Another Reason Why the State's Unfunded Pension Liability Continues to Grow

 

From the TRS Report, November 2014:

“Every Year the TRS Board is required to certify under the current statutory funding what the state’s funding amount will be for the next fiscal year. Friday, October 31, the board voted to inform the state that under the law Illinois must pay TRS $3,742,702,194 for FY 2016.  

“We also told the state that based on generally accepted actuarial standards, a minimum state funding of $4,365,257,249 would have been required, or some $622,555,055 more. And if the state was required to give enough to keep the projected unfunded liability from growing during the fiscal year, an FY 2016 amount of $5,338,280,276 would have been required, which is a full $1,595,578,082 more than what the 1995 funding plan calls for in the next fiscal year.

“When a legislator tells you with some conviction that the pension funds are being paid what is required, what he or she means is what is required by the law, and not what is necessary to give us any movement at all toward full funding…”

For the complete report, Click Here.

Should we worry about the unions’ “commitment… to develop a fair and constitutional solution to fund the state’s retirement systems” after the Illinois Supreme Court’s ruling?

 

“…Going forward, our union coalition repeats our longstanding commitment to work with anyone of good faith to develop a fair and constitutional solution to fund the state’s retirement systems” (The Illinois Education Association, November 25, 2014).  

To the We Are One Leadership:

“[B]y joining a pension system, public employees obtain absolute ‘vested’ rights in the pension plan, including later benefit increases added during their service. These rights cannot be unilaterally changed by the legislature under any circumstances, but the rights may be modified via legitimate contract principles…” (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).

Though “rights may be modified via legitimate contract principles” (or by what is commonly called consideration), we hope the leadership of the We Are One Coalition intrepidly believes from now on that “a fair and constitutional solution” should never be an exchange for reductions of originally-vested benefits assured by the Illinois Constitution!

In Illinois, the Supreme 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)). There are over a dozen antedated court rulings to confirm this fact.

“Any alteration of the pension system amounts to a modification of an existing contract between the State and all members of the pension system, whether employees or retirees. A member is contractually protected against a reduction in benefits” (Kuhlmann v. Board of Trustees of the Police Pension Fund of Maywood, 106 Ill. App. 3d 603, 608 (1st Dist. 1982)).

Thousands of union members (that the union leadership did not acknowledged at the time of Senate Bill 2404) did not support a decision to cut benefits and rights already guaranteed by the State and U.S. Constitutions that some Illinois politicians and union leaders chose to negotiate nearly two years ago. (Quinn’s loss confirms this conclusion).

Senate Bill 2404 “attempt[ed] to extract a pretense of agreement from individual public employees and retirees to the reduction of their vested pension rights...; [SB 2404] force[d] a retiree to choose between pension rights and health care coverage. [This] rested upon an assumption that the State ha[d] an unlimited right to exclude a public employee or retiree from participation in a health insurance program…

The We Are One Illinois Labor Coalition’s acquiescence to modify retirees’ and public employees’ rights and benefits was an inexcusable abdication of a constitutional guarantee. According to Tabet, DiVito & Rothstein LLC, it was “a unilateral reduction of pension rights… even if coupled with equally unilateral benefits that the [Labor Coalition] imagine[d] retired and active public employees might theoretically find desirable…” (Gino L. DiVito, John M. Fitzgerald, and Katherine M. O’Brien of Tabet, DiVito & Rothstein LLC, Constitutional Issues Concerning Legislative Pension Reform Proposals, February 2013).

“…Illinois Courts have consistently held over time that the Illinois Pension Clause's protection against the diminishment or impairment of pension benefits is absolute and without exception. The Illinois Supreme Court has ‘consistently invalidated amendment to the Pension Code where the result is to diminish benefits’ (McNamee v. State, 173 Ill. 2d 433, 445 (1996)). In their affirmative matter, the defendants assert that the Act is nonetheless justified as an exercise of the State's reserved sovereign powers or police powers. The Court finds as a matter of law that the defendants' affirmative matter provides no legally valid defense. The Court ‘may not rewrite the pension protection clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve’ (Kanerva, 2014 Ill. 115811, ¶ 41). The Pension Protection Clause contains no exception, restriction or limitation for an exercise of the State's police powers or reserved sovereign powers. Illinois courts, therefore, have rejected the argument that the State retains an implied or reserved power to diminish or impair pension benefits (See Fell v. Board of Trustees of Judges Retirement System, 107 Ill.2d 158, 167-68 (1985) (holding that, to recognize such a power, ‘we would have to ignore the plain language of the Constitution of Illinois’); Kraus v. Board of Trustees of Police Pension Fund of Village of Niles, 72 Ill. App. 3d. 833, 851 (1979)).

“Because the Act diminishes and impairs pension benefits and there is no legally cognizable affirmative defense, the Court must conclude that the Act violates the Pension Protection Clause of the Illinois Constitution. The Court holds that Public Act 98-0599 is unconstitutional” (Ruling by the Honorable Judge Belz). 

We presume that the IEA pronouncement, “…Going forward, our union coalition repeats our longstanding commitment to work with anyone of good faith to develop a fair and constitutional solution to fund the state’s retirement systems,” means unequivocally a re-amortization of the pension debt and reform and modernization of the state’s regressive single-rate tax structure to sufficiently address the funding of the state’s retirement systems. “To work with anyone of good faith” on the State of Illinois’ revenue and debt problems is what the union membership expects, not a capitulation of their constitutional rights and benefits that have been lawfully earned.

Review also The Honorable John Belz handed down his ruling today from the 7th Judicial Circuit Court stating that pension rights are constitutionally protected for retirees in Illinois.

With Illinois’ pension systems, what’s past is prologue by Eric M. Madiar, former chief legal counsel to Senate President John Cullerton

“Anyone following the pension-reform debate knows Illinois has long diverted the money needed to properly fund its pension systems to avoid tax increases, cuts in public services or both. Some may not admit it, but they know it. They also know this practice is the primary reason why the systems are under water.

“Because much of my time the past three years has been spent on the state’s pension problem, I wanted to find out how long it’s been that way and how long we have known about it. As chronicled in an article I wrote that was published by Chicago-Kent College of Law, I have an answer: 1917.

“That’s not a typo.

“In 1917, the Illinois Pension Laws Commission warned leaders that the retirement systems were nearing ‘insolvency’ and ‘moving toward crisis’ because of the state’s failure to properly fund the systems. It also recommended action so that the pension obligations of that generation would not be passed on to future generations.

“The warning and funding recommendation went unheeded, as did similar warnings and recommendations found in decades of public pension reports issued before and after the pension clause was added to the Illinois Constitution in 1970.

“For decades, these reports consistently warned the public and lawmakers of the dire consequences of the state’s continued under funding and of the significant burden unfunded pension liabilities posed for taxpayers. They advised that the pension clause bars the legislature from unilaterally cutting pension benefits of retirees and current employees.

“Indeed, one of the clause’s purposes is to prevent the state from reneging on its pension obligations during a fiscal crisis because of the burden imposed by unfunded liabilities. The clause was added at a time when the pension systems were no better than they are today.

“These reports also reveal that as early as 1979 Moody’s and Standard and Poor’s advised Illinois that it would lose its AAA bond rating if it did not begin tackling its increasing unfunded pension liabilities.

“In 1982, Gov. Jim Thompson succeeded in passing legislation making pension funding far more dependent upon stock market returns to stave off higher state pension contributions. Interestingly, that legislation resulted from a report commissioned by Thompson that highlighted how the pension systems should consider investing in mortgage-backed securities to obtain higher stock market returns.

“Further, a 1985 task force report noted that Standard and Poor’s reduced its bond rating for Illinois from AAA to AA+ because of the state’s ‘deferral of pension obligations,’ and that another rating agency viewed Illinois’ pension funding as a future financial ‘time bomb.’

“Finally, the much-heralded 1995 pension funding plan was designed to increase the state’s unfunded liabilities and postpone its actuarially sound pension contributions until 2034.

“Given this well-documented history, it’s extremely hard to legitimately believe Illinois’ current situation is so surprising that the state constitution can be ignored and pension benefits unilaterally cut. As noted in my previous legal research, the pension clause does not support such a result.

“The likelihood of that result occurring seems even more remote given the Illinois Supreme Court’s July decision, in which it explained that the clause was intended to ‘insulate’ benefits from ‘diminishment or impairment by the General Assembly’ and that the court could not rewrite the clause ‘to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve.’

“Make no mistake, the court’s decision strongly signals doom for the argument that the 2013 pension-reform bill is constitutional because the legislature can trump the pension clause when it declares a fiscal necessity. So, too, does the state’s sordid history of failing to properly fund its pension system.

“When it comes to Illinois’ pension-funding problem, what’s past is prologue. Addressing this problem, however, requires the acceptance of this history, as well as the obligations and boundaries imposed by the pension clause.”

This summary article by Eric M. Madiar appears to be no longer available at http://illinoissenatedemocrats.com/ However, it is still available at the State Journal-Register.    

To read the complete 43-page report by Madiar, Click Here.

HR 1267 (Pension Cost Shift from the State of Illinois to Local School Districts, Community Colleges, and Universities)

House Sponsors:
Rep. David McSweeney - Dwight Kay - Jay Hoffman - Wayne Rosenthal - Jerry F. Costello, II, Jack D. Franks, Ed Sullivan, Jr., Brandon W. Phelps, Kay Hatcher, Rich Brauer, Donald L. Moffitt, Charles E. Meier, Raymond Poe, Michael W. Tryon, John M. Cabello, C.D. Davidsmeyer, Chad Hays, Bill Mitchell, David Reis, Brad E. Halbrook, Joe Sosnowski, Jil Tracy, Mike Bost, Norine Hammond, Adam Brown, Josh Harms, Dennis M. Reboletti, Ron Sandack, Barbara Wheeler, Patrick J. Verschoore, Tom Demmer, Michael P. McAuliffe, Robert W. Pritchard, John D. Cavaletto, Michael Unes, Darlene J. Senger, Dan Brady, Sandra M. Pihos, Mike Fortner, John D. Anthony, Patricia R. Bellock, Sheri L Jesiel, Timothy L. Schmitz, Emanuel Chris Welch, Thomas Morrison, Brian W. Stewart, Mike Smiddy, Linda Chapa LaVia, Deborah Conroy, Jeanne M Ives, Keith P. Sommer and Sam Yingling

Last Action:

Date	Chamber	Action
11/19/2014	House	Referred to Rules Committee

Synopsis As Introduced:
States the opinion of the Illinois House of Representatives that the proposed educational pension cost shift from the State of Illinois to local school districts, community colleges, and institutions of higher education is financially wrong.

HR1267 LRB098 22670 GRL 61643 r
1		HOUSE RESOLUTION
2		WHEREAS, A proposed educational pension cost shift, which
3		would shift the cost burden from the State of Illinois to local
4		school districts, community colleges, and institutions of
5		higher education, is under discussion; this proposal would
6		require all employers of members in the Teachers' Retirement
7		System and the State Universities Retirement System to pay the
8		normal cost of pension benefits earned; and
9		WHEREAS, If this proposal were to become policy, for the
10		Teachers' Retirement System and the State Universities
11		Retirement System, it would potentially move $10.187 billion in
12		estimated normal costs of pension benefits earned from the
13		State to local school districts, community colleges, and
14		institutions of higher learning over a 10-year period;
15		actuarial changes recently made by these 2 systems will further
16		increase these numbers; and
17		WHEREAS, This plan would move these spending commitments
18		from one taxing body, the State, to a group of taxing bodies,
19		the school districts and community colleges, while additional
20		pension costs would be shifted to State universities; and
21		WHEREAS, A pension cost shift would lead to a massive
22		increase in local funding requirements on school districts; the

HR1267 - 2 - LRB098 22670 GRL 61643 r
1		cost shift would exacerbate the problem of adequately funding
2		our local schools by taking even more when districts, teachers,
3		and local voters are fighting to simply keep educational
4		opportunities open to our students; in addition, a pension cost
5		shift would likely lead to massive property tax hikes or to
6		classroom cuts that will harm our students; and
7		WHEREAS, According to the Illinois State Board of
8		Education, 67% of school districts in the State are operating
9		in the red; and
10		WHEREAS, School districts already bear a large share of the
11		Teachers' Retirement System pension burden by paying a
12		statutory share of the System's total contribution costs,
13		constituting 0.58% of pensionable teacher payroll; districts
14		also contribute towards any locally-negotiated early
15		retirement options and for the pension costs of certain
16		increases in compensation, totaling $92.5 million in Fiscal
17		Year 2012; and
18		WHEREAS, Representatives from Northern Illinois University
19		publicly stated that if the cost shift were to be covered by
20		increasing tuition on parents and students, each percentage of
21		payroll cost shifted to the university would translate into a
22		2% tuition increase; this proposed cost shift would also
23		increase the liability of State-funded universities and all

HR1267 - 3 - LRB098 22670 GRL 61643 r
1		community colleges, thus making higher education even more
2		unaffordable for students and their parents; and
3		WHEREAS, This plan would harm the interests of all
4		taxpayers, especially in downstate and suburban areas and would
5		sharply increase inequities created by the current school aid
6		formula between Chicago and the rest of the State; because of
7		the impact on institutions of higher education, Chicago
8		taxpayers, parents, and students would also be affected;
9		therefore, be it
10		RESOLVED, BY THE HOUSE OF REPRESENTATIVES OF THE
11		NINETY-EIGHTH GENERAL ASSEMBLY OF THE STATE OF ILLINOIS, that
12		we state our belief that an educational pension cost shift is
13		financially wrong and would only serve to shift pension burdens
14		from the State to the status of an unfunded mandate.

Pension Cost Shift Commentary:

Furthermore, if Illinois policymakers pass a bill to shift its responsibility of paying the “normal costs” to local school districts, many school districts would not be able to afford to pay these costs, even if they are “phased in for a few years.”

“A shift would create a new and large financial requirement for school districts, which would be difficult for many to meet. Moreover, Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes. Shifting the state’s normal cost obligation onto school districts would only mean that an even higher proportion of school districts’ revenue would come from property taxes.

“[Furthermore,] property tax bases would not be sufficient to absorb any shift in the employer normal cost for teacher pensions…  School districts are demographically and financially varied, and it would be difficult to impose a uniform normal cost shift on them… Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes… While shifting the state’s normal cost obligations onto school districts may provide some relief to the state’s budget, it will not mitigate these financial obligations and will instead push them onto school districts that, on average, already derive the majority of their revenue from local sources” (The Center for Tax and Budget Accountability, March 2012).

What would be other probable effects? In cash-strapped school districts, of which there are many, teachers would not receive increases in their salaries; many teachers would lose their jobs; student programs would be reduced or eliminated; class sizes would increase; it would be more difficult to recruit, as well as retain and attract, the best teaching candidates… (Education Sector Policy Briefs).

The public school system in Illinois would be jeopardized; the public school teacher’s dignity and guaranteed retirement security would be imperiled, and their students’ right to be taught by the very best teachers available in Illinois would be at risk.

Approximately one-third of the total pension payment is the normal costs; the other two-thirds of the payment is the interest owed on the debt that the state created for not fully funding the pension system for almost six decades. To transfer the normal costs of the teachers’ retirement system to the school districts is to diminish the state’s role in providing income retirement security to its public employees.