U of I expert: Rauner’s pension fix ‘unconstitutional’

From the U of I News Bureau

John D. Colombo, the Albert E. Jenner Jr. Professor and interim dean of the university’s College of Law, spoke with U of I News Bureau business and law editor Phil Ciciora about what’s next for pension reform in the state of Illinois.

Ciciora: Was there anything from the Illinois Supreme Court’s ruling that particularly stuck out to you?

Colombo: I was struck by how direct the court was in its criticism of the Legislature. The opinion leaves no question where the blame for the pension situation lies: It lies with the failure of the Legislature to properly fund the pensions over the years. The Legislature created this mess; the court was absolutely clear about that.

Does the plan being pushed by Illinois Senate President John Fullerton, which offers pension-eligible workers a choice between cost-of-living increases or including pay raises in the calculation of retirement benefits, otherwise known as “consideration” in contract law, meet constitutional muster?

Given the breadth of the opinion, the Legislature really doesn’t have much room to maneuver. The court was quite clear that the terms of an employee’s pension are set in stone at the date of hire, and those terms cannot be “diminished or impaired” without the consent of the employee.

Cullerton’s proposal to give employees the choice between having future pay raises count toward pension benefits and a 3 percent cost-of-living increase is likely unconstitutional. The pension laws clearly provide formulas for benefits, and those formulas are quite clear about how an employee’s earnings affect the pension benefit. If pay raises are not included, that is a “diminishment” to that employee. The employee cannot be forced to choose between two benefits that the employee already has – for example, the right to count future pay increases and the right to the cost-of-living increase.

The contractual concept of “consideration” is also known as “bargained-for-exchange.” That is, a central concept of contract law is that each party gets something from the deal and gives something up. For example, suppose I agree to buy your car for $20,000. I give up $20,000 and get the car; you give up the car and get $20,000. There is a voluntary bargain that imposes benefits and burdens on each side. But telling an employee to choose between two benefits they already enjoy is not consideration – it is not a bargained-for exchange. If I say, “Give me your car or give me your money,” that’s not a negotiated deal. It’s one side holding a gun to your head. That isn’t a valid contract.

Gov. Rauner has his own plan, which would move all active workers into the less generous Tier II pension system, which is broadly similar to a 401(k) plan. Can we surmise that Rauner’s plan, if it were to pass the Legislature, is also unconstitutional?

Rauner’s plan to “freeze” benefits and move employees to a 401(k) or 403(b) plan is equally unconstitutional. You cannot change an employee’s benefits or the rights they have to earn future benefits for the worse after they have started work. Period. End of discussion.

The idea of amending the Illinois constitution has gotten some traction. Would that solve the issue?

That course of action would do nothing to solve the problems facing the state of Illinois right now.

First, an amendment requires a three-fifths vote of the Legislature just to get on the ballot, and the earliest it could be on the ballot is November 2016. Accordingly, it would do nothing for the coming year’s budget and nothing for the 2016-17 budget, which would have to be passed next May.

Then there is the problem of the voters actually voting in favor of the amendment, which also requires a supermajority: 60 percent of the votes cast on the amendment, or 50 percent of all votes cast in the election. The latter usually isn’t a useful alternative, because many who vote don’t vote on these kinds of questions.

Next, even if an amendment passes, it is unlikely that the Legislature could change benefits for employees who are already retired or in the system. The pension clause isn’t the only constitutional problem; both the state constitution and the federal constitution also protect contracts generally from legislative impairment – what we lawyers call the “contracts clause.”

So even if an amendment to the pension clause passes, legislation would have to comply with the contracts clause. If new legislation impaired an existing contractual relationship, it would potentially violate the contracts clause. That would lead to a new round of litigation, possibly in both state and federal courts, which could last several years. So even if the constitutional amendment route were ultimately successful, it would be five, six or seven years before it could be effective. That really doesn’t help the current problem.

So what can the Illinois legislature do to resolve the pension situation?

The basic answer to this is (1) cut more out of the budget to fund the pensions, (2) raise revenue in the form of raising taxes, (3) push pension costs down to the local governments, school districts and universities that actually employ the employees, or some combination of the three. I think it’s quite likely that state universities will be required to pay for the pension costs of their employees in the future.

The revenue-raising options include restoring some or all of the “temporary” tax increase, which could raise several billion dollars, and taxing retirement income at the state level. Most people don’t know that all retirement income is exempt from Illinois income tax; very few states exempt all retirement income from taxation. That alone could produce $1 billion or more in revenue per year. Enacting some sort of services tax – basically, an expanded sales tax on services that many states have done, including our Midwestern neighbors Wisconsin and Michigan – is also an option.

California faced a similar crisis a few years ago and adopted a series of modest budget cuts and tax increases to deal with it. They are now in much better shape than Illinois, and their economy is doing well. Perhaps that should be a model for what we need to do. What shouldn’t be a model is another round of likely unconstitutional pension legislation that will accomplish nothing.

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