PI Original Micah Maidenberg Friday March 4th, 2011, 12:12pm

Report: Pensions Can't Be Unilaterally Cut

Eric Madiar, the chief legal counsel in State Senator John Cullerton's office, lays out a powerful defense of the Illinois State Constitution's pension clause in a thorough new analysis.

In 1905, Franklin MacVeagh, then the head of the Commercial Club of Chicago, addressed his colleagues in Cincinnati on the topic of contracts. A person's character, he insisted to the Ohio business leaders, can be measured by whether or not they stick to such agreements. "There is no moral exemption for any man or body of men that breaks contracts," MacVeagh said. "Nor is there any hope of public or private respect for a contract breaker. A contract breaker is an utter misfit as a citizen or a business man."

The quote is included at the very beginning of "Is Welching On Public Pension Promises An Option For Illinois?", a new legal analysis written by Eric Madiar, Senate President John Cullerton's chief legal counsel.

It is a cheeky way to begin, given that the Commercial Club of Chicago has been at the forefront in pushing state government to renege on the retirement commitments it has made to public employees across Illinois and slash their pension benefits. The spirit of Franklin MacVeagh apparently does not animate the current crop of leaders at that organization.

But Madiar's report (PDF) isn't meant to merely tweak the interests demanding benefit cuts. The 76-page document, studded with 630 footnotes, is a dense legal analysis that powerfully argues that the state constitution's pension clause creates a set of guarantees public-sector workers can count on. The clause states the following: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."

Debates about the state's pension funds are starting to intensify. The five funds for teachers, state employees, university employees, judges, and legislators are challenged, to say the least. A March 3 report (PDF) from the state's auditor general puts total pension liabilities at nearly $139 billion as of June 30, 2010. The five retirement programs have approximately $63 billion in assets, the auditor general says. The funding issue has already meant big changes to how the state compensates its workforce: new employees are now excluded from the traditional pension option.

The question floating now is whether Gov. Pat Quinn and the legislature will seek cuts to current employees' benefits. House Speaker Michael Madigan (D-Chicago), one of the most powerful actors in Springfield, raised eyebrows last month when he broached the idea of lower pensions for present state workers. "What we’re saying is that there’s a benefit plan up in place up until today, but starting tomorrow, there’s going to be a new benefit plan that’s not going to be as rich as the old," the speaker said. The state's supreme court, he said, ultimately will make that call.

Should pension cuts pass the legislature and win Quinn's signature, Madiar's analysis serves as something of a preview of how public employees would likely defend their rights in the court system. Here's how Madiar describes what the pension clause means for state government and its current employees:

The Pension Clause not only makes a public employee’s participation in a pension system an enforceable contractual relationship, but also constitutionally protects the pension benefit rights contained in the Pension Code when an employee joins a pension system, including employee contribution rates. The Clause also safeguards pension benefit enhancements that are later added during employment. Further, the Clause bars the General Assembly from adversely changing the benefit rights of current employees via unilateral action. And, the Clause ensures that pensions will be paid even if a pension system defaults or is on the verge of default.

Madiar's report also takes on a dissenting legal opinion from the law firm Sidley Austin from last spring that argues that the governor and legislature can reduce benefits for current employees. Madiar writes that the law firm's interpretation of the clause "ignores the Pension Clause’s plain language, defies common sense and logic, and adds limitations where none exist." He supports his analysis with long discussions of related case law.

"In sum," Madiar writes, "welching is not a legal option available to the State."

The vast majority of state pensioners -- nearly 82 percent, according to one of our previous calculations -- earn less than $50,000 annual in pension benefits. And take a look at this benefit spreadsheet we compiled using data (PDF) from the Illinois Retirement Security Initiative, a project of the Center for Tax and Budget Accountability:

Judges receive the best benefits, the numbers show, but keep in mind that about 1 percent of all state pensioners get more than $100,000 annually.

While employees contributed their share the five pension funds, state government repeatedly chose to take a pass. Pension liabilities "principally stem from the State’s decades-long failure to make its required contributions to the five pension systems," Madiar writes. He goes on thusly:

Those contributions were not forthcoming because the State’s fiscal system failed to generate sufficient revenue to both maintain public services, such as education, healthcare, and public safety, as well as cover the State’s actuarially required contributions to the systems. As a result, the legislature and various governors chose for decades to use the pension system as a credit card to fund public services and stave off the need for tax increases or service cuts.

Some of the most fascinating discussions in Madiar's report are historical ones. He notes, for example, that in 1970, the five state pension systems had an aggregate funding level of just 41.8 percent, so underfunded pension funds are unfortunately nothing new in Illinois.

At the time of the 1970 constitution convention, the underfunding issues and loose laws on the books lit a fire under public employees -- especially people who worked for Illinois' universities, the report says -- pushing them to advocate for including the pension clause in the constitution. They feared a capricious legislature and governor would simply strip their benefits away, with no recourse.

A snapshot from the convention finds members of the convention "inundated with communications" from public-sector workers worried about their retirements. "Public employees believed their pension benefits were imperiled due to underfunding and required constitutional protection," Madiar writes. "John Parkhurst, chairperson of the Local Government Committee, received similar correspondence from police and firemen concerned that granting municipalities 'home rule' authority would permit them to abandon their pension obligations to employees."

Public employees won a major victory in 1970 in securing the pension clause's place in the state constitution. There's no question that the state's pension system needs improvement, but Madiar lays out the case that it cannot be done by unilaterally, on the backs of state workers who have contributed so much to the system.

Madiar reiterates that point near the end of his legal brief, switching into something of a moral argument. "The Pension Clause will become a 'suicide pact' only if individual citizens are purely self-interested and admit no obligation to the common good," he writes. "By adopting the Clause, the drafters and voters weighed, measured, and found wanting the current claim that it is unfair to pay these pension obligations. Public employees have paid their required fair share of pension costs; it is incumbent on the State to meet its end of the bargain."

UPDATE (3/9): The first draft of this story reported that state employee unions can collectively bargain over pension benefit levels. However, organized labor does not have the binding authority to do that under other state laws governing public-sector labor relations.

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