Article 8, section 5. “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.”
That’s the language in the Illinois Constitution that’s been causing all the turmoil in political circles for the past couple of years. Is there anything vague about the phrase “shall not be diminished or impaired”?
The Illinois Supreme Court heard arguments yesterday about whether the so-called “pension reform law” should be held constitutional. There were indications – perhaps – that the Court will find it unconstitutional, which means the whole pension mess is sent back to square one, and billions of dollars have to be squeezed from existing programs or from the taxpayers (or both).
What to do?
Call in the experts.
“The gentlemen who drafted this clause said the reason we are putting this in the Illinois Constitution is to stop a practice by state or local governments of intentionally underfunding their pensions and claiming the hole got so big they now are not gonna pay off the benefits,” declares Ralph Martire of the Center for Tax and Budget Accountability. “So what has happened here? Historically the State has made the intentional policy decision to not make the normal cost contribution. It intentionally grew its unfunded liability… In 1995 our unfunded liability was $17 billion. By law, they grew it to $48 billion in 2008. That was the law, and they still grew it – they still continued to under-fund it until 2012…so this is clearly a problem created by intentional policy decisions of the State. And it would be utterly irresponsible for the Supreme Court to rule any way other than, hey, we’re gonna enforce the Constitution.”
The State argued that, in essence, the budget deficit created by this perennial under-funding of the pensions has become so massive, and so threatening to our entire economy, that a kind of fiscal state of emergency exists, and that allows the State to invoke police powers. These police powers would be used to override Section 5.
“For the police powers to apply,” explains Martire, “The event creating the crisis had to have been unforeseeable at the time the contract was entered into. The problem can’t merely be a worsening of a condition that existed at the time. The pensions were unfunded. They’ve been unfunded for a long period of time. And it’s merely a worsening of that condition. It doesn’t even fall under the exemption that would permit a state to utilize its police powers as recognized by the U.S. Supreme Court.”
Martire’s concern is not simply that he thinks it’s unconstitutional, but that it would set a grisly precedent.
“If you’re gonna allow the State to do this for pensions, why not let it do it for bonds? Why not let it do it for contracts…if you have a constitutional protection that a state could evade by simply making intentional policy decisions to not make an appropriate investment, you’re really creating a Pandora’s box. I mean, why have a constitution?”
We started this conversation today because we wanted to apply this discussion to the Mayor’s race. Although both candidates put forth their “financial plans” yesterday, neither was very specific about how they’d guide Chicago through this impending fiscal disaster.(We recorded this program before the plans were released. But we correctly anticipated that the plans wouldn’t offer many details.)
Kate Grossman is Deputy Editorial Page Editor at the Sun Times, whose page has argued that pension payments shouldn’t always be first in line, ahead of schools, prisons and social services. “Emanuel hasn’t articulated a plan for the same reason Garcia hasn’t,” she explains. “Because they’re in the middle of an election, and who wants a property tax increase? Who wants to say cut the firefighters benefits, nobody wants to say that. So, granted, they’re both guilty of it. We’ve argued that Garcia is far more guilty of it than Emanuel is, particularly because Emanuel has a record. Emanuel pushed through a reform of municipal employees’ and laborers’ pension funds which cuts pensions and increases revenue for those funds. He did it. It’s clear that’s his model for how you do it.”
The reforms haven’t gone into effect because those are among the issues being debated right now at the Supreme Court. The affected unions sued, citing Section 5.
“He wanted to fund it with a property tax increase. He pulled back, because there was a lot of resistance, but this is the only revenue source that they think is reliable, stable and deep enough to tap into that they can count on to make a dent in the pension payments. So, in sum, they’ve both been very vague. Chuy has been more vague, but we know basically where Emanuel stands on this,” Grossman asserts.
And, she points out, politicians have simply run out of delaying tactics.
“2015 is the year. We’re in it. We have a $300 million operating deficit for the City. An extra $550 million extra pension bill for police and fire, plus another $50 million for two other pension funds. This – we’re here. We don’t have time, there’s no place now for vague statements.”
Martire is less willing to defend Emanuel’s record.
“The issue with Rahm’s approach is that it bet too much on hoping that pension benefits would be something you could cut,” he says. “Without that piece, there’s really some very significant issues with Rahm’s approach. Look at what Rahm and the past mayor of Chicago have done. Since 2010, they’ve known that this “pension ramp” was coming up. And no-one’s prepared for it. Yet the State law, which created this pension “ramp”, and , by the way, gave them some pension “holidays” – so this kick-up is something that they bartered for – they have to budget fully for this payment when it comes due, and levy appropriately for it in the property taxes. Rahm hasn’t levied for it in the property taxes. And he hasn’t budgeted for it. So Rahm Emanuel’s budget actually doesn’t comply with State law…Why a sitting mayor doesn’t have an answer for this issue, when that sitting mayor has been there and known about it since he’s been in office, is another question.”
“What politicians did was continue to kick the can forward,” he continues. “They passed something they knew probably wouldn’t be constitutional. They knew that when they passed it, to just kick the ball out and maybe get it through another election campaign. And that’s not an approach to public policy that’s OK. Frankly, deferring to the courts to determine policy decisions that ought to be made by a governor or mayor, and a general assembly or city council, is irresponsible.”
So what to do? Martire advocates a “re-amortization” of the pension debt. (You can see him explain it at about 17:15)
In addition, he calls for expanding the state sales tax to include certain consumer services, which he claims could generate 2.4 billion in new revenue for the State annually, and about $300 million for the City of Chicago. And it would grow with the passage of time.
He also advocates replacing the portion of the state sales tax that expired in January. A report issued by his CTBA claims that when the tax expired, no lower or middle-income people benefitted from it. The only cohort of people who saved money, he contends, were the 11% of top earners in the state. And since they engage in less consumer spending, the money largely drops out of circulation.
That would require sign-on from Bruce Rauner, who strongly advocates the lower tax rate and had proposed a budget that slashes revenue sharing with local governments.
“Do you have a different governor than I have?” asks Grossman.
The experts seem to be in agreement. The fiscal cliff is a real thing. And the cliff is high, so the fall, if it happens, will be perilous. But there are ways to break the fall. It’s just that they’ll require buckets of political courage to achieve.
Ralph Martire: “Rahm Emanuel’s famous for saying Waste No Crisis, well, here’s a crisis and it’s legitimate. And it’s state and local. And you have a bi-partisan chance to maybe put together a grand bargain to at least deal with some of these structural tax issues. So I think it’s a moment where it is possible.”
How’s that for ending on an optimistic note?