Amending the Pension Protection Clause Is Unnecessary, But It's Great Political Theater

Amending the Pension Protection Clause Is Unnecessary, But It’s Great Political Theater

Recent calls by outgoing Chicago Mayor Rahm Emanuel to “amend” the Illinois State Constitution, specifically the Pension Protection Clause, are getting significant traction in the local press and the city newspapers. The lead in Thursday’s (December 13) Tribune Editorial page opines, “Calling all mayors: Join Emanuel’s pension push.”   

The Tribune, understandably, embraces the exiting mayor’s position: “There’s no question Chicago Mayor Rahm Emanuel can influence public policy with unique firepower.  Even as he leaves the city’s top post, his ideas to address Chicago’s pension challenges can perk the ears of a wide and influential audience.”  

Mayor Emanuel, who has decided not to run again for mayor of the Chicago, is nevertheless quite willing to provide a veteran’s advice to those many who would replace him.  Breaking from a Democratic/progressive position on pensions and liabilities, Emanuel juggled two disparate political concepts:  promotion of a graduated tax system for the state and the overturning of the public pension protection clause for state workers.

Emanuel’s office, like the State, faces an ever-increasing pension liability for public workers, teachers, police, firefighters, etc.  For that, he blames the promise of an annual compounded 3% Cost of Living Agreement.  “Think about it.  What kind of progressive sustainable system guarantees retirees three percent annual pay increases when inflation has been basically at zero and current employees have at times been furloughed, laid off, or received minimum pay increases?”

The Pension Protection Clause of the Illinois Constitution (1970), which the Tribune 

characterizes as “rigid,” states: Membership in any pension or retirement system of the 

State, any  unit of local government or school district, or any agency or instrumentality 

therof, shall be an enforceable contractual relationship, the benefits of which shall not be 

diminished or impaired.”  (Article XIII, Section 5)

The annual compounded Cost of Living became a serious concern in the 1970’s.   It was a 

time of rampant inflation.  Inflation rates for the entire decade of the 70’s was 7.25%, and in 1978 and 1979 the numbers were vaulting back again (as in ’74) to over 12%.  People were choosing ridiculous balloon mortgages for housing and essentials were often unavailable or found at the end of a meandering queue.  In Illinois, concerns for the well-being of those on 

fixed income/pensions resulted in an attempt by the General Assembly to find some remedy.  

 The TRS AAI remained unchanged until 1990, when the formula was altered in state law to require subsequent increases to be compounded – calculated from the member’s current pension amount instead of the original amount. Inflation at the beginning of 1990 was 5.4 percent.

The 3 percent compounded AAI is a product of a time when inflation was higher than it is now and had been increasing at a steady pace for many years. Inflation averaged 6.37 percent during the 20 year period prior to 1990, with a high of 13.9 at the beginning of 1990 and a low of 1.46 percent at the beginning of 1987.

Since 1990, the growth in the cost of living from year to year has been slower. In the 29 years since the current TRS AAI was set, inflation has averaged 2.47 percent, with a high of 5.4 percent in 1990 and a low of -0.09 percent in 2015.

But now, the 3% compounded COLA has become the villain in our state’s sordid financial 

drama.  Emanuel stated, “The truth is, going back decades too many elected officials, labor 

leaders, and civic leaders – people in positions of responsibility – agreed to a funding and 

benefits system that was not sustainable and therefore not responsible.”  

Actually, that’s not the truth.

The real truth is going back decades too many elected officials – people in positions of responsibility – shorted the actuarially required contribution to the pension funds while workers 

contributed their required amounts; thus, a shortage that snowballed over the decades to 

become what is now a behemoth of debt for which the departing Mayor of Chicago would 

blame an increase in COLA costs provided 40 years after pensions were provided for Illinois workers and the 40 years after their provision.  

Looking back at the truly culpable elements in the increase in unfunded pension liabilities, 

the Center for Tax and Budget Accountability has found that nearly 42% of the increased 

debt is due to inadequate state contributions.  Benefits like the compounded COLA are 1.6%.    

Finally, Emanuel’s lame-duck advice to dismantle the Pension Protection Clause through a Constitutional Amendment is unconstitutional, difficult, and unnecessary.  

Unconstitutional:  If we learned anything in the unanimous decision of the Illinois Supreme 

Court in May of 2015, it was the antecedent court cases and the careful wording of the 

Illinois Constitution that prevented Lisa Madigan, Pat Quinn, and the General Assembly 

from using a crisis of their own making from undermining the contractual promises to public sector workers.  (Thank you, Henry Green and Helen Kinney).  As Director of the Center for Tax and Budget Accountability Ralph Martire reminded during a recent NPR radio interview: “You cannot reduce a benefit that was a pension benefit that was promised to an employee 

in the state of Illinois that’s a public sector worker as of the date of their employment.  That 

is their benefit for their tenure.  Period.  End of story.”  

Unnecessary: Incoming and new hires coming in to the public sector in Illinois do not have access to a compounded COLA in their retirement.  Nearly a decade ago, the legislature in 

the General Assembly passed a bill generating a second Tier for incoming educators which would force them to work longer (age 67 without penalty), for a simple and capped interest COLA based on the CPI, and the same payments to the pensions as Tier One (those who 

have 3% compounded).  The dwindling population of Tier One teachers is now heading 

toward retirement.

The General Assembly can (and has) made changes to the COLA as well as other 

requirements and diminishments for public sector workers who are entering the public work 

force.  That is legal and easier to do.  Again, Martire: “Why take away the constitutional 

protection for workers when legislatively, you can create a Tier II, Tier III, Tier IV that has a 

different cost of living adjustment, COLA, for workers going forward? You accomplish the 

same thing in much less time, because passing a piece of legislation through Springfield is 

a much quicker process than getting a constitutional amendment.”    

In addition, a Tier III is being added after 2018, if approved by the Internal Revenue System for meeting basic requirements for a state retirement program to be used in lieu of the social security system.   A hybrid plan, the Tier III program in Illinois will also dispense with the 

compounded COLA and provide only a simple interest COLA linked to the CPI or an 

opportunity to move to a 401(k) rather than a defined benefit.

Emanuel calls on the incoming Mayor and the General Assembly to combine an amendment for both the progressive tax schedule and the alteration of the Pension Protection Clause.  The latter, as I have tried to explain, is unnecessary as well as unconstitutional.  It is also 

unnecessarily difficult as 3/5th’s of each of the House and the senate of the General 

Assembly must agree to the Amendment and the voters can them approve or disapprove in the next general election (2020).

 Summary: The calls by the outgoing Mayor of Chicago identify the critical costs and debt 

the city (as well as the state) have built up over the last 80 years, but to try to blame a single reason (like the compounded COLA) ignores the truth as well as the answers.  

The legislature has already addressed those issues through Tier developments even if 

unfairly. 

The Illinois Supreme Court states that such an attempt will not affect current Tier One 

retirees.  Any changes, even those by constitutional amendment, can only be enforced 

“going forward.” 

The refusal to amortize the pension debt and subscribe to an artificial “ramp” that is draining services is undermining the general revenue. By 2030, $6.5 billion in General revenue will 

be required to pay the pension ramp (PA88-593) unless the General Assembly acts.

Tier Two and Three (and other) employees will never be given protection against inflation.

What should the departing Mayor advise?  

Amortize the unfunded liability to pensions, dispense with the 1995 pension ramp used to 

short pension payments, recalculate the annual required contribution to meet the current 

(not smoothed) needs, create a tax structure which is both progressive and comprehensive 

to the people of our state.