A challenge to the pension-protection clause


Two years ago, I wrote of Illinois, “The state’s deepening fiscal crisis will end when an ordinary citizen, who is not a public employee, successfully challenges the Illinois constitution’s ‘pension-protection clause’ in a federal court.”  Curiously, something along these lines is happening.  The U.S. Court of Appeals for the Seventh Circuit will soon consider the case of Bargo v. Bruce Rauner, et.al. which argues that the state’s ironclad protection of public-employee pensions is unfair to the other residents of Illinois.

The petitioner, Michael E. Bargo, Jr., is appealing the decision of a district court, which dismissed his case in May.  The brief Bargo filed in the lower court argued that the Illinois constitution’s pension-protection clause violates the equal protection clause of the US Constitution.  A single sentence makes up Article 13, Section 5, of the state constitution (the pension-protection clause), which reads: “PENSION AND RETIREMENT RIGHTS: 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.”

This provision inviolably protects the the pensions of every public employee, setting up a privileged class of Illinoisans with a “retirement right” that no one else in Illinois enjoys.  The arrangement appears to violate the Fourteenth Amendment of the Constitution, which declares: “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the Unites States . . . nor deny to any person within its jurisdiction the equal protection of the laws.”

Much of Bargo’s brief concerns how the pension-protection clause affects Illinois taxpayers and the governments within Illinois.  Collectively, state and local governments are groaning under the weight of unfunded pension obligations totaling some $250 billion.  Meanwhile, Illinois sanctions several funding mechanisms that benefit the Illinois Municipal Retirement Fund (IMRF, the state’s largest pension fund) without regard to the needs and wishes of local populations.  These mechanisms allow the IMRF to seize state grants allocated to communities throughout the state without restriction and to seize revenue from county treasuries.  They empower IMRF to sue in circuit courts throughout the State.

Bargo seeks to demonstrate how the obligation to fund public pensions goes hand-in-hand with taxation that fails to benefit taxepayers, diverting funds away from public purposes.  As taxes are levied and engrossed for the sake of public employees, the general welfare of Illinois is suffering.  Pensions claim an ever larger share of the tuition that students pay at Illinois’ public universities.  School systems and social services throughout the state are suffering as a larger share of taxes must go to pension obligations.  As Illinois faces mounting financial embarrassment, its citizens must acquiesce in a system that transfers wealth from the general population and the State itself to one class of people, thanks to the superior protection the Illinois constitution affords public employees.

The pension-protection clause, which stipulates that a benefit once given to a public worker can never be reduced or taken away, robs government of the discretion to curb or modify pension provisions that are being abused or that are unduly generous to the point of being unaffordable.  The state’s courts have repeatedly cited the pension-protection clause in striking down pension-reform proposals, including several that the unions themselves have agreed to.  Unfortunately, Article 13, section 5, creates a class interest within the public sector that stacks the deck against ordinary Illinois citizens, making an appeal to the federal courts necessary.

Bargo v. Rauner, et. al., puts the pressure on the state’s most powerful officials to defend a principle gradually strangling once-vigorous Illinois.

Graphic by the Illinois Policy Institute.

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Master the CPS Pension Crisis in 5 Easy Steps

Playing Teacher (Prang Co. lithograph), Courtesy Library of Congress.

Should we sympathize with the Chicago Teachers Union (CTU)?  On Friday, the teachers walked off the job and took to the streets, ostensibly on a crusade, not principally for their own benefit, but for the sake of increasing education funding more generally.  Union boss Karen Lewis, looking jaunty, proclaimed, ‘We’re dying a death of a 1,000 cuts,’ implying that teachers were among Governor Bruce Rauner’s victims, and that all would be well if only the union could squeeze more money out of the state and its taxpayers.

Yet, if a report of the Illinois Policy Institute is correct, the financial woes of the Chicago school system and its teachers are largely internal and have been brought on by themselves.  The Chicago Teachers Union has been complicit in the ruin of the pension system established to provide retirement security, allowing money to be diverted from the fund while accepting overly generous increases in working teachers’ salaries.  Meanwhile, the Chicago Public Schools (CPS) leadership has so mismanaged its finances that a pension system that was fully funded in 1999 now represents a $9.5 billion liability, despite the fact that, over the same period, public funding for CPS has increased at 150% of the rate of inflation, when calculated on a per-student basis.

The IPI’s report, published in late 2015, analyzes the funding of teachers’ pay and pensions over several decades.  It explains the arrangements that have created the pension crisis while debunking some leading claims about where the solution lies.

1. Pension pick-ups:  In 1981, when Ruth Love was CPS superintendent, the district and teachers agreed that the district would pay the part of the teachers’ pension contributions.  Instead of pension contributions coming out of teachers’ pay, a part of their share would come out of the schools’ general operating funds.  These pension “pick-ups,” which continue today, amount to a loss of operating revenue of $1.266 billion over the last decade.  Meanwhile, the pick-up has not been counted as part of the CPS’s mandated contribution to the pension fund.

2. Pension holidays: On two occasions, in 1995 and again in 2010, the General Assembly allowed the CPS to forego paying in to the teachers’ pension fund as mandated.  The first of these ‘pension holidays’ lasted from 1995 to 2006.  During this period, the school system diverted all the money that should have gone for pensions (amounting to $1.5 billion) into its general operating funds.  During the second pension holiday, from 2011 to 2013, the CPS diverted another $1.3 billion from the pension fund.

3. Colossally bad management: While the public is constantly being told that the schools’ problems stem from under-funding, the IPI claims that ‘Tax-payer provided revenues for the Chicago Public Schools have more than doubled‘ between 1997 and 2014, rising from $2.6 to $5.3 billion annually.  Meanwhile, the size of the student population has dropped by about 7 percent, from a high of roughly 383,000 students in 2003 to 355,634 students in 2014.  In 2014, the CPS received revenue of $15,011 for each child enrolled.

4. Unwise salary increases: The lifetime compensation of CPS teachers is the highest in the nation, relative to other major urban school systems.  A beginning teacher with a BA earns $51,092 a year.  Salaries increase rapidly during the first decade of service, so that teachers with 10-14 years of service earn an average pay of over $84,000 per year.  The salary structure increases the pension benefits of teachers earlier in their careers, enhancing the payout to younger ‘retirees.’  In 2014, over 72% of teachers in the Chicago schools had less than 14 years’ seniority.  The pension fund’s pool of beneficiaries is increasing, while the number of teachers paying into it is declining, another factor pushing it toward insolvency.

5. Reckless borrowing: It’s hard to escape concluding that the Chicago schools have been terribly mismanaged. Between 1998 and 2014, despite enjoying many years of pension ‘holidays,’ the CPS sank ever more deeply into the red, borrowing instead of confronting its true fiscal constraints.  CPS indebtedness totaled $6.2 billion in 2014.  Its bond offerings have been floated at ever higher rates of interest, even as its bond rating tanks.  Today, nearly eight percent of the CPS budget goes right to debt payments.  Another 68 percent goes to compensation costs, leaving just 24 percent for all the other expenses of running the schools.

Image: “Playing Teacher”
(1890 Prang Company lithograph)
from this source.

Why not challenge the constitutionality of Illinois’s pension-protection clause?

pensions-photo
Illinois citizens are expected to sit tight as the cost of meeting state and local pension obligations brings their government ever nearer to bankruptcy.  Everyday, we hear of a new head-ache: how our property-taxes are likely to begin sky-rocketing, or how short-term borrowing to pay pensions will soon destroy Chicago’s bond rating, and how people are leaving the state to avoid being stuck with the costs when the looming disaster of all-out bankruptcy finally arrives.  Yet no matter how painful to the citizenry, our government must rake together the money for public-pension obligations that are burgeoning.

All because a section of the Illinois constitution stipulates that, no matter what, one class of Illinois citizens can count on protections that no others can: the benefits of belonging to a state pension system must not be diminished or impaired.  In the service of this constitutional provision, the state may be driven into bankruptcy and the rest of the population held forever accountable for promises that by-gone politicians irresponsibly made.  The needs of ordinary citizens are being choked off so that those of lawmakers and public workers may be fulfilled.

The power of the legislature to pass laws conferring benefits on themselves and other public workers is difficult to limit.  The pension ‘system’ in Illinois is an irrational bricolage of myriad laws passed over the decades.  The Chicago Tribune has described it as a “convoluted mess of provisions riddled with giveaways, funding flaws, excessive borrowing, and pension holidays.”  The pension code is organic in the sense that’s easy to add to, but any benefit, once added, is virtually impossible to take away.

Consequently, the state’s pension system is an unholy mix of the good, the bad, and the ugly.  It pays pensions to convicted felons like Jon Burge and to brazen scoundrels who had the luck to head up our towns and public universities.  It pays millions of dollars in benefits to cagey officials who correctly perceived the advantages of ‘double-dipping.’  The fact that citizens are powerless to curb the excesses of the pension system feeds hostility to it, to the detriment of many decent and deserving public employees.

Why not take a page from the four Virginians who have mounted a potentially game-changing challenge to the Affordable Care Act by questioning the meaning of just one of its phrases?  Should the public welfare of Illinois be sacrificed to secure the well-being of one special class in perpetuity?  In fact, the pension provision defines a special class of citizens in terms of their distinctive relationship to the state and then confers unassailable privileges on them.  How can this be constitutional?

 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.

As matters stand, the pension provision has become the yardstick against which any pension-reform legislation must be fearfully measured.  Sensible legislation has been struck down while legality of this patently odious and inegalitarian provision has gone challenged.  Illinois citizens should stand up and challenge the constitutionality of the pension provision itself.  A requirement that leads to such unfair and destructive outcomes is an affront to the larger purpose of government.  Does it really trump every other principle of constitutional law?

Given the urgency of Illinois’s fiscal condition, this question should be engaging the state’s best legal minds.

RELATED
Susan Barsy, “The Pension Stand-Off in Illinois”