When You Are $111 Billion in the Hole, Is It Better to Dig or Climb? A Critical Look at Illinois’ State Pension Obligations

Seal of ILThat’s right, billion with a ‘b.’

That’s how much Illinois’s unfunded public pension debt has grown to according to a state legislative report from the General Assembly’s Commission on Government Forecasting and Accountability. That includes five pension systems the state is responsible for (state university employees, public school teachers, judges, state lawmakers and state workers).

Much like the often remote figure of the $19 trillion federal debt, you may be thinking, “So what does this have to do with me?” Anyone who pays taxes – particularly income taxes should listen up. About 25 cents of every tax dollar we pay to Springfield goes toward one of five public pension systems. Okay, that’s less than half. So what’s the problem? Less than 30 years from now (2045), the ballooning unfunded pension liability is projected to exceed the total amount of assets that the state currently has in its possession. Think of pre- bankruptcy Detroit on steroids.

While there is a precedent for large municipal bankruptcies like Detroit ($18 billion in 2013), Jefferson County, Alabama ($4 billion in 2011) and Orange County, California ($2 billion in 1994), America has certainly never seen an entire state declare bankruptcy in its history.

How soon is that expected to become a reality? Ac- cording to Moody’s Investors Service, Illinois’s pension funds aren’t predicted to run out of money for another 50 years (until 2066). That could come a lot sooner though, with more taxpayers and job seekers keep leaving the state and Chicagoland area along with their income.

In fact, Chicago saw the greatest population loss of any major U.S. city in 2015, according to the U.S. Census Bureau. Illinois was one of just seven states to see a population dip in 2015 and had the second-greatest decline rate last year after West Virginia, according to U.S. census data. While the state’s population dropped by 7,391 people in 2014, that number more than tripled in 2015 to a loss of 22,194 people.

Some say, “Well then why not just tax the rich more?” Turns out Chicago lost more millionaires than any other U.S. city in 2015 as well. Global wealth data analysts at New World Wealth estimated that Chicago lost 3,000 of its 134,000 millionaires in 2015. That puts Chicago in the top four global cities in terms of the loss of millionaires, along with Paris, Rome and Athens.

Along with the population losses, shrinking tax base and revenue declines, comes the credit rating downgrades as well. Moody’s has dropped Chicago bond ratings all the way to junk status, meaning the city must pay sky-high interest rates to borrow more money to make up for any deficit spending. Fitch Ratings has Chicago only one notch above junk and Standard & Poor’s Ratings Services at just two notches above junk.

Chicago’s unfunded pension liability to police, fire- fighters and teachers has now accumulated to $20 billion, ac- cording to Moody’s. As a result, Chicago has a combined debt and pension liability of $26,000 per resident, as calculated by Moody’s. That’s nearly twice as much as Detroit before that city cut its debt and pension liabilities through bankruptcy in 2013. At that rate, Moody’s announced that Chicago risks bankruptcy within the next decade.

So why isn’t anyone doing anything about this? They’ve tried. Both state lawmakers in Spring- field and city alderman in Chicago passed laws aimed at reforming their respective pension systems by compelling beneficiaries to contribute more for their own benefits only to have them both struck down by the courts including the Illinois Supreme Court as unconstitutional.

Specifically, the courts have found the pension reform laws to violate Article XIII, Section 5 of the Illinois Constitution which reads:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

That language was only added at the last constitutional convention Illinois had in 1970 and was largely borrowed from New York’s 1938 pension clause (found under Article V, Section 7 of its constitution) due to lobbying efforts from state university employees, police and firefighters who sought stronger protections for their pension benefits.

As a result, the Illinois high court has strictly interpreted that language to mean that pension benefits and obligations that have accrued over the decades are not to be touched, or “diminished or impaired.” That includes fully subsidized healthcare benefits as well as a 3% compounded cost-of-living adjustment (or annual increase) for all 200,000 active retirees who are currently receiving pension benefits.

It’s in stark contrast to every other state supreme court in the country – including Florida, Georgia, Michigan, New Jersey, New Hampshire, Rhode Island and Wisconsin – which have upheld efforts by their state legislatures to reform their public pension systems. That’s in large part due to their consensus holding that expectations of public pension benefits are not “property,” and when a state government pays out such benefits, it’s usually just making good on legislative generosity, not paying out due to any legal obligation.

In 1999, for example, the National Education Association (NEA) sued Rhode Island for amending its teachers’ pensions, and the NEA lost. (Parella v. Ret. Bd. of Rhode Island Employees’ Ret. Sys., 173 F.3d 46 (1st Cir. 1999)) The federal appeals court in that case held that amending the pension benefits did not violate the Obligation of Contracts Clause, the Takings Clause or the Due Process Clause of the U.S. Constitution (The NEA tried just about every legal argument in the book).

But the Illinois courts remain the sole outlier to hold otherwise, strictly due to the language of the state constitution’s pension clause. The only solution the state Supreme Court has offered in its opinions is for the state legislature to get creative in seeking additional tax revenue from the state’s shrinking population.

Short of proposing a constitutional amendment to modify the language of Article XIII, Section 5, massive tax increases will be the only option left for Springfield and Chicago.

By John Giokaris

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