Government Of, By, and For State Employees

I am not a legal expert, so I can't say if the court ruling in Illinois that struck down (modest) pension reforms is a good one or not.  The author at the link seems pretty angry at the judges, but I am not sure their decision was unreasonable given the language of the state Constitution.  The root-cause problem seems to be this provision of the state Constitution

“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.”

This is government of, by, and for state employees.  Pension benefits can never be lower than they are right now, so there is always a ratchet effect.  One mayor caves to a stupid contract, and we are all stuck with it for life.  I am pretty dang certain their constitution has no similar provision protecting, say, taxpayers.  Can you imagine a ratchet in the constitution that says that tax rates can never be higher than they are today?

We actually need this disaster to drag out for a while until after Obama is out of office.  A federal bailout request is coming soon (you don't think any of the participants expect to pay for this mess themselves, do you?) and Obama is incredibly likely to shovel them as much cash as they ask for.

  • Rob McMillin

    Obama is incredibly likely to shovel them as much cash as they ask for.

    This did not happen during the recession, when it became a crisis for many states, Illinois included; do we really think it will going forward? Why?

  • Matthew Slyfield

    Obama served as a community organizer in Chicago for a long time, and he came to the Presidency through the Chicago political machine. Favors are owed, and it's time to pay up.

  • esoxlucius

    Illinoian here. The Supreme Court made the only call it could. The constitution is very clear. It doesn't mean I like it but you do have to respect judges who don't bend the law just because we wrote some really stupid stuff into law back in 1970. There are 3 ways out of this mess. Bankruptcy, MUCH higher taxes, or change the constitution. The much higher taxes will speed up the mass exodus which leaves bankruptcy as the more viable option. Also, as a former village trustee I can tell you our police pension is currently 42% funded even though we made every payment the state actuary demanded.

  • NL7

    One of the problems in this area is that ERISA came in to secure the vested right to pensions, since there was some concern about scenarios where workers could lose pension benefits that had been framed to seem secure (e.g. to avoid the scenario where a worker could work for 29 years and then be fired right before vesting, getting little or no pension).

    But government plans are excepted from ERISA (like some other plans), the sense being that states could be trusted to manage their own pension liabilities without screwing over vulnerable workers. So while private employers have rules against cutting benefits, dragging out vesting, or underfunding their obligations, and they must pay PBGC premiums for their DB pensions, the states adopted only the employee protections and generally not the funding and pension reinsurance provisions.

    So we have states that today usually have the most lavish and generous pensions, and mimic many of the provisions of private pensions. Your typical pension plan, even one not collectively bargained, has a number of restrictions against cutting promised benefits or dragging out vesting; they can change new benefits and freeze accruals, but they can't take back vested benefits. So the states are not that unusual in this regard, except the rate at which they pile on benefits (or in some cases allow various forms of double dipping and spiking).

    What's terrible policy is that the states are far worse than private employers at making any serious attempt to reserve for pension liabilities or to pay PBGC premiums. Lots of private employers around the financial crisis suddenly found themselves underfunded and having to increase allocations to plans that had previously been well funded. The states were even worse off, because of the then-recent pension binge, the pro-cyclical nature of most states' tax bases, and the trend toward unrealistic fund growth estimates.

    So it's frustrating to see these giveaways protected by law, but in some sense it's no different than a court upholding an annuity, a bond or a stock - it's an intangible right to future cash flows and that right is already owned. The problem is that the state gives away huge benefits without reserving to spend them.

    I think it might be a good move to change state laws to institute some kind of clawback provision for government employees with the most generous pensions, where the state pension is in trouble. Provided it's structured so that the top employees get hit with a clawback first and worst, it might even provide some incentive among state bureaucratic leaders to self-lobby for more realistic pension reserves.

    Shareholders and executives are decent enough at protecting their own interests and not giving away the piggy bank. Politicians clearly cannot be trusted to defend public revenues or to plan away from future tax revenues. A law forcing pension costs to be 110% funded might cause some sanity in handing out benefits. But better yet, a state law forcing all state and local pensions to freeze and only allowing defined contributions going forward would be better - matching contributions can be reduced in lean times, unlike vested pension promises.

    Even if you fix the pensions, you still have health plan issues, like retiree medical costs.

    This is really a union issue. The unions will fight for MORE, whatever the situation. All you can do, short of busting the union, is try to make the promises nonbinding on future politicians and taxpayers.

  • TeleprompterOTUS

    This is a great ruling as long as there is no bailout. Illinois residents need to bear the burden of their politicians decisions and can vote with their feet and leave if that's too much for them. Maybe, just maybe, if we make the system work it will be self correcting.

  • mesaeconoguy

    …shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

    Until it can’t be satisfied. That automatically breaks the contract, and if/when enough people leave IL, and no more tax revenue appears, we will have the discussion about monetizing this obligation across the rest of the country.

  • mesaeconoguy

    Bankruptcy, only if it is a local municipality. There is no state bankruptcy process.

    Before Chicago goes bankrupt, they will likely receive an emergency financial stability board, similar to that in NYC in the 1970s. That will give city officials some political cover to enact draconian measures, which will have to be done. Chicago is very, very close to this option right now.

  • esoxlucius

    I know states can't go bankrupt but there is a first time for everything. Also, Obama may pretend he's king again but the House of Representatives *should* be able to control the purse strings. The news I heard was 111 billion that we owed as a state. I personally am giddy about the excrement sandwich the democrats face. If they bail out Illinois then every state who was responsible pays the tab pissing off many voters and making less democrats. If they don't bail out Illinois democrat voters have to wonder what good it does to be a democrat and join a union. Either way dark days for the socialists.

  • mesaeconoguy

    Yep, they will probably just make shit up when IL runs out of money, and everyone else will wind up paying, though I do hope you're right that people will wake up to the giant shit sandwich being served them by leftist and (public sector) union scumbags. I'm not counting on it, though.

  • W Wolf

    My own crazy idea: If these benefits can't be diminished, we should then calculate exactly what the value of the benefit was at the time it was promised. Your annual pension benefit was increased by $1000 in 1980? Well, at the time, with the assumed mortality, that was worth $9000 at retirement. Today, with lower expected mortality? That's worth $11000, so if you reduce the nominal benefit to ($1000 * 9000/11000), that's not a reduction in promised benefits, on a real basis.

    For retiree health care, you can also consider the expected inflation in medical costs. Did you assume medical costs will increase 5% a year when the benefit was passed? Well, that's all the increase you get. You don't get the free ride, because the cost of that benefit increased by 11% a year.

  • joe

    esoxlucius "Illinoian here. The Supreme Court made the only call it could. The constitution is very clear."

    Yes and no - No question that state constitution prohibited the reduction of pension benefits for pension benefits earned for services already rendered. The court incorrectly ruled that the prohibition on the reduction of pension benefits extended to future pension benefits to be earned for future services to be rendered.

  • J_W_W

    It didn't happen during the recession? Yes it did, they just didn't call it a bailout, they called it a stimulus.

  • esoxlucius

    I'm not a lawyer. I appreciate your point of view. However living here in this state which recent polls suggested that 50% of residents would leave if they could, I may have a personal bias toward seeing the apocalyptic crash and burn that is so righteously deserved for a state run by idiots and the minions who voted themselves more dollars from the public till. I want it to implode, nay, I need it to implode. We need a cautionary tale that people tell around campfires in hushed tones about the wasteland Illinois wrought upon itself. There's no end to what can be accomplished when democrats and unions work together in harmony to wreck a whole state through idiotic financial mismanagement. But hey, it was great for the public *servants* while the gravy train rolled along.

  • esoxlucius

    Heres some other things to think about. We recently split the retirement age. It used to be you could retire at 50, newer hires are 55. The first thing is that they can start collecting immediately. 90% of their pay at 50 years old. They live till 90 years old. That means for 30 years of work we get to pay 40 years of salary. But the 90% doesn't stay pegged at 90%. They get cost of living raises for not working so in short order they are making more money retired than they were when they were working. Add in survivor benefits, yes, the state of Illinois transfers to your spouse, your pension until SHE dies. So winner-winner-chicken dinner to the young wife with the old firefighter husband.

    So you're 50, retired and collecting your pension, but you're bored so you become a fire chief which allows you to work another 15 years WHILE collecting your pension and then, thats right, you get another, different pension when you retire as chief.

    So a chief's pay in Dupage county is 125K, and your pension which we all remember from above grows for cost of living adjustments is $100K per year. You are making $225K a year as a retired police chief.

    But don't get me wrong, judges do it too. Be an appellate judge - get a pension, Be a county judge, get a different pension. Be a assistant district attorney get another pension. Firefighers, Cops, Judges, teachers. The holy grail is to become a superintendent of a school system and quit the second you vest your pension, move to Arizona, become a superintendent again, get another pension. Annual pension payout $500K

  • slocum

    I wonder -- will they be tempted to decide to do this strategically while Obama is still president or take the chance of waiting for a less friendly administration?

  • marque2

    That is a technicality. States are sovereign and can, like Greece just refuse to make payments. We say Greece is about to go bankrupt, even though technically the will default on sovereign debt.

    If I were you I would try to separate the concept of bankruptcy, from the Federal bankruptcy code. The process for a state would be similar, except, no appointed judge. A team of state negotiatiors would meet with state creditors and attempt to negotiate something. The fact that there is no Chapter X State default section of federal law, doesn't mean it can't effectively happen.

  • mesaeconoguy

    Yes, a technicality which matters a great deal.

    The problem with your negotiation approach is that 1) because there is no clear bankruptcy process for states, there exists great peril for creditor seniority during improvisation, and 2) impacts from arbitrary assignment could have massive negative investor effects on the state and municipal bond markets.

    Just ask Franklin Templeton:

  • mesaeconoguy

    Great question, and I would guess before Oblunder leaves office, though that could be seen as a signal of failure, particularly with Oblunder picking out locations for his presidential library.

  • skhpcola

    Can you imagine a ratchet in the constitution that says that tax rates can never be higher than they are today?

    That's a damned fine idea. Let's cut them drastically first.

  • mesaeconoguy

    We may find out the answer shortly:

    Moody's downgrades Chicago debt to 'junk' with negative outlook
    The firm said its downgrades could trigger up to $2.2 billion in accelerated payments on Chicago debt.

  • locomotivebreath1901

    The obvious solution is to amend the state constitution.