Jane the Actuary Uncategorized

Forbes post, “How Did Arizona Succeed With Pension Reform? With One Weird Trick . . .”

Originally published at Forbes.com on May 13, 2021.

 

It’s a tired story by now in Illinois: the graduated income tax state constitutional amendment on the ballot this past November failed because of a fundamental lack of trust by the people of Illinois in their elected officials. That’s not just my own claim; new House Speaker Chris Welch said as much, according to the Chicago Tribune, in making a pitch for another try at an amendment in which they would pinky-swear to use new tax money only for good purposes:

“In evidence by the failure of the progressive tax, folks don’t trust us . . . If we can rebuild that trust, it’ll be amazing what voters will help us do.”

And this same lack of trust is at least part of the reason why an amendment to the state constitution to eliminate the “pension protection clause” is a nonstarter. Yes, some Illinoisans believe that under no circumstances should benefits be altered for anyone, even the fat cats taking home more in pension benefits than they ever earned in public office, as was the subject of a WGN report on Tuesday. But others have been persuaded that any changes to pensions will impoverish the elderly, and are understandably worried — in other words, the electorate has as little trust in Illinois’ Republican legislators as in Democrats.

That’s why I had suggested in my Tuesday article a constitutional amendment that builds in protections for low- or even middle-income state workers, for example:

“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, for any plan participant whose salary or retirement benefit is less than the median salary or retirement benefit, respectively, in the state of Illinois” (addition in italics).

Does this sound off, too narrow and detailed? Should constitutions provide general principles and leave the specifics for legislation? Sure, yes, in principle, it would be nice to simply remove this clause from the Illinois constitution, but that’s not a realistic option.

And, in fact, the experience of Arizona five years ago suggests that the most pragmatic path, with the best chances of success, is exactly this very narrow, clunky, amendment.

Alexander Volokh chronicled the path Arizona took to its constitutional amendment, a change to its pension clause which, prior to the amendment, was essentially identical to that of Illinois: “Public retirement systems shall not be diminished or impaired.”

In 2016, Arizona’s Public Safety Personnel Retirement System (PSPRS) was almost as unfunded as Illinois’ pensions, at 48% funded. Key stakeholders from both parties, and including the public safety unions themselves, recognized that change was needed, and the Pension Integrity Project team at Reason Foundation worked together with them to create a set of changes, primarily focused on reforming its out-of-control cost-of-living adjustment system, as well as instituting a risk-sharing system for new hires (with a proper actuarial analysis conducted at the time!), and new governance reforms, all of which together comprised S.B. 1428.

But how did Arizona ensure that this bill, which did, after all, cut (future) benefits for existing employees, would not be overturned by the Arizona Supreme Court? Through a constitutional amendment, Proposition 124. The text of this amendment? The italicized portion of the following:

“Public retirement systems shall not be diminished or impaired, except that certain adjustments to the public safety personnel retirement system may be made as provided in Senate Bill 1428, as enacted by the fifty-second legislature, second regular session.”

Honestly, I find this a bit mind-blowing.

This is nothing at all like what we expect from a constitutional amendment. It’s clunky, awkward. It feels like defeat, to acknowledge that this is the best we can do rather than the “pure” change of removing the trouble-making clause entirely.

But it worked. It passed by a 70-30% margin.

Would Illinois voters (or the Democrats who currently fully control the state) be willing to approve an amendment narrowly-tailored enough to ensure pension cuts only apply to the highest earners in the state?

Could Pritkzer have passed his graduated tax amendment if there had been guarantees built into the amendment itself, rather than having voters write a blank check to the legislature? The proposed amendment, after all, merely struck the requirement that any income tax be non-graduated; it was neat, clean, but should it have been more detailed to offer voters assurances that it would neither attempt to boost taxes one bracket at a time, divide-and-conquer style, nor attempt to fund government through such high rates on higher earners that they leave the state?

I don’t know. But I continue to mull over the question of whether this sort of amendment, which fully acknowledges voter mistrust and constrains the legislature as a result, is what Illinois, and states similarly trapped, need to be able to move forward.

 

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.

Jane the Actuary Retirement

Forbes post, “Public Pension Funding And Reform— Or Lack Thereof — When We’re Not ‘All In This Together’”

It takes the right kind of culture to reform pensions, or to diligently fund them in the first place.

 

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Jane the Actuary Retirement

Forbes post, “Beating A Dead Horse, Etc.: Here’s More Research On Public Pensions and the ‘Contracts Clause’”

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.