Illinois’ Pension Crisis and the Constitution

Around the state, politicians seem to have focused again on something they don’t like to talk about: how to fix the state’s pension crisis. The Illinois legislature’s bipartisan Commission on Government Forecasting and Accountability has released a report showing that the underfunding of state pensions has continued to grow and now stands at over $133 billion. The Illinois Supreme Court decided that the state could not retroactively change the rules allowing city employees serving as union leaders to accrue pension credits based upon their higher-paying union positions. Chicago mayor Rahm Emanuel has called for an amendment to the state constitution to eliminate the clause that protects public pensions from being “diminished or impaired.”

Illinois’s constitutional provision rejects the position of a few other states that treat public pensions as a mere “gratuity” that the government can change at will. Mayor Emanuel is certainly correct to characterize our pension protection clause as thwarting meaningful reform on a critical issue for the state. The clause belongs to a set of constitutional rules that guard against a political majority singling out groups. Today’s political majority is tomorrow’s political minority, and that minority might include us. Retroactive changes to pension especially burden persons who acted in reliance on the prior law.

But, it is also true that Illinois’s pension protections are at the extreme end of similar protections in other states. The Illinois Supreme Court has interpreted the clause to mean the state cannot take almost any action that would diminish an existing public pension in any way. The court’s interpretation is not clearly wrong. The constitutional language is broad, and the drafters of the state constitution rejected qualifying language that would have permitted the state to modify existing pensions for “fiscal soundness.” Although it might be tempting to bend the constitutional language given the enormity of the pension problem, in times of crisis we should be especially vigilant about ignoring the rule of law for expediency’s sake.

It is exactly these considerations that have led to calls to change the state constitution through the amendment process, but the Contract Clause of the U.S. Constitution prevents states from impairing the obligation of contract. A state constitutional amendment that applied to existing pension rights might do exactly that.

The federal Contract Clause would override any contrary state changes to its pension contracts, but what is the “contract” the state has made? Is it only the promise of a pension? Is it the promise of a pension coupled with the state constitutional protection? Or, is it both of those plus the strict state case law on the topic? Even if a state constitutional amendment impaired something that a court considered part of the pension contract, the Contract Clause has been interpreted flexibly to allow states to act in times of emergency, which is arguably what Illinois faces. Although the ultimate outcome would be uncertain, there likely would be years of litigation over the application of the Contract Clause to any state constitutional changes.

Another recommendation that often gets floated is a federal law that allowed Illinois to go through some sort of bankruptcy proceeding that would reduce pension obligations and other state debt. Although the congressional bankruptcy power might permit such a law, the Constitution requires bankruptcy laws to be “uniform.” An Illinois-only law might not be uniform, an issue that bondholders are litigating against the legislation that allowed a Puerto Rico-only bankruptcy proceeding. There likely is not political will nationally to pass a state bankruptcy law that went beyond Illinois.

The lesson is that there is no quick legal fix to what is ultimately a financial problem. The solution is easily stated – more money has to come in and less money has to go out. The hard part is finding the political will to implement it.