CHICAGO – Illinois' latest stab at pension reform is unconstitutional and will face a court challenge if it becomes law, a union lawyer warned lawmakers Tuesday.
Senate Bill 11, sponsored by Senate President John Cullerton, D-Chicago, lays out a series of pension changes with the cornerstone being a choice offered to employees hired before 2011 to forgo compounded cost of living increases. In exchange, salary increases would continue to count toward their pensionable salary upon retirement.
The pension reforms could trim between $700 million and $1 billion off the state's annual pension contributions, which will rise to $8 billion in fiscal 2018. It was constructed using the so-called "consideration model." Backers believe it doesn't run afoul of the state constitution's strict clause banning the impairment or diminishment of benefits and meets contract law provisions that allow for changes in a bargained for exchange agreed to by the parties.
"It's constitutional because we're giving them a choice and they're getting something for it and that's what's called consideration," Cullerton said on a news program.
The legislation fails on both fronts, John Shapiro, of Freeborn & Peters, told lawmakers at a Senate committee hearing Tuesday. Shapiro represents the We Are One union coalition. He was among the attorneys that successfully argued before the Illinois Supreme Court that the state's prior pension reforms which cut benefits were unconstitutional.
"It's not constitutional nor is it fair," Shapiro said Tuesday. The choice is "not a bargained for exchange and they are not voluntary" as contract law requires. Either "choice" represents a reduction in benefits so there is no choice offering a new benefit and it's a coerced choice not a voluntary one, he said.
At the heart of the conflict is whether future salary increases being counted toward an employee's pensionable salary are constitutionally protected. If they are not protected and the state is free to determine whether they continue to count then the change could be construed as a new benefit.
Shapiro dismissed that argument, saying salary increases play a pivotal role in calculating an employee's annuity and the formula is part of an employee's protected pension benefit. Employee pension benefits are protected from the time they become members in the pension fund.
In a statement, the coalition said it would "swiftly" challenge the plan if it becomes law.
The pension reforms are part of a sweeping bipartisan budget and reform plan brokered by Senate leaders. All bills that make up the package are linked so lawmakers must pass the whole package.
Cullerton noted that fact during a committee hearing, warning that if the pension plan is not approved by lawmakers then the "Grand Bargain" doesn't pass. Illinois has the lowest bond rating of any state, "and it's going to go down if we don't pass something," Cullerton said.
He also reminded the unions of their past support for a similar plan using the consideration model several years ago. That plan asked pension fund members to accept cuts in exchange for preserving their healthcare subsidies in retirement.
Lawmakers chose an alternative plan with greater savings proposed by House Speaker Michael Madigan, D-Chicago. The high court voided those reforms in May 2015 after rejecting the state's argument that it was permitted to cut benefits under its sovereign powers to act in a time of fiscal crisis. High court opinions have left the door open to use of the consideration model. The high court has also ruled that the state's pension clause applies to retiree healthcare.
Employees who fall into the state's tier one plan who started before 2011 would be offered the choice. They would be asked to forgo the 3% compounding cost-of-living increase in retirement and accept what tier 2 employees get – the lower of a 3% non-compounding or half the rate of inflation. They would also be asked to postpone some COLA increases.
In exchange, tier one employees would receive a constitutional guarantee that future raises would count toward their pensions, a lump sum refund worth 10% of their contributions to the pension systems so far, and a 10% reduction in what they pay toward their pensions going forward. If they decline the offer, future pay raises won't count toward their pensionable income.
It would cover three of the state's five funds, including the ones that cover state university employees, teachers and lawmakers, and would also include the Chicago Teachers Fund. The general state employees fund is not included because of pending litigation over a new contract and the judges' fund is excluded because the courts will decide the legality of the reforms.
The cash-strapped state owes $8.8 billion to the state's five pension funds in fiscal 2018. That's up 12.7% from the $7.8 billion the state is paying in fiscal 2017. The state's unfunded liabilities rose to $126.5 billion in fiscal 2016 from $112.9 billion a year earlier and the funded ratio deteriorated to 39.2% from 40.9%.
In a piece published last year defending the legality of the latest version, Cullerton's former legal counsel Eric Madiar argued that the plan adheres to the "bargained for" exchange requirement by offering the state's irrevocable promise in exchange for employees agreeing to lower annual COLA increases.
"The waiver of this legal right is a new benefit that employees accepting the offer would obtain and do not possess today," he wrote. "Illinois courts state that any 'act or promise which is of benefit to one party or disadvantage to the other is a sufficient consideration to support a contract.'"
It meets the legal consideration requirement by harnessing "the discretionary power of the state, as an employer, to condition or not condition its offering of future salary increases to each Tier 1 employee in order to obtain a pension benefit reduction," he wrote.
If rejected, then the employee would do so with the full knowledge that all future salary increases will only be offered to him or her expressly on a non-pensionable basis which is the state's right, he argued.
