Pension reform may be 'back to square one'
Expert: Justices' decision good for UI employees, bad for school's financial future
An Illinois Supreme Court ruling on state health insurance premiums could spell doom for the state's recent pension reform law, many court watchers agree.
That could be good news for University of Illinois employees and bad news for the university's financial future, a UI pension expert said Thursday.
Retirees and those who are close to retirement can "be somewhat more confident that they're being taken care of" if the pension changes approved this spring are overturned, said Jeffrey Brown, professor of finance and director of the UI's Center for Business and Public Policy.
That will help the university retain faculty members who may have left otherwise, he said.
"The bad thing is, the state's fiscal problems are right back where they were before. And if they can't touch pensions, and they can't touch health care, and if we're limited in how much we can do on the revenue side politically or economically, then where's the money going to come from?" he asked. "It's going to come from all the programs that are funded by discretionary expenditures, and higher education is at the top of that list."
The court ruled that a 2012 law that changed the way the state contributes to health insurance premiums, and required retirees to contribute to their own health care, violated the "pension protection clause" of the Illinois Constitution. The clause states that membership in a retirement system is a contract and its benefits "shall not be diminished or impaired." The court said health insurance subsidies are a benefit of membership in a pension system and cannot be diminished by the Legislature.
The ruling surprised Brown and others who felt retiree health care benefits were not directly subject to the provision.
The changes in the pension reform bill — which has been put on hold, pending court challenges — directly affected pension payments. The law would cut cost-of-living increases on pension payments for current and future university retirees, raise the retirement age for employees under the age of 46 and cap the amount of earnings that could be applied toward pensions.
Given the court's blunt language on health insurance premiums, "it's just patently obvious what they're going to do," said Christopher Mooney, director of the UI Institute of Government and Public Affairs.
"It seems to me that this makes all the other pension reforms moot. At this point, we're back to square one trying to figure out what to do about this problem."
Brown said it's worse.
"Now we know that a lot of the things we thought we might be able to do to fix the fiscal problems may no longer be on the table," Brown said. "You're back to square one but with some of the paths closed off."
The state argued in the pension reform case that a fiscal emergency trumped its commitment to past pension provisions. The court is not likely to give those arguments much weight, as it concluded that the pension protection clause was aimed at the right to receive the benefit, not the state's ability to pay for it, he said.
The court in effect said, "You made these promises, you've got to keep them. It's not our problem to figure out how to do that," Brown said.
At least some of the pension reform provisions are sure to be overturned, as they're specifically cited in the state pension code, Brown added.
What can the state do? Legislators could try to amend the constitution, but that would take time and public employee unions would "fight tooth and nail," Mooney said. Even if an amendment went through, he questioned whether the state could unilaterally renege on the contracts it's made with current employees and retirees.
The other option is to pay the benefits promised, he said.
"That's essentially what got us in this position. State policymakers have not paid what they were supposed to pay," Mooney said.
That, of course, will require more tax revenue or drastic cuts in services, and the state budget is already operating at a deficit.
Brown said state appropriations are going to come under increasing pressure, which means the UI is likely to become more reliant on donors, research grants and other external funding.
UI spokeswoman Tom Hardy said the university is following the case "with obvious interest."
The university has been trying to prevent an exodus of employees fearful of losing retirement benefits.
Hardy said the number of UI workers planning to retire dropped slightly in recent weeks, after a judge put the pension changes on hold and the UI announced plans for a supplemental retirement benefit.
"There were people who withdrew their applications and made a decision to continue to work at least for the time being. But I don't think that has amounted to a large number," Hardy said.
In May and June, 563 employees filed retirement applications, just one less than the 564 who retired in all of 2013, he said. The number for June stands at 427, six less than the 433 on file a week ago, he said.
According to the State Universities Retirement System, retirement applications can be rescinded as long as they haven't been finalized.
Brown said it's still not clear what the court will do. It may throw out only part of the pension law, or provide guidance on what can be done.
"I think there's still incredible uncertainty," Mooney said, for employees and their managers. "It's sort of a bait and switch for these people. There's a lot of anxiety. Some of my own colleagues didn't want to retire but felt they had to.
"This just throws another curve ball at everybody."
Retirement on rise
— UI workers submitted 427 retirement applications in June: 230 from the Urbana campus, 184 from Chicago, 13 from Springfield.
— The May-June total is 563 universitywide, just short of the 564 total retirements for all of 2013.
— The State Universities Retirement System has received 2,726 retirement applications for the first six months of 2013, compared to 2,250 for all of 2014.