Illinois’ Narrow Road to Pension Reform

On March 24, the Illinois Supreme Court struck down a Chicago pension reform bill that sought to address the city’s considerable pension shortfall. In addition to posing a setback for Chicago Mayor Rahm Emanuel’s efforts to fix the city’s finances, the ruling highlights a problem some states face in attempting to bring their pension liabilities under control.

As the late, great Yogi Berra would put it, last week’s ruling was déjà vu all over again. Last week’s ruling echoes a May 2015 case, in which the court ruled unanimously that SB1, a modest state pension reform law enacted during the administration of Governor Pat Quinn ran afoul of a provision in the state constitution that stipulates: “Membership in a pension or retirement system of the State … shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

That provision was also at the center of the ruling striking down the Chicago reform. The ruling said: “The pension protection clause does not guarantee any particular method of funding, but, rather, guarantees the right to be paid.”

So is pension reform even possible in states like Illinois that privilege public pensions like this? Yes, says Illinois Policy Institute Senior Attorney Jacob Huebert:

In trying to defend its reforms, the city used an argument that advocates of pension reform have long made: that the government can make changes to pension benefits “for consideration,” meaning the state can reduce an employee’s pension benefits if the employee voluntarily agrees to the reduction in exchange for some new benefit. The Illinois Appellate Court has said this would be permissible, but the Illinois Supreme Court has never directly addressed it.

So, in striking down the Chicago pension reform, the court pointed the way to a different approach. Huebert adds:

That effectively gives the Illinois General Assembly the green light to pass reforms giving workers the option to trade some of their long-term pension benefits for less costly short-term benefits.

The decision also leaves open the possibility that unions could agree to such changes on their members’ behalf if they did it through a collective-bargaining agreement. That could make large-scale changes easier. And it should be permissible because workers represented by a union give the union the right to make a contract on their behalf through collective bargaining.

That won’t be easy, but lawmakers in Illinois and other states where pensions have similar protected status must seize the options for reform open to them. One, which Huebert notes, is to stop digging the hole by enrolling new employees in defined contribution retirement plans like 401(k) accounts.

And to highlight the urgent need for pension reform, a recent Illinois Department of Insurance report revealed that all state aid to Illinois’ public universities is going to pay for pensions.

Failure to reform means risking similar financial strain on public services. Pensions or potholes? It’s clear where taxpayers’ interests lie.