An Illinois Supreme Court ruling that struck down a pension reform law on Friday could have just opened the door even wider to the prospect of deep cuts to services and new taxes for Illinois residents.
With only three weeks left until lawmakers have to pass a balanced budget, legislators now have even more political cover to raise taxes and cut spending following the high court’s decision that it was unconstitutional for the state to pare back promised pension benefits for state employees.
The high court’s decision to rebuff a 2013 plan that would have brought $105 billion in savings means the state now finds itself in an even deeper hole than it did when the deal was first hashed out. Lawmakers — with Gov. Bruce Rauner’s blessing — allowed a temporary income tax hike to expire on Jan. 1, only cutting deeper into the state’s revenues.
Allowing the hike to roll back from 5 percent to 3.75 percent for individuals — costing the state an annual $4 billion in revenue — undermined the state’s argument to the Illinois Supreme Court that it was facing a crisis.
“This ensures that however we resolve this, the citizens of Illinois will be paying more for less service from the state of Illinois,” Kent Redfield, professor emeritus of the University of Illinois at Springfield, said of Friday’s ruling. “I think that’s an inevitable outcome from this.”
In the short term, the ruling blows a hole in Rauner’s proposed budget, since he assumed $2.2 billion in savings by putting all retirees into a less generous Tier II system. Rauner’s office on Friday afternoon pushed for a constitutional amendment to create a distinction between earned benefits and future benefits — a move that one expert called “a meaningless gesture.”
“The Supreme Court’s decision confirms that benefits earned cannot be reduced,” Rauner spokesman Lance Trover said. ”That’s fair and right, and why the governor long maintained that SB 1 is unconstitutional.
“What is now clear is that a Constitutional Amendment clarifying the distinction between currently earned benefits and future benefits not yet earned, which would allow the state to move forward on common-sense pension reforms, should be part of any solution.”
But it was unclear how such an amendment would help solve the crisis. It arguably could not bring savings because, according to the court ruling, a new law cannot retroactively affect those who are already in the system, said Charles N. Wheeler III, Director of the Public Affairs Reporting program at the University of Illinois at Springfield.
“I would say it’s irrelevant,” Wheeler said. “The court is saying the benefits are what they are for people in the system. Even if you were to do away with the pension law all together, I don’t think you can do that retroactively. So I think he can talk about that, but I think it’s a meaningless gesture.
“My prediction, based on what the court has said so far, is the amendment wouldn’t be constitutional for those in the system. You don’t need an amendment to do whatever you want to people who aren’t in the system yet.”
But state Rep. Elaine Nekritz, D-Northbrook, one of the architects of the SB1 pension compromise bill, said the ruling was devastating to the balance the legislation aimed to achieve.
“To me the primary goal was balance, balance between our current state services and paying for the pension payment,” Nekritz said. “It’s pretty clear that they have taken away that ability to achieve that balance. The way to look at this, the choice was either to make some cuts or to pay for it. They’ve very clearly said we gotta pay for it.”
Still, the Illinois Supreme Court said it was lawmakers who created the fiscal disaster by not making pension payments and using pension money to cover operating costs. The hole was dug even deeper, the court said, after lawmakers allowed a temporary state income tax increase to expire in January even as the pension law was still being litigated.
“The General Assembly may find itself in crisis, but . . . it is a crisis for which the General Assembly itself is largely responsible,” Justice Lloyd A. Karmeier wrote on behalf of the court. “The General Assembly could also have sought additional tax revenue. While it did pass a temporary income tax increase, it allowed the increased rate to lapse to a lower rate even as pension funding was being debated and litigated.”
The shortfall in the amount of money necessary to meet all pension obligations has reached stifling depths largely because of years of skimping on — or skipping — annual pension contributions by past governors and General Assemblies.
The SB1 compromise law dealt with four of the state’s five pension programs. It would have curbed pension perks in several ways in an effort to erase the shortfall by 2044, including eliminating the 3 percent compounded cost-of-living adjustment added in 1989, replacing it with a formula that gave the increases on a portion of benefits, depending on years of service. Some state workers would have had the option of freezing their pensions and contributing to a 401(k)-style plan.
The law also would have delayed the retirement age for workers aged 45 and younger, on a sliding scale. Workers would have had to contribute 1 percent less to their retirements and the pension agencies would have been allowed to sue the state if it didn’t contribute its full annual portion. Those were additions designed to help the law survive a court challenge.
“It’s unfortunate,” said David Yepsen, Director of the Paul Simon Public Policy Institute. “They were all warned this was a possibility. So we’ve now wasted a year and a half. It makes the problem they have to deal with deeper, larger. You go back to square one. In one sense, though, it
does now give leaders another reason to do painful things. They can go to voters and say, ‘We tried to fix this pension thing, the Supreme Court won’t let us.’ The court has given them some political cover to do what’s painful.”
In a report released last week, the Civic Federation, a financial watchdog group, recommended looking to tax retirement income, expand the sales tax to services and reinstitute an increase to the individual and corporate income tax.
Wheeler also suggested the possibility of refinancing the owed pension debt over the long term while considering revenue options and cuts for the short term.
“Maybe go to a plan where we pay the payments out over a longer period of time,” Wheeler said.
Legislative leaders — Republicans and Democrats — on Friday said they were willing to go back to the drawing board.
Illinois Senate President John Cullerton, D-Chicago, called the ruling a victory for working families. Cullerton had long said that SB1 was not constitutional.
“That victory, however, should be balanced against the grave financial realities we will continue to face without true reforms,” Cullerton said in a statement. “If there are to be any lasting savings in pension reform, we must face this reality within the confines of the Pension Clause. I stand ready to work with all parties to advance a real solution that adheres to the Illinois Constitution.”