Illinois High Court Tosses Out State's Pension Fix : The Two-Way In a move to repair the nation's worst government pension crisis, lawmakers eliminated promised benefit increases. The justices ruled the action would leave pensions "diminished or impaired."

Illinois High Court Tosses Out State's Pension Fix

The Illinois Supreme Court today struck down a recently passed law designed to fix the nation's worst funded public pension system, putting Illinois lawmakers and the state's new Republican governor back to square one as they try to solve a huge state budget crisis.

The law enacted in December 2013, would have eliminated annually occurring 3% cost of living increases in pension benefits. It also would have upped the retirement age for state workers and limited the amount of salary that could be used to calculate pensions.

The measures were aimed at reducing a more than $100 billion pension funding shortfall.

But a provision in the Illinois constitution states that public pension benefits "cannot be diminished or impaired," and the state's high court justices ruled unanimously that the Illinois General Assembly "overstepped the scope of its legislative power," and declared the law unconstitutional.

Illinois' elected officials have a long history of under funding pensions for state employees, including judges, university staff and teachers outside of Chicago. (The city has its own poorly funded pension system for teachers.) But there have been times that lawmakers have increased pension benefits in an effort to court votes from public employees and support from their unions.

For example, in 1989, lawmakers said they would guarantee the 3% compounded annual raises in pension income for retirees. But in later years, when struggling to balance the state's budget without increasing taxes, lawmakers sometimes refused to allocate enough money for pensions. In some cases they took what they called "pension holidays" — years in which they skipped pension payments altogether.

The crisis is so great that the state this year is spending $7 billion on pension fund payments — more than 20% of its general budget — just to keep pace. And next year, pension payments could eat up close to a quarter of Illinois' operating budget.

Even with the pension crisis looming, it took several years for Illinois' former Democratic governor, Pat Quinn, and the Democrats who control both chambers of the legislature, to come to an agreement to slowly fix the problem. (The law struck down Friday would have taken 30 years to close the huge pension deficit). That solution was promptly challenged in court by retired state employees' and public workers' unions.

The state argued that the pension crises amounted to an emergency that required it to invoke special "police powers" and override the constitutional protections for pension benefits. The Illinois Supreme Court ruling was scathing in its ruling. The justices scoffed at the notion, stating in the unanimous opinion that such powers were reserved for threats to public safety.

The law "was in no sense a last resort," Justice Lloyd Karmeier said in writing the court's opinion. "Rather, it was an expedient to break a political stalemate."

Furthermore, the court pointed out that the crisis is one that is largely of the legislature's making, and that there are several ways of addressing it without reducing benefits.

"The General Assembly could also have sought additional tax revenue," Karmeier wrote. "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."

In a statement Friday, Republican Governor Bruce Rauner called the Supreme Court ruling "fair and right," and he called for a constitutional amendment that would allow the state to reduce future pension benefits without affecting benefits already earned.

His proposed budget for the next fiscal year included $2.2 billion dollars in savings from his own pension reform plan, which he has not released publicly, saying he was waiting on the court's long anticipated ruling.

The Civic Federation of Chicago, a non-partisan budget watchdog group, this week called the governor's budget "unrealistic," relying on savings "that do not appear to be achievable or prudent in light of the State of Illinois' obligations and long-term policy objectives."

Rauner and the Democrats controlling Illinois' legislature were already at an impasse over closing a projected $6.2 billion deficit before the current legislative session ends May 31. Now they must come up with a new way to solve the pension crisis too.