Illinois' supreme court overturns state's 2013 pension reform law

NEW YORK/CHICAGO (Reuters) - The Illinois Supreme Court on Friday voided the state’s 2013 pension reform law, in a ruling hailed as a win for retired state workers and public employees, but one that also raises the prospect the state’s dire finances will deteriorate further.

Illinois has the worst-funded pension system and the lowest credit ratings of all 50 states and has contended that pension costs are making it difficult to fund services such as healthcare and public safety.

The 2013 law was aimed at easing a $105 billion unfunded pension liability and the state’s annual pension contributions.

“Crisis is not an excuse to abandon the rule of law,” the supreme court said in its ruling. “It is a summons to defend it.”

The court said that while Illinois faced significant financial challenges, it had an obligation to ensure the state constitution, which protects public worker pensions, was followed.

The state had contended the legislature was entitled to invoke police powers, in which a state has authority to make changes for the good of its citizens, to solve a fiscal emergency. However, the court called the state’s “police powers” defense “fatally flawed.”

The ruling was a victory for unions who had fought to protect pensions.

“We are thankful that the Supreme Court has unanimously upheld the will of the people, overturned this unfair and unconstitutional law, and protected the hard-earned life savings of teachers, police, fire fighters, nurses, caregivers and other public service workers and retirees,” said Michael T. Carrigan, president of Illinois AFL on behalf of the We Are One Illinois union coalition.

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Some Illinois state bonds fell following the ruling, with general obligation bonds falling to 105.901 cents from 109.983 cents. Chicago bonds maturing in 2021 fell to 96.384 cents, down from 99.300 cents.

“The court’s ruling could be the correct ruling of the law, but it’s not a feasible solution,” said David Tawil, president of Maglan Capital, New York, who does not own Illinois municipal bonds. “Eventually there is going to be a restructuring.”

Illinois’ reform law, enacted in December 2013, reduced and suspended cost-of-living increases for pensions, raised retirement ages and limited salaries on which pensions are based.

A state legislative commission reported in November that without the 2013 law, pension payments would jump to $7.6 billion in fiscal 2016 from $6.8 billion this year, reaching $16.3 billion in 2045. The unfunded liability would climb as well, topping out at $128.7 billion in 2029.

Governor Bruce Rauner, a critic of the 2013 law, has proposed his own pension reform plan that largely relies on a constitutional amendment that must be approved by voters.

Illinois Policy Institute CEO John Tillman said the ruling suggested that raising taxes would be the way to pay for pensions - which he said was a flawed premise.

“Raising taxes will not fix a broken system,” said Tillman. “The pension system is beyond repair, and there will never be enough money to fund it.”

Tillman said a 2011 temporary tax increase generated more than $31 billion, yet 90 cents out of every $1 collected from the tax increase went to pensions - “still was not enough to make the pension system whole.”

The ruling, which was unanimous according to the court papers, could also have negative ramifications for Chicago which cut pensions under a 2014 law and for attempts by the Chicago Public Schools and Cook County to seek benefit cuts to bolster their own retirement systems and relieve budget-busting pressures.

The ruling underscores the difficulty faced by some other states and local governments to rein in pension costs for current and retired workers.

“There are no winners today,” said Ty Fahner, president of the Civic Committee of The Commercial Club of Chicago. “If there’s any good news, it’s that Chicago and Illinois are resilient, and we’ve responded to great challenges before.”

Additional reporting by Ed Krudy, Robin Respaut, Tim Reid