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A Pyrrhic Pension Victory

eye on the news

A Pyrrhic Pension Victory

Illinois public workers may pay dearly for a court decision to overturn retirement reforms. December 2, 2014

Late last month, a Sangamon County circuit court judge overturned Illinois’s pension reforms, which the legislature passed in the waning days of 2013 in order to cut the state’s enormous retirement debt. Workers and retirees celebrated, but theirs is a Pyrrhic victory. Without the ability to fix a hugely indebted retirement system with more than $100 billion in unfunded liabilities, Illinois legislators and local officials will continue to rely on harsh fiscal remedies to balance their budgets. Government employees in the Prairie State can expect layoffs and stagnant wages for years. This is the price of victory when there’s no more money to go around.

Sangamon County Circuit Judge John Belz ruled that Illinois’s constitutional protections for pensions prohibited the legislature from reducing cost-of-living adjustments (COLAs) for current or future retirees, and also stopped the state from requiring current employees to work longer before they reached retirement age. Essentially, the court said that the state can never cut retiree benefits—including those benefits that vary from year to year, such as COLAs—and that Illinois could never reduce the rate at which its current employees earn new pension credits, even for work they haven’t yet done. The ruling granted Illinois government workers far greater pension protections than private-sector employees enjoy under federal law. The case will now go to the Illinois Supreme Court, whose previous decisions suggest that it won’t see things differently. If the ruling is upheld, the Illinois legislature will go back to Square One in its efforts to fill the state’s retirement hole without reducing benefits for current workers and retirees.

For years, Springfield would borrow money to make contributions to its pension system, then skip several years of payments and borrow all over again. In late 2010, however, the investors who typically bought Illinois’s pension bonds balked at purchasing even more debt for an otherwise unsustainable system, creating a massive financial shortfall. Looking to close the gap, legislators hiked taxes by a whopping $7 billion in a special emergency session in January 2011, but because they did nothing to reform pensions, much of the money simply disappeared into the retirement system, even as the state’s unpaid bills soared to $9 billion.

Now, to pay off its retirement debt, Illinois needs more than $6 billion a year from taxpayers to make up for the skipped contributions to the pension system, along with more than $1 billion more to pay off its pension bonds. That represents more than one-fifth of the state’s general-fund budget. By contrast, states typically spend no more than 4 percent to 5 percent of their budgets on pensions. The consequences have already been felt by Illinois taxpayers—and workers. Government employment is down by nearly 30,000 workers since its 2009 peak. Local governments, those that deliver the most basic services to taxpayers, have done the most trimming, slicing 20,000 jobs. Meanwhile, rising benefits costs are squeezing out other spending, including pay increases. School districts have been hit the hardest; their budgets are largely made up of personnel costs. According to the Census Bureau’s annual survey of public expenditures, total spending on schools in Illinois increased by $5 billion between 2006 and 2012 (the latest year for which figures are available). But benefits costs, which rose 75 percent, ate up $2.7 billion of that spending. By contrast, total spending on salaries increased less than $1.5 billion, a gain of a mere 12 percent in six years. The cost of benefits for public workers in Illinois now outpaces salaries by $1.2 billion.

Governor-elect Bruce Rauner wants to establish a defined-contribution plan for new state workers, which would gradually wind down the current defined-benefit plan as workers retire. The court’s ruling may make this easier to accomplish. But even if Rauner wins that political battle, the new system will do nothing to wipe away the state’s current debt, which must be paid off over the next 20 years or so. The debt has major implications for Illinois’s economy. Several years ago, Chicago mayor Rahm Emanuel observed that if the state didn’t fix its pension problems, “you won’t recruit a business” to move into the state. That’s because, as the Chicago Tribune observed, “Companies don’t want to buy shares in a phenomenal tax burden that will unfold over the decades.” Shortly after Emanuel’s observation, Caterpillar, the giant Peoria-based maker of heavy construction machinery, declined to locate a new factory in its home state, citing growing worries about Illinois’s “business climate and overall fiscal health.”

It’s worth noting that some other states have benefited from more sensible court rulings on pension issues. In October, the Colorado Supreme Court ruled that it was legal for that state’s legislature to end COLAs for current retirees. Though the court held that pensions comprise a contract between workers and government, it concluded that a benefit as variable from year to year as a cost-of-living adjustment should not be regarded as an irrevocable pension agreement. That was a significant victory for government, because annual cost-of-living adjustments constitute as much as half of the retirement debt that states and localities owe.

Even before its court rulings, Illinois faced a steep fiscal mountain to climb, thanks to $5 billion in remaining unpaid bills and the impending expiration of 2011’s temporary tax increases. Now that mountain is even steeper. It’s hard to imagine that Illinois government workers won’t wind up with a big share of the pain that’s coming.

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