Plan A in Springfield: Uphold the U.S. and State Constitutions/ Plan B in Springfield does not have to be a miracle

“…During his campaign for governor, Republican Bruce Rauner said he favored switching current state employees, including suburban and downstate teachers, from a traditional pension system to a 401(k) retirement account…

“Dave Urbanek, a spokesman for the Illinois Teachers Retirement System, said any such change would not be nearly as simple as it sounds. He said there’s roughly a $104 billion deficit in the state’s five pension funds, and ‘that’s money the state owes. 

There are currently 395,000 people in the (TRS) system, including 159,838 active teachers.’

“‘If you close (TRS), freeze it so there are no new members coming in and current members can no longer contribute to the pension system because they would be making contributions to their 401(k) plans, the state would still have to find a way to pay the $928 million a year contribution (to TRS) for active members who are eligible to retire in the future. ‘They (active members) would no longer be contributing to the pension system but would still be eligible to collect a pension for their years of service prior to the switch.’

“‘In addition, the state would have less time to make up the $104 billion debt to its pension systems. When you have an open system, you can project costs far into the future. But when you have a closed system, you have a defined end date. So you have to make larger payments in a shorter time frame to fulfill the state’s commitment. Also, the amount generated by investment would decrease because of the shorter time frame of a closed system.’

“Urbanek pointed out that the state would have to make some form of contribution to the 401(k) plans of active teachers, while also making payments into TRS. ‘Someone would have to figure out, in the end, if the state would actually be saving money or if it would cost more to make the switch,’ he said...’” (Kadner: Plan B in Springfield needs to be a miracle, Chicago Tribune). 

Commentary:

According to the former Chief Legal Counsel to Illinois Senate President John Cullerton and Parliamentarian of the Illinois Senate Eric Madiar: “The Clause was ‘intended to force the funding of pensions indirectly, by putting the state and municipal governments on notice that they are responsible for those benefits…’ The Clause makes participation in a public pension plan an enforceable contractual relationship and also demands that the ‘benefits of that relationship’ not be diminished or impaired. And, the contractual relationship is governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system. It is for this reason that both the [Illinois] Supreme Court and Appellate Court have invalidated changes to the Pension Code that would diminish or impair a current participant’s pension benefit rights.  

“[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).

Court Cases:

1979       Kraus v. Board of Trustees… Police Pension Fund, Niles

Law existing at the time of “vesting” is incorporated into employee’s agreement… Pension benefits commence at the time employee contributions begin… General Assembly cannot modify benefits. “The Clause protects pension benefit rights as an enforceable contractual relationship that is subject to modification [only] through contract principles.”

1982       Village of Sherman v. Village of Williamsville

Record of proceeding of Constitutional Convention (21 July 1970)… Rights are fixed when an employee embarks upon employment.

1987       Carr v. Board of Trustees… Police (Peoria)

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1988       DiFalco v. Board of Trustees… Firemen’s Pension of Wood Dale

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1991       Schroeder v. Morton Grove… Police

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1992       Hannigan v. Huffmeister

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1993       Barber v. Board of Trustees of Village of Barrington

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system.

1996       McNamee v. State

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system. …Asks questions whether “the Pension Clause mandates that the pension system be funded at a particular funding percentage or according to a funding schedule.” The Pension Clause “creates an enforceable contractual relationship that protects only the right to receive benefits… A cause of action would exist if legislation diminished a person’s right to receive benefits or placed the pension system on the verge of default or imminent bankruptcy… The Illinois Supreme Court concluded that the Clause guarantees that pension recipients will receive pension payments when they come due” (Madiar).

1998       People ex. Rel. Sklodowski v. State

Vested Case Issue: an employee acquires a “vested” right when he or she enters the pension system. “Clause does not create a contractual basis for participants to expect a particular level of funding… [However,] The Illinois Supreme Court concluded that the Clause guarantees that pension recipients will receive pension payments when they come due” (Madiar).

Plan B in Springfield does not have to be a miracle:

The current “Pension Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions systems what the state owes. There needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time (a flat payment) just like a home loan that is amortized; though the initial payment will be difficult in the beginning, over the long term it will become a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years.

“Decades of mismanagement and failure to match contributions are the predominant reasons that the state’s pension systems are suffering to the degree that they are today. Years of pension holidays, continually borrowing against the systems without a plan for repayment and a severe economic recession, which caused investments to plummet, further exacerbated the problem” (Senate President John Cullerton).  Thus, there needs to be a required “actuarially-sound” annual payment from the state to the pension systems and not a constitutional challenge that breaks a contract with public employees.

“At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy)…

Increase taxation on the wealthy: Illinois is in the top 10 of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners (The Institute on Taxation and Economic Policy).

The state needs a tax rate that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (Center for Tax and Budget Accountability CTBA), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (CTBA), and one that helps 99 percent of the state’s population. 

Consider a broader-based taxation system that would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (CTBA).

Establish a financial transaction tax or “Robin Hood Tax”: a .50 cent tax on every $100 of transacting. Eliminate the tax loophole for “Tax Increment Financing Districts.”