Why That Illinois Pension Check Will (Most Likely) Be in the Mail After All

Posted by Jeffrey Brown on Aug 16, 2010

Filed Under (Retirement Policy)

As an economist, I often get annoyed when lawyers with no training in economics try to act as if they are experts in economic policy.  As such, all the lawyers out there should be equally annoyed with this blog post, because I – an economist with no legal training – am about to make an observation about state constitutional law. 

Several readers have emailed me the Chicago Tribune op-ed on August 10, 2010 entitled “Pension check may not be in the mail.”   In it, Dennis Byrne states that “if the pension funds go bust, the state has no obligation to step in to pay the benefits.”  This was based on a legal opinion provided by the Chicago law firm Sidley Austin.

According to this legal opinion, the contractual agreement is between the workers and the pension fund, rather than the workers and the state.  I find this a rather odd interpretation. 

In the 1998 “Sklodoswski” decision by the Illinois Supreme Court, “beneficiaries in various state employee pension systems brought suit seeking to compel the state and its officials to appropriate monies necessary to meet statutory funding obligations contained in the Illinois Pension Code.”

Essentially, Supreme Court ruled that while beneficiaries do have a contractual right to benefits, the Illinois constitution does not require that the state pre-fund those benefits. 

The court ruled that:

“allegations of underfunding are insufficient as a matter of law to constitute an impairment of benefits.  Plaintiffs … have alleged only an opinion that present funding levels are insufficient, from a prudential standpoint, to meet the accrued future obligations of the funds.  These claims have no factual allegations that would support a finding that the funds at issue are ‘on the verge of default or imminent bankruptcy’ such that benefits are in immediate danger of being diminished.”

The Court seems to have come awfully close to saying that if the level of funding reached a point where it was “on the verge of default or imminent bankruptcy,” such that the funds were no longer able to pay benefits, then this would constitute an impairment, and the state would have to pony up the funds.  The Court was simply observing that being actuarially under-funded is not sufficient to impair benefits.  And the Court is right on this point – since true impairment comes when the fund runs dry, not when there is an actuarial imbalance.  But once the funds run dry, the unspoken implication is that benefits would indeed be impaired and that the state would have to step in at that point. 

If you don’t believe these hypothetical discussions, then let’s look at some history.  As I noted in my 2009 paper in the American Economic Review (co-authored with David Wilcox):

“Perhaps the most reliable evidence on the riskiness of public pension benefits comes from instances when a public pension plan sponsor suffers from severe financial distress. For example, during the 1970s, the fiscal position of New York City deteriorated so greatly that, by March 1975, it was unable to complete a $912 million offering of short-term notes (Attiat F. Ott and Jang H. Yoo, 1975).  In response to the ensuing crisis, the city negotiated a one-year wage deferral and, over the period to 1978, cut 61,000 jobs from its payrolls, among other steps (David Lewin, 1977).  City pension funds became important sources of financing for the city.  Nonetheless, the city never reneged on accrued benefits under any of its five DB plans.  This protection of pensioners during a period of losses for other parties reflected the non-impairment provision in the state constitution.” 

“Another notorious case study occurred in the early 1990s, when Orange County’s Treasurer, Robert Citron, invested heavily in derivatives and long-term bonds, betting that short-term interest rates would remain low.  In December 1994, Orange County filed the largest municipal bankruptcy in U.S. history, following nearly $1.7 billion in losses sustained in Citron’s fund.  In response, the county chief executive officer proposed a 40 percent reduction in the county’s general fund budget, layoffs of more than 1,000 people, and the elimination of more than 500 other vacant positions (Matt Lait, 1995).  In spite of these financial difficulties, however, defined-benefit obligations were met in full.  In part, beneficiaries were protected by the fact that the pension fund was over-funded.  However, they were also protected by a constitutional provision stating that “the assets of a public pension … system are trust funds and shall be held for the exclusive purposes of providing benefits to participants in the pension or retirement system…” (Article XVI §17(a)).  Attempts by the county to use the surplus assets in the trust fund were rebuffed.”

In short, there has never been a case to my knowledge where a pensioner residing in a state with a constitutional guarantee against impairment was denied his or her benefits.

If I were a participant in a state DB plan (which I am not), I would still be pretty comfortable with my pension guarantee.  For perspective, it remains a substantially stronger guarantee than what the other 95% of America gets from Social Security which (a) is intentionally structured as an unfunded, pay-as-you-go system, and (b) which can be changed by Congress and the President at any time.

4 Responses to “Why That Illinois Pension Check Will (Most Likely) Be in the Mail After All”

  • George Devries Klein says:

    It would be helpful if a lawyer (licensed in Illinois) helped prepare this. Just remember, if it happened as outlined in other states, it may not happen in Illinois. Over the years, Illinois has demonstrated it operates not like a US state but more like a third world country and its word, edicts, laws and paradigms are not to be trusted and certainloy are subject to whims, changes, and ad hoc exceptions..

  • Jeff Schroeder says:

    Since taxpayers are most likely about to dig deeper to pay these generous defined benefits (better than in the private sector), it would be nice if they were at least taxable for state purposes for retirees who are younger than normal retirement age (ie. 62). Workers making much less will continue paying tax on W2 earnings, while retirement income is not presently taxed in the state of Illinois regardless of the age of the retiree.

  • Dave says:

    I did not receive my check scheduled to be direct deposited today , Monday April 19, 2011.

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