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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A Cracking Veneer

heavily tweeked aerial shot of downtown and industrial Chicago
I’ve been away.  To Puerto Rico, ironically, which like Illinois is bankrupt, but which is free of the pretensions of grandeur that make living in Chicago, Illinois such a political and spiritual nightmare.

While I’ve been away,

A woman fleeing a gang of 10 youths in Streeterville ran out onto the Drive, where she was killed by a car.

Sixty-nine people were shot over the holiday weekend, 6 fatally.

The City of Chicago paid $2 million to settle a lawsuit that whistle-blowing cops had brought, heading off a trial that would have centered on the police department’s code of silence.  Mayor Emanuel, who was to have been called to testify, figured this was a good use of citizens’ money.  What use is justice here anymore, anyway?

In the state capital, the legislature once again ended its spring session without passing a budget.  The legislature has now failed of its duty for two years.  According to the website Truth in Accounting, Illinois’s debt burden is $187 billion.  Others place it at $148 billion.  Illinois lawmakers are too cowardly to face the pain entailed in getting the state’s finances back in balance again.  It’s difficult to divine why they are in office.

Chicago is a microcosm of all that troubles the nation now.  The racial divisions, out-of-control violence, and public corruption are corrosive.  Public order is fragile and in jeopardy.  Over all this is a posturing ‘leadership’ that cares mainly for reputation and the superiority of being part of a political elite.

Image © Susan Barsy

The Teachers’ Example

Winslow Homer, The Noon Recess (Courtesy Library of Congress)

Today, children enrolled in the Chicago Public Schools are learning to do without their teachers.  The teachers are not in the schools today because they, as union members, decided to teach us all a lesson by not showing up to do their jobs.  Instead of teaching, they chose today, April Fools Day, to stage what they ironically refer to as a Day of Action.  Yes, this day, when they do not show up to do their jobs.

No doubt the teachers have legitimate grievances, but so do taxpayers.  The teachers want the school district and the state government to bend heaven and earth to give them an agreeable contract.  The school district is teetering on bankruptcy.  Teachers’ unfunded pensions are an underlying cause.  The teachers deserve pensions and rightly fault the politicians for failing to invest in and protect the pension funds, as obligated.  But the funds that should be there simply aren’t.

Taxation is increasing to help cover ballooning pension obligations.   Meanwhile, the school budget is being cut.  Education in the present is being sacrificed to preserve the benefits of retired and retiring teachers.  The teachers’ union doesn’t speak to this issue.  Yet, to all appearances, Peter is being robbed in order to pay Paul.  The teachers are going to squeeze Peter and everyone around him, hoping that enough money can miraculously be conjured to go around.

The Day of Action is a farce, because it does not solve the problem.  It doesn’t bring antagonistic parties any closer to agreeing on what to do about a desperate lack of money.  Instead it diminishes the public’s sympathy and respect for teachers and the difficult work they do.  How not to behave: this is all Chicago teachers have taught on this April Fools.

Factor Rauner In

After getting off to a wobbly start, Illinois Governor Bruce Rauner has begun to speak truth to power. While a nervous media has attempted to portray the governor and state legislature as equally responsible for the State’s impoverished condition, he has rightly insisted that the budget is the bailiwick of the legislature.  (Click here for his latest on the budget impasse.)

After years of overspending, mismanagement, and corruption, Illinois government is in the throes of an all-out economic crisis.  Yet the Democratic-controlled legislature continues shilly-shallying.  That body, whose lack of prudence over decades has created this disaster, is still evading responsibility.  Rather than face the music, the legislature’s top priority is shifting blame.

Meanwhile, legislators have failed to kick into emergency mode and make the painful decisions necessary to keep the government running and avoid defaulting on its obligations.  The state can no longer pay its bills and has been without a budget for weeks, with penalties accruing.  Do members of the Illinois House and Senate, whatever their party affiliation, really want to be associated with a bankruptcy?  Do they want to be remembered as the individuals who did nothing, who failed to be heroic, as the public sector’s finances tanked?

To say that the situation reflects poorly on the long-dominant Democratic party is putting it mildly.  Though the self-interested rule of House Speaker Mike Madigan and Senate President John Cullerton has been unbreakable, some cracks in their monolithic organizational control have begun appearing.  As the crisis builds, some legislators see that, when the state goes down, their careers and reputations will be destroyed too.  Some may begin to buck the status quo.  If only they would break rank, the power of Mike Madigan would at last be destroyed.

Governor Rauner has begun to work these fault lines.  He has wisely refused to be drawn in to the budget crisis (it isn’t his job), thereby exposing the legislature’s ineptitude and lack of resolve.  Mike Madigan has begun looking like a silly befuddled wizard, with an inadequate inventory of smoke and mirrors.  On September 2, he failed to secure enough votes to override the Governor’s veto of a labor bill that would have excluded the governor from negotiations with unions.

The override failed by one vote, and the public has now heard from the brave Democratic legislator who chose to absent himself rather than act as Speaker Madigan’s lackey.  Ken Dunkin, a Chicago-area representative and former chair of the Legislative Black Caucus, said afterward that his action was a refusal to ‘wear the jacket.’   Despite being widely criticized by fellow legislators and publicly chastised by Speaker Madigan (!), Dunkin told reporter Charles Thomas afterward that his duty is to work for the economic empowerment of struggling African-Americans in Chicago, a crusade that might involve finding common ground with Governor Rauner.

These developments are sweet to every Illinoisan longing for public integrity and economy, and for an end to Mike Madigan’s iniquitous reign.

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”

Was American Greatness Built on Fiscal Folly?

The US Capitol in the 1830s (Courtesy Cornell University Library via The Commons on Flickr)

Is American greatness based on extravagant decisions that make no economic sense?  I’m pretty sure the answer is yes.

Our history is littered with “go-for-broke” projects that were hailed as sure-fire disasters at the time.  They would never have had a chance if our ancestors had had to defend themselves against the hand-wringers and economic rationalists who control American decision-making today.

Here is a short list of things that would never have happened because they entailed excessive risk, uncertain returns, irrevocable loss, or extravagant outlays.  In some cases, the day of exoneration for these decisions didn’t arrive for decades.  In the meantime, the country and its leaders endured ridicule as well as some terrifying liabilities.

1.  The Revolution.  It should have been a doomed undertaking.  The rebellion was impulsive and deepened into a pitched struggle that lasted eight years.  During that time, the colonies held it together with a more or less powerless committee that they tried to dignify with the name of the Continental Congress.   The war was fueled largely by reckless borrowing and the issuing of funny money.  The country organized under the Constitution largely because the new structure promised impecunious states debt relief.  Burdened from the outset with staggering debts, we became the US because there was no other way.

2.  The Louisiana Purchase.  Jefferson’s famous 1803 purchase was another patent error we wouldn’t think of committing today.  True, he acquired all that land west of the Mississippi, out of which 14 or 15 perfectly good states were made, —but he agreed to pay France an amount of money that was two times our entire federal budget at that time.  How could that be wise?

3.  The founding of Washington, DC.  Another ghastly boo-boo.  Instead of putting the capital near one of the existing states or cities, our frivolous forefathers insisted on mapping out a whole new city, and on a ridiculously grandiose scale, too.  Ignoring the fiscal realities, they threw away dollar after dollar building up an unduly magnificent city—it was all too European.  Yet, lo and behold, the iconic city they built is a global symbol, anchoring a metropolitan region of some 5 million people that is one of the most dynamic in the US today.

4. Seward’s Folly.  The Alaskan Purchase.  Another instance of classic fiscal adventurism.  Another expenditure the US didn’t need, especially not in 1867, when the government was laden with debt from the Civil War.  Critics argued that Alaska was inconvenient, and unnecessary; its only asset was a population of fur-bearing animals, whose value was declining.  That was before the gold was discovered, or the oil.  Purchased for 7.2 million dollars, Alaska today has a $49-billion GDP.

5. Ending slavery.  This, surely, was the most economically reckless action in American history.  For in putting an end to slavery, the US deprived one class of white Americans of millions of dollars of “property” and put an end to a convenient labor system they were accustomed to.  The gradual recognition that the slaves in our midst had a moral and political claim to be treated differently—that, in fact, Americans of all races are entitled to full civil and political equality—is one of the costliest convictions at which we’ve ever arrived.   Yet like many of our other decisions that “made no sense,” this one was essential to our national integrity.  And it highlights, in a way that the other items on my list do not, why economic rationality alone has never been, and should never be, the transcendent value in a republic like ours.

So, to my contemporaries I say—yes, cut away the waste and the unnecessary—but never disavow that go-for-broke mentality.  It’s part of the folly that made us great.

Image: The U.S. Capitol in 1830s Washington, D.C.
from this source.
  For a photograph of the Capitol from this period, click here.

The European Muddle

Like many great issues of the day, the euro mess is difficult to conceptualize.  Why not take a stab at it, though, since it’s something that could cause the US economy to collapse?

Here are links to a few graphics encapsulating different aspects of the European problem.  A few insights can be gained by interpreting them with our own 2008 financial crisis as a point of comparison.

The European Union faces at least two complex interrelated problems.  The first has to do with the condition of banks; the second has to do with the indebtedness of member countries.  There is also a third problem, which is more political.  It has to do with the structure of the EU itself and the poor tools it has for redressing “state-level” problems (critical weaknesses within member-nations like Greece and Spain) that threaten the euro’s value and stability.

Credit imbalances within the euro zone
The integration of nations within the eurozone encouraged capital flows within the community, while creating imbalances that threaten it, should the banks within one of the weaker countries fail.

This wonderful set of graphs published by the New York Times shows the interrelation among creditors and borrowers by country.  Done in late 2011, the graphs offer a general idea of how the stronger European economies—France’s in particular—would be affected if the banks of Greece and Italy were to go down.  French banks have many loans outstanding there and would incur grave losses, possibly fatal ones, were their weaker counterparts to fold.

Unlike in the US, the euro-zone lacks a mechanism like the Federal Reserve, which capably intervenes to stabilize and close or sell ailing US banks if necessary.  In 2008, the Treasury and Federal Reserve averted a general financial meltdown in the US this way.  They intervened directly in the affairs of troubled banks in the interest of keeping the whole banking system operating.  The panic of failing banks was mitigated;  otherwise, it would have spread like a contagion.  Our banking system was supported, and the problem was treated as a matter quite separate from that of the federal government’s own indebtedness or patterns of borrowing.

Until recently, the European Union could not behave similarly: it could not act to help banks, it could only give money to sovereignties.  On June 28th, however, the EU’s member-nations agreed to begin lending money to banks directly, a measure that untethers these two problems and allows a more flexible approach aimed specifically helping banks that might fail.  Nonetheless, it remains to be seen whether this will be much help, as the level of capital needed to stabilize the banks is very large.

Rising sovereign debt
Which leaves the other big problem: the rampant government spending in many EU countries, illustrated in this set of maps, also published by the New York Times.  The maps indicate the significant variation in the spending habits of the governments that make up the European Union.  In many of the EU countries, however, including some of the strongest—such as France and Germany—sovereign debt as a portion of GDP has been growing dramatically.  The difficulty of reining in spending and bringing the most profligate governments in line has led to popular unrest as well as political conflict over austerity measures and proposals for stringent fiscal reform.

It’s not clear, though, whether these disproportionately high debt burdens pose a threat to the long-term health of many of the stronger EU countries.  The more that the elements of the crisis can be differentiated and handled pragmatically on a case-by-case basis, the better the prospects for amelioration will be.  This is definitely a case where what’s good for the goose is NOT good for the gander–or in this case, more fitly, for the PIIGS (the acronym for Portugal, Italy, Ireland, Greece, and Spain).  Helping the most distressed banks may at least buy the EU time to address the more politically fractious issue of how to restore fiscal balance—a very different proposition in Greece than it is in France or Germany, and a more sensitive issue still for the euro zone as a whole.

RELATED:
The Sovereign Debt Exposure of the EU’s 10 Strongest Banks
, Forbes.
Paul Taylor, Euro Zone Fragmenting Faster Than the EU Can Act, The Independent (Dublin).

Why Democrats Should Embrace Simpson-Bowles

After writing about the federal budget the other day, I experienced what can only be called “a tea-party moment.”  By which I mean, a momentary but passionate longing for an end to deficit spending.  It doesn’t have to happen tomorrow, and it couldn’t have happened yesterday, but we have to have a plan for getting the federal budget back on a sustainable footing.  Democrats—all Democrats, as a party—need to embrace this goal.  If they can lead on this issue and bring the electorate to see how deficit reduction can be accomplished responsibly, they’ll find themselves enjoying renewed dominance nationally.  Endorsing the widely respected bipartisan recommendations of the Simpson-Bowles commission is the best way.

What’s clear from the budget graphic I wrote about last week is that the entitlements—Medicare, Medicaid, and Social Security—, are growing at annual rates that will continue to put the squeeze on the discretionary spending that Congress determines.  That’s why deficit spending will continue, and probably at a rate much higher than the $900 billion that President Obama has been proposing.  As the mandated portions of federal spending increase, there will be less and less scope for spending that addresses topical but often urgent contemporary needs.

To the extent that Democrats in the House and Senate have cast themselves as defenders of the status quo when it comes to entitlements, they have taken up an untenable, self-immolating position that will weaken them as a party.  Most Americans understand that the structure of entitlements will have to change, and, if they don’t already, they can be made to.  Today’s entitlements are simply too good to be true.  Originally intended to aid the ill and elderly who would otherwise be destitute or cut off from care, entitlements must be preserved to fulfill their original function of assisting the most needy.  But these programs must be modified in light of experience and changing social and economic conditions.  Social welfare is an important principle that we can best honor by re-tailoring these programs to fit the 21st century.  Simpson-Bowles, which calls for substantial but gradual changes to these programs, shows us the way.  It may not be the perfect plan, but you know what?  Its huge merit is that it was arrived at, and has already been vetted in, a bipartisan way.  With its provisions for thorough-going tax reform and modifications to the sacred cow of Social Security, it represents the deep sort of compromise that can be liberating.

The approach of the Democratic convention and the November election provide Democrats with a golden opportunity.  Look at the Republican primary contest and ask yourself, what’s holding together the Republican Party?  The alarming strength of candidates like Rick Santorum, Newt Gingrich, and before them Rick Perry attests to the party’s troubling divisions.  Were I a moderate Republican, I would be desperately seeking an alternative to a party whose constituents are proving themselves to be so provincial, chauvinistic, and bigoted.  Now is the time for Democrats to take the lead.  Democrats need to become champions of efficient, compassionate government—not the backward-looking defenders of a lost society that they often seem.  Making deficit reduction and tax reform their rallying cries would leave Republicans without productive ground to occupy.  The Democrats would win many converts among disaffected Republicans and the unaligned.  Democrats cannot continue to defend government spending simply because that’s what they’re comfortable doing.

The Times this week published an amazingly convoluted analysis arguing that it has been politically necessary for President Obama to avoid acknowledging any allegiance to the deficit-reduction plan that Bowles-Simpson produced—even though his current ideas about deficit reduction mirror theirs.  The fact is: the burden of deficit reduction isn’t the President’s.  The deficit problem belongs to Congress, and Congress alone.  That’s why it’s so important that the Democratic Party as a whole take responsibility.  Take the lead.  Admit that recent economic trends give us the breathing room to tackle the deficit issue, and take up a position in the center field.  It’s not just good politics.  At bottom, it’s what’s prudent and responsible: a balanced budget—or a nearly balanced one—is what the country needs.