By David Walker, former U.S. Comptroller General
The State of Illinois must amend its Constitution to address the serious unfunded pension and retiree health care challenges facing the state and the City of Chicago. The Employee Retirement Income Security Act of 1974 (ERISA) should be basis for the Amendment.
The Illinois Supreme Court has issued two decisions regarding the ability of the State of Illinois and the City of Chicago to amend their current pension plans and retiree health care arrangements. Those decisions were based on the Court’s interpretation of wording in the 1970 Illinois Constitution which states that retirement benefits “shall not be diminished or impaired”. These decisions were unprecedented and unduly restrictive since they do not allow for the type of reasonable reforms that can be achieved in the private and non-profit sectors under ERISA.
Several key facts are clear. First, the State of Illinois and City of Chicago are in poor financial condition. For example, the Chicago based Institute for Truth in Accounting (TIA) recently rated Illinois #48 of the 50 states in financial condition. TIA has also rated the City of Chicago poorly in both financial position and transparency.
Second, both the state and the city have huge unfunded pension and retiree health care obligations. The related current costs are already having an adverse impact on the ability of the state and the city to fund education, critical infrastructure and other key public services. Absent reform, these adverse impacts will grow thereby increasing pressure for future tax increases at both the state and city level.
Third, the Illinois Constitutional provision predates enactment of ERISA. That federal law was the result of many years of discussion and debate involving employers, unions, citizen rights groups and a variety of other parties. It was designed to create reasonable and sustainable pension protections in light of several large company failures and pension abuses.
Finally, both Illinois and Chicago need to reform their existing retirement plans in a reasonable, affordable and sustainable manner. Doing so will require a state Constitutional Amendment.
It would seem that the most prudent and equitable course of action would be to pursue an Amendment that is based on ERISA’s framework. Such a framework would prevent an involuntary reduction of a pension benefit based on service rendered to-date but would allow for reductions or caps in future benefit accruals and cost of living adjustments (COLAs) to such future accruals. In addition, it would also require certain minimum funding standards to provide reasonable assurance that promised benefits will be paid. Importantly, under ERISA, retiree health care arrangements are not deemed to be retirement plans. As a result, needed changes can be made to make them more affordable and sustainable over time.
It’s time to recognize reality. Illinois and Chicago face serious financial and competitiveness challenges that cannot be effectively addressed without restructuring current pension plans and retiree health care arrangements. A state Constitutional Amendment is needed to make that happen and it should be pursued on a high priority basis. Using ERISA as a model for such an Amendment is an appropriate, equitable and effective way to proceed.