected individuals in this bill. It is consideration to the class rather than an opportunity for each individual to renegotiate their contract. For those still working, their annual contributions will be reduced by 1%.

[No consideration was given to public employees in Senate Bill 1: reducing the contribution rate for current teachers by one percent was not a consideration. It was not negotiated; furthermore, modification of contract principles for retirees was also without consent. “It is well settled that a contract, once made, must be performed according to its terms, and that any modification of those terms must be made by mutual assent and for consideration” (Ross v. May Co., 377 Ill. App. 3d 387, 389 (2007)].

For the entire class, there is a significant new right in the form of additional funding. The Supreme Court has said the Constitution has protected the right to a benefit, but we’re also creating a new right to fund the benefit properly and therefore guarantee its fiscal health and stability. We’re not only going to an actuarially funding schedule, we’re going above and beyond that. All of this is money going to the retirement system and therefore to the employees.

[Illinois legislators who challenge constitutional contracts can never be trusted. As a matter of fact, according to Representative Elaine Nekritz: “The so-called pension payment guarantee has wiggle room. If the state fails to make a pension payment, a retirement system could file action in the Illinois Supreme Court to compel the state to make the required payment. But if the state faces a crisis, it could simply vote to change what the required payment would be; [thus], effectively working around that guarantee”].
The second argument is simply one of balancing priorities. The Constitution does include Article XIII, Section 5. But it’s a long constitution and it includes other things too, such as a free public education and health and welfare and safety. It’s very clear that we’ve had to cut spending on things like public education in a way and to an extent that imperils the quality of our services.

“… [T]here are those among us who want to abandon] the fundamental principle that the rules of the game for contracting parties are not to be changed midstream… This is especially hard to comprehend when public employees have diligently and faithfully paid their contributions while their government employers have failed to pay their required share. Indeed, for decades, states have treated pension systems as a credit card to pay for government services and avoid tax increases or service cuts (p. 194)... For lawmakers, it is simply politically more palatable to unilaterally cut pension benefits for public employees and retirees than to raise taxes, cut services, or both…” (Eric M. Madiar (2012). Public Pension Benefits under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants? ABA Journal of Labor & Employment Law, V. 27, no. 2, 179-194. Retrieved December 7, 2012 (Defending and Protecting Public Employees’ Pensions against the Legislative Siege)].

My expectation would be that the courts decline to rule narrowly but will recognize that this was an attempt to balance between different priorities, all of which are important, some of which are statutorily and others which are constitutionally protected. Though it was a difficult and painful struggle internally, I felt like the public harm from doing nothing at all was unacceptable to the people of Illinois. I hope the courts will weigh that seriously and carefully as they make a determination...

“…One thing we cannot do [Daniel Biss]… is ignore the Constitution of Illinois… No principle of law permits us to suspend constitutional requirements for economic reasons, no matter how compelling those reasons may seem…” (from Ann B. Jorgensen et al., Appellees, v. Rod R. Blagojevich, Governor, et al., Appellants).]

“[Any] attempt to denigrate the validity of decades of judicial precedents about the binding nature of legislation establishing pension commitments to government employees and to motivate state courts to overturn long-settled premises about these commitments would impose its own, unjustifiable costs. The states and their instrumentalities have promised pension benefits to their employees; those employees have relied on those long-standing promises; and as a result the citizens of the states have benefited from the services provided by those employees. [In short,] there is no sound public policy reason to conclude that these promises – based on the reasonable expectations of the contracting parties – should not be fully protected by the laws prohibiting or limiting the impairment of contracts” (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).

“[The Pension Protection Clause was approved by the Constitutional Convention and ratified by the people of Illinois. Over the years, the Illinois Supreme Court has had several occasions to interpret the Pension Protection Clause. The Illinois Supreme Court’s decisions have been consistent: ‘[T]his court has consistently invalidated amendments to the Pension Code where the result is to diminish benefits.’ McNamee v. State, 173 Ill. 2d 433, 445 (1996). That is because, under the Pension Protection Clause, the ‘contractual relationship’ between a retirement system member and the State of Illinois is ‘governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system.’ McNamee, 173 Ill. 2d at 439.

“[In a strikingly similar context, the Illinois Supreme Court also has warned: ‘No principle of law permits us to suspend constitutional requirements for economic reasons, no matter how compelling those reasons may seem.’” (Jorgensen v. Blagojevich, 211 Ill. 2d 286, 316 (2004) (from the 12-page legal document recently filed by the law firm of Tabet, DiVito & Rothstein on behalf of the plaintiffs named from the IRTA and IASA)].

[Your oath of office, Senator Biss: “Each prospective holder of a State office or other State position created by this Constitution, before taking office, shall take and subscribe to the following oath or affirmation: ‘I do solemnly swear (affirm) that I will support the Constitution of the United States, and the Constitution of the State of Illinois, and that I will faithfully discharge the duties of the office of…to the best of my ability’” (The Constitution of the State of Illinois, Article XIII—Oath or Affirmation of Office, Section 3)]. 

-Glen Brown
For the complete interview, Click Here.

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