Originally published at Forbes.com on February 27, 2020.
Yes, readers, I have other topics I want to address than Illinois pension reform. But I am also attempting to clear out a dreadfully long list of draft articles and bookmarks, among them an article at MuniNet Guide from last August, by James Spiotto, “What Illinois Can Learn From the Supreme Court of Rhode Island and Even Puerto Rico About Public Pension Reform.”
Readers will recall that I had earlier this month cited some commentary at Wirepoints with respect to the contention made by pension reform opponents that, notwithstanding the clause in the Illinois constitution that protects past and future pension accruals and benefit increases, the Contracts Clause in the U.S. Constitution prevents the state from making any reductions even if an amendement were passed. But what makes Spiotto’s article worth sharing, and summarizing, is that it delves into the issue far more extensively to make the case that this is not so.
Again, reform opponents say that the U.S. Constitution prohibits any sort of reform that affects existing benefits, full stop. Spiotto writes,
“[T]he U.S. Supreme Court and virtually all state courts have recognized that the police powers of a government to impair contractual obligations for a higher public good, the health, safety and welfare of its citizens and its continued financial survival, cannot be waived, divested, surrendered, or bargained away. . . .
“Since 2011, there have been over 25 major state court decisions dealing with pension reforms. Over 80% (21 out of 25) of those decisions affirmed pension reform which provided reductions of benefits, including COLA (“Cost of Living Allowance”), or increases of employee contributions, as necessary, and many times citing the Higher Public Purpose of assuring funds for essential government services and necessary infrastructure improvements. Of the four states that did not permit public pension reform efforts, two states, Oregon and Montana, cited the failure of proponents of reform to prove a balancing of equities in favor of reform for a Higher Public Purpose.”
Of the two remaining failed reforms, one of these was, yes, Illinois. (I wrote at length about the Illinois Supreme Court’s decision in January.) The other was Arizona, which, like Illinois, had an explicit pension protection in its constitution. Unlike Illinois, however, all parties — state workers, legislators, and local governments — came together to pass an amendment enabling reform.
Spiotto also explains that the Illinois Supreme Court interpreted the constitutional protection of pensions as so strong as to mean that, unlike the acknowledged ability of the state to modify other contracts in the interest of a Higher Public Purpose, pension promises were unique in being fixed and permanent regardless of any such needs. But, Spiotto writes,
Virtually every other analysis has recognized that governments, state and local, could not surrender or bargain away an essential attribute of their sovereignty, namely, the police power of a government to be able to impair contractual obligations for a Higher Public Purpose for the preservation of government and the health, safety and welfare of its citizens. The U.S. Supreme Court for over two centuries has so held that the police power to impair contracts for a Higher Public Purpose cannot be divested, surrendered or bargained away as the cases of Stone v. Mississippi, 101 U.S. 814, 817 (1880), U.S. Trust Company of N.Y. v. New Jersey, 431 U.S. 1, 23 (1977) and their progeny have so eloquently ruled. Likewise, numerous state courts consistently have so held, most recently in the State of Rhode Island’s Supreme Court decision of Cranston Police Retirees Action Committee v. The City of Cranston, et al., Rhode Island Supreme Court, 208 A.3d 557 (June 3, 2019).”
The Cranston, Rhode Island, case deserves special mention; its pension plan was less than 60% funded, and the city responded by suspending the COLA adjustment for 10 years for police and fire retirees. Retirees filed suit and the courts, including the Rhode Island Supreme Court, decided in favor of the city, that is,
“The Rhode Island courts found that there was a contractual relationship that was substantially impaired by the 2013 Ordinance, but that the impairment was permitted as reasonable and necessary to fulfill an important public purpose. The court recognized the precarious financial condition of the city compounded by a reduction in state aid rendering a budgetary shortfall that resulted in reduction in salaries, public employees and services.”
In fact, subsequent to this article’s publication, in December, the United States Supreme Court weighted in, by declining to hear the case.
What’s more, Spiotto suggests that, in the case of Illinois, the court had come to its decision because the state had not increased taxes to solve the problem, so that “public pension unfunded liabilities were perceived by the Supreme Court of Illinois to be a self-inflicted crisis not borne out of the notion of poverty or inability to pay.” However, since that time, the state of Illinois has indeed raised taxes considerably and intends to raise them further with a graduated income tax. Therefore, “Any reluctance to permit reasonable and needed modifications of pension benefits due to the failure to increase taxes or the mistaken belief the unfunded liabilities are affordable should, for all practical purposes, be overcome and resolved by recent action at the state and various local levels demonstrating the limits of taxation and the unaffordable nature of certain pension benefits.”
And I’ll end this brief summary with a sentence with which Spiotto begins his argument:
“One of the hallmarks of a mature and successful society is the continued capacity for growth and change.”
Casting public pensions as immutable, even with respect to potential changes which minimize harm to their participants, regardless of the degree to which they stand in the way of the well-being of residents of the state or locality, is, to the contrary, a hallmark of a society on the decline.
Update: as it happens, James Spiotto passed away the very same day as I published this article. For the interested reader, here’s more about the man the Bond Buyer called “a legendary voice in the municipal industry for his bankruptcy and restructuring expertise that influenced governments, investors and federal lawmakers.”
December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.
In California, most of the 2012 pension reforms (reductions) applied to new employees only. Employee contribution increases, however, were increased by collective bargaining and applied to all employees. Contributions were increased by 3-5 percent, and general salaries were increased by the same amount. (Pension impairment offset by something of equal value?)
Except the contribution increases began in July 2012, and salary increases followed in 2013 or later, conditional upon sufficient revenues.
“determination of funding availability […] shall be at the sole discretion of the Director of the Department of Finance.”
The general salary increase would be the first for Unit 12 employees (and most others) since 2007-08. By tying it to contribution increases, they perhaps met the letter of the law, if not the spirit.
The Law of Eminent Domain can solve the pension crisis as the Supreme Court has affirmed that it doesn’t only apply to land but to all properties. Government only needs a compelling interest that serves the need of the public and complies with the 5th (or 14th) Amendment requirement that private property cannot be taken without “just” compensation: i.e., not a required dollar-for-dollar settlement. Eminent Domain, an extraordinary process placed in the Constitution to resolve dilemmas, can provide the big stick to compel the amending of these outrageous and exorbitant pensions and bringing them back to reality before government at all levels goes bankrupt. When factoring in retirement benefits, public employees on average are paid and receive benefits 78% higher than private employees performing comparable work. There is a lot of room for negotiations when determining “just” compensation. Retirement is a government granted property right that can be amended through Eminent Domain, which will provide a permanent settlement better than bankruptcy.
Retirees and their unions must yield to the sovereignty of Government when it evokes the power of Eminent Domain when a compelling public interest arises, and the Eminent Domain process does not impair a contractual labor obligation but rather “takes” a portion of the fruit derived from it. Saying that Eminent Domain impairs a contract is like saying that the income tax, which is essentially a labor contract, impairs the agreement between employer and employee.
Another option is the power of the state to levy taxes. It has been estimated that the California pension dilemma could be averted by simply imposing a 50 percent surtax on all retirement income in excess of $40,000, but public employees and their unions have grown accustomed to the idea that taxpayers alone should pay for everything. Therefore, no politician would dare contemplate this simple solution since union money keeps them in office. In short we have a pension crisis simply because politicians derive benefits from it and do not want to fix it.