July 28, 2015
By: Scott Beyer
The financial situations for the city of Chicago and the state of Illinois are by now exceedingly clear: both are swimming in debt. The state’s figures stand at $164 billion, and the city’s combined debts are $87 billion, with most of this attributable to unfunded public employee retirement systems. Cutting these liabilities is essential for either, but as both the city and state learned recently, it won’t likely happen through the courts, suggesting that they better find a new plan.
Since May, two rulings have killed measures designed to cut retirement costs for Illinois and Chicago. On May 8, the Illinois Supreme Court ruled against a reform law that had been signed by former Democratic governor Pat Quinn, and that would have reduced benefits and cost-of-living increases, while extending retirement ages, for state workers. Because Chicago taxpayers will be on the hook for much of the state’s system, which is the nation’s worst-funded, Moody’s rating service responded by downgrading the city’s bonds to junk (something I covered for Forbes)
And last Friday, Illinois state judge Rita Novak did the same for Chicago’s reform plan. She found that the city’s plan, which would address a $20 billion pension deficit through similar cuts, amounted to a breach of contract. This time Standard & Poor’s, which also recently downgraded the city to three notches above junk, stated that it might go even lower in response. Meanwhile, the pension system itself is predicted to exhaust its assets in the next decade.
The city will appeal the plan to the state supreme court, although it is unclear why. Illinois’ constitution prevents the altering of pension benefits, and it appears that the courts, in a bout of absolutism, will uphold this even amid impending fiscal chaos. So a secondary plan is needed that circumnavigates the courts–and that’s where Governor Bruce Rauner comes in.
On July 8, Rauner announced a pension reform proposal that will apply to city and state workers alike. In many ways, it mirrors the reforms being made to pension systems nationwide, by forcing a litany of cuts for workers that would save several billions annually. Other reforms from the proposal are more alternative–it would strip public workers of collective bargaining rights; would allow Chicago to use casino revenue to pay for pensions; and would finally let Illinois municipalities file for bankruptcy, meaning they could terminate their weighty employee contracts.
The only problem is that many of these actions are illegal, while pension reductions are unconstitutional. So as part of the proposal, Rauner has weighed the idea of a constitutional amendment that allows municipalities to reduce pensions. In Illinois, constitutional changes require a three-fifths vote in the House and Senate, and a three-fifths vote by the public (or half their votes during a general election). As Reuters noted in May, such a change in Illinois ”would be tough, especially as it is a largely Democratic state with activist public unions.”
It thus appears that Rauner’s reform plan will continue to face political and legal hurdles, and may end up no better off than those of Quinn and Chicago mayor Rahm Emanuel. In the short term, this will cause the city and state to suffer from high debt, high borrowing costs, high taxes, a bad economy, and the odious reputation of being poorly-managed. In the long-term, it may cause these pension systems to become insolvent