What Happens If Our Pension Plans Go Broke?

Train WreckWe’re now seeing the real face of Illinois’ pension crisis by the cuts being proposed by Governor Rauner in his 2016 budget. In Fiscal 2016, Illinois will owe $6.8 billion to its 5 pension plans, which will account for roughly 18% of the entire state budget. Stakeholders from every state program are flooding into Springfield to beg the Legislature to spare their programs, hoping that their protests, sit-ins, die-ins and other acts of political theater will convince lawmakers that someone else’s ox deserves to be gored.

With the recent Illinois Supreme Court decision striking down the December, 2013 pension reform bill, it’s time to go back to the drawing board. The Court was unsparing in its criticism of the General Assembly’s failure to make payments into the fund, pointing out that:

“The General Assembly understood that the provisions would be subject to the pension protection clause. In addition, the law was clear that the promised benefits would therefore have to be paid, and that the responsibility for providing the State’s share of the necessary funding fell squarely on the legislature’s shoulders. The General Assembly may find itself in crisis, but it… is a crisis for which the General Assembly itself is largely responsible.”

We’re $100+ billion in arrears on funding the 5 State pensions, and many municipalities are in no better shape. The Court left no wiggle room in ruling that benefits “shall not be diminished or impaired.”

But what happens if the pension funds actually go broke? What’s the State’s obligation to guarantee that money is taken from the General Revenue Fund to keep the funds solvent?

You may be surprised to know that the State has no obligation at all to guarantee the funding of any of its pension plans. While membership in a pension plan is a contractual right, with a guarantee that benefits earned shall not be diminished or impaired, the Supreme Court ruled the case of Sklodowski v. State that:

“The framers of the Illinois Constitution were careful to craft in the pension protection clause an amendment that would create a contractual right to benefits, while not freezing the politically sensitive area of pension financing. In addition, the funding provisions contained in the Pension Code do not evince a legislative intent to create vested contractual rights (to funding) in favor of beneficiaries.” (emphasis mine)

In McNamee v. State of Illinois, the Court also ruled that Article XIII, Section 5 did not guarantee a certain level of funding. The Court relied heavily on debate transcripts from the 1970 constitutional convention, in which Delegate Helen C. Kinney stated :

“[the clause] was not intended to require 100 percent funding or 50 percent or 30 percent funding…it is simply to give [annuitants] the basic protection against abolishing their rights completely or changing the terms of their rights after they have embarked upon employment…”

In reversing the ruling of the circuit court, the justices held that the framers of the constitution did not intend to regulate funding, and that Article XIII, Section 5 creates an enforceable contractual relationship that protects only the pensioner’s right to receive benefits.

The Court did mention in a footnote in its recent decision that “we do not, however, foreclose the possibility that a direct action could be brought by pension system members to compel funding if a pension fund were on the verge of default or imminent bankruptcy”, but the same Court said in Sklodowski that “allegations of underfunding are insufficient as a matter law to constitute an impairment of benefits…and (the plaintiff’s) claims contain no factual allegations that would support a finding that the funds at issue are ‘on the verge of default or imminent bankruptcy’ such that benefits are in immediate danger of being diminished.” In other words, because the court ruled that the Illinois Constitution does not create an enforceable contractual right to funding, it did not reach the question of whether a court order compelling state officials to appropriate the full statutorily-required pension contribution was barred by the separation of powers doctrine.

If the funds have to be on the verge of default or imminent bankruptcy to constitute impairment, how comfortable would you be as a State employee or retiree that you’re going to win on a separation of powers argument? By the time we get to the point of imminent insolvency, it’s going to be too late. It might be a good idea to step away from the cliff and sit down and bargain.

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6 Responses to What Happens If Our Pension Plans Go Broke?

  1. Pingback: What Happens If Our Pension Plans Go Broke? | ricochetti

  2. Dixon Dukes says:

    I like the old “imminent train wreck” photo you found to accompany your post!

    But how likely is it that the parties will actually “step away…and sit down and bargain”?

    Like

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