David Skeel is a Visiting Professor at Harvard Law School.
On Friday, the Illinois Supreme Court released its much anticipated ruling in the challenge to the 2013 Illinois pension reforms referenced in my previous post. (In re Pension Reform Litigation, 2015 IL 118585 (Ill S. Ct., May 8, 2015)). As expected, the court struck down the reforms, deeming them incompatible with the pension protection in the Illinois state constitution. The ruling’s most surprising feature was its breadth. The court suggested that the pensions of current and retired public employees cannot ever be reduced, in any way, no matter how bleak the state’s financial condition might be.
As described by the court after a detailed discussion of Illinois’s long history of underfunding its pensions, the 2013 legislation would have increased the retirement age for employees who joined one of the pension systems before January 1, 2011, replaced the automatic 3% yearly increase in these employees’ annuities with a variable formula, and altered their pensions in three other ways. The seven members of the Illinois Supreme Court unanimously agreed that these adjustments are forbidden by Illinois’s constitutional pension protection, which states that: “Membership in any pension or retirement system of the State … shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” As it has done in the past, the court construed this provision as protecting a public employee from the moment she “first embarks upon employment in a position covered by a public retirement system,” and as prohibiting changes not just to benefits the employee has already earned, but also to benefits that may accrue in the future.
To appreciate the breadth of this protection, it is useful to compare it to the Michigan constitutional provision that came into play in the Detroit bankruptcy. The Michigan provision also states that pension benefits are a contractual obligation that cannot be diminished or impaired, but the protection is limited to accrued benefits. The provision permits the state to alter the terms of the arrangement with respect to benefits that the employee has not yet earned.
The most far-reaching feature of the Illinois Supreme Court opinion, in my view, is its suggestion that there is no wiggle room at all in this protection, no matter how dire the state’s circumstances may be. In the past, federal courts sometimes have permitted states to alter their contractual commitments in the context of an economic crisis, despite U.S. and state constitutional provisions forbidding the retrospective impairment of contracts. After pointing out that even a sponsor of the 2013 reforms acknowledged that it was not the only alternative for addressing Illinois’s pension woes, and that proponents of the pension protection had rejected efforts to include an escape hatch for emergencies when it was adopted in 1970, the Illinois Supreme Court stated that when “legislation has been directed at reducing pension benefits of State employees, this court has expressly held that it is ‘not defensible as a reasonable exercise of the State’s police powers.’”
It is possible that the court’s refusal to permit even modest adjustments to pensions will spur Illinois to take serious steps to reduce its massive ($111 billion) pension shortfall. Let’s hope that the state does, and that the amount of the shortfall is not insurmountable. But as I noted in the earlier post, I worry that what this will mean is severely cutting back on the benefits of future state employees, and perhaps forgoing even necessary new hiring in the future. I also worry that that the shortfall may simply be too deep for Illinois to eliminate. I have advocated elsewhere that Congress should enact bankruptcy legislation that would give severely distressed states (or a commonwealth like Puerto Rico) the option to file for bankruptcy. That option isn’t currently available to the Illinois legislature, and Illinois probably would not invoke it if it were. What the Illinois legislature can do, however, and in my view should do, is permit its municipalities to file for bankruptcy if they become insolvent. Hopefully, no major Illinois municipality would need to exercise the option. But the new Illinois Supreme Court decision has made clear that adjusting the pensions of existing employees outside of bankruptcy cannot be part of the solution.