Jim Dey: Court ruling puts Illinois at dilemma's door
Nearly 40 years ago, then-President Gerald Ford made headlines when he announced the federal government would not bail New York City out of its desperate financial woes.
But one particular front-page headline was credited with costing Ford New York state's electoral votes in his extremely close 1976 race against Democrat Jimmy Carter.
"Ford to City: Drop Dead," wrote the Daily News, one of New York City's tabloids.
Members of the Illinois Supreme Court would certainly disagree, maybe even take umbrage. But a headline summary of its recent decision in a controversial public employee pension case could evoke an equally cadaverous conclusion: "Supreme Court to Illinois: Drop Dead."
Judges, of course, contend they decide cases based on their interpretation of the facts and the law, and let the chips fall where they may. But the bottom line of the high court's 6-1 decision — which held that health insurance for state retirees is a constitutionally protected pension benefit — is that those falling chips really are boulders that could squash everything in their path.
University of Illinois finance professor Jeffrey Brown calls the decision "terrific news" for public employees, but warns that "it may be an irrecoverable fiscal blow to the state."
He sees two unpalatable options available to our elected officials: raising taxes through the roof to meet skyrocketing revenue needs generated by this decision or slashing non-pension expenditures (education, transportation, law enforcement) and using the proceeds to fund pensions.
"Neither of those options are good for the long-term economy (of Illinois)," he said. "That's when you have to worry about getting into a death spiral."
Owing to many years of poor spending decisions, including the Legislature's failure to properly fund the public pensions, Illinois has been in dire financial straits for years. It's taken a whack at raising taxes — a 66 percent state income tax increase in 2011 — and trying to slow the anticipated growth in public pension costs.
In addition to requiring retirees to pay some of their health insurance costs, legislators approved a series of changes in pension rules that included raising the retirement age and modifying the 3 percent annual cost-of-living increases.
But the Supreme Court's decision knocked the health insurance law out cold and foreshadows a similar decision on public pension benefits when the courts rule on the pending challenge to that law.
The court action has prompted legislators to talk, vaguely, about going "back to the drawing board." But if efforts to slow the increases in pension costs to cut the estimated $100 billion pension under-funding problem is off the board, what's the alternative? There's only one — more revenue.
Neither Democratic Gov. Pat Quinn nor Republican gubernatorial candidate Bruce Rauner wants to address that possibility. Both have insisted that the lawsuit involving the pension system presents a different issue than the court's health insurance ruling. But few are buying that claim, asserting that if the court rules that health insurance can be interpreted as a pension benefit that can never be diminished, then certainly actual pension benefits will be given the same interpretation.
The legal issue turns on the interpretation of the so-called "pension clause" in the Illinois Constitution. It reads that membership in a state pension plan is "an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."
But does that mean that while benefits already earned cannot be impaired, future benefits can be modified? The high court appeared to say that benefits can never be modified — even if they won't be earned for another 20 years.
In other words, it's unconstitutional to do anything other than increase benefit arrangement in place on the day an employee is hired. "Find me a system anywhere in the world that doesn't allow you to change the benefits prospectively," said Brown.
Right here in Illinois, would be the Supreme Court's response.
So how will Illinois come up with the cash?
A spokesman for a public employees union suggested raising taxes on millionaires. But there aren't enough millionaires and billionaires to generate sufficient revenue. There are lots of ordinary people who can be hit up, though. Here are some options:
— Illinois doesn't tax retirement income. That would generate $2 billion-plus a year.
— House Speaker Michael Madigan wants to shift the cost of teacher pensions from the state to local property taxpayers. He has promoted that option in the past and can be expected to do so again.
— Illinois doesn't tax services. It can start to do so and place a sales tax on food as well.
— Illinois' state income tax is scheduled to fall from 5 percent to 3.75 percent on Jan. 1. The Legislature can make the temporary 5 percent tax permanent, then extend it from there to generate more revenue.
None of those is an attractive option, but that doesn't appear to matter.
"... we have concluded that the (non-diminishment) provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them," Justice Charles Freeman wrote for the court.
Jim Dey, a member of The News-Gazette staff, can be reached by email at email@example.com or at 217-351-5369.