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Comment: In this article, Mark D. Rosen, a Professor at the IIT Chicago-Kent College of Law, says precisely what we have long written at Wirepoints -- that the U.S. Constitution is not an impediment to a state constitutional amendment to authorize reasonable pension reform. And, just as we wrote here, he says Governor Prtitzker's was wrong to say that approach is "fantasy."
Summary and audio linked here.
Chicago’s political leadership is floating a pension buyout program as evidence it is seriously addressing the city’s thirty-six-billion-dollar unfunded pension liability, but Mark Glennon, founder of the Illinois policy research organization Wirepoints, said that the proposal moves debt from one column to another rather than reducing it, and that the broader fiscal picture facing the city continues to deteriorate across every measurable dimension. Audio here.
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
Full interview and summary linked here.
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I copied same comment from great Bauer article–“Beating a Dead Horse” from a couple days ago. —Fantastic Bauer article. I’m not an accountant, actuary or lawyer–but tried to make point in another wp comment. If pension reform constitutional amendment was attempted and legal battle ensued pitting States fiscal obligation to provide “Higher Public Propose” (funding for basic services-schools, police, etc) as being crowed out by pension obligations (protected under Contract Clause) how do you weigh, from overall pot of taxable funds available, how much is required for “Higher Public Propose” vrs pensions? At what point or using what method is… Read more »
Most likely, the state or a municipality would pass a law cutting back benefits and then the unions would challenge it and then a series of courts (hopefully Federal) would dig in and evaluate the law. Or a lower court would invalidate the law and the appeals court would find some legal error and refer it back to the lower court for further proceedings in accordance with the appeals court’s opinion. I doubt a court would say, in advance, what was OK and what was not. The problem in Illinois is that quite a few legislative bodies would not take… Read more »
My view on this pension mess is that the state constitution says that pensions shall not be diminished. OK, so the IL Supreme Court also says the state cannot diminish pensions. The state pension agencies, are well, the state itself, and the state can’t go bankrupt. because if a state could go bankrupt, Chapter 9 of the bankruptcy code, which is federal law, would override the state constitution, and that pension clause suddenly becomes meaningless, as does the ridiculous contracts clause argument – contracts are terminated all the time in bankruptcy. So the key to all of this is to… Read more »
State pensioners contractual rights are to receive payment of their pensions when they retire. The courts have already ruled that pensioners have a right to receive their payments and have zero rights as to how the pension funds are funded. The pension funds can be completely bone dry and the state is required to pay pensioners regardless. Their contract is with the state or municipality not with the pension fund itself.
Yes but that’s the genius of my plan. Shoving off the pension fund into a separate non-state agency allow the pension fund to file bankruptcy, which is impossible to do right now because the pension funds are state agencies, and states can’t file bankruptcy. Once it’s in bankruptcy court, all bets are off: pensions can be cut based on expected future payments from the state, which is zero. Pensioners can try to sue the state of IL but that will go nowhere. There’s a couple of minor kinks to work out here, of course, but it could have potential. Much… Read more »
This sounds a bit like CALPERS and I think the outcome is still a bit murky. See, e.g., https://capitolweekly.net/bankruptcy-court-calpers-pensions-can-cut/ Plus I don’t think the sponsoring government could offload its existing liability just because a different entity assumes or even guarantees that liability. An employee or retiree could probably sign a release of his/her contract rights if there were some “consideration” for the release but I don’t see any consideration flowing from the agency. If the state itself were to guarantee pensions up to $60,000 per year (or some other figure) that might tempt some pensioners to give a release but… Read more »
“Plus I don’t think the sponsoring government could offload its existing liability just because a different entity assumes or even guarantees that liability. ” I don’t think this entire accurate. From a contract perspective, the state is merely assigning its rights and obligations from the state agency, or instrumentality thereof, to the new state funded quasi-municipal corporation. Is there an anti-assignment clause in the pensioner’s contract? “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… Read more »
Awesome. I think I’ll create a new company, have the new company assume all the debt, and then have the new company file bankruptcy. Very simple. I’m sure my creditors won’t mind.
I think the federal government should do the exact same thing with all of its’ debt as well. 22 trillion in debt just wiped out. Woohoo!!!!
As a sovereign nation, the Federal Gov. can print money, or default. It doesn’t need to file bankruptcy.
As for your example above…this is pretty much what bankruptcy is, well you have it backwards, because the old company keeps the debt, and goes bankrupt, while the new company emerges with less debt…
Ever heard of GM, the various airlines, Sears…..all new companies, because the old corporate structure was wiped out in bankruptcy.
I’m just trying to think outside the box here, it’s a thought experiment.
“well you have it backwards” I think that’s you. I was pointing out the lunacy of your argument. You are advocating for a bankruptcy in reverse order. You want to offload the debt to a new organization and then have the new organization declare bankruptcy. You are really digging into an argument that is pure fantasy. 1. The courts have already ruled that the state is responsible regardless of funding level. The courts have already stated they will step in and force payment before the funds run out. 2. Pensioners would not allow their rights to be assigned to another… Read more »
My contracts course was in 1965 but in real-estate terms a tenant can’t assign his lease and automatically be released from liability to the landlord. How is a contract assignment like a tight skirt: it binds the assignees. But it does not ordinarily get the assignors off the hook. If a landlord sells a building he/she will want the tenants to release the landlord — unless the lease already contains a clause obligating the tenant to accept the new landlord and release the old. The school system in Detroit studied a new entity approach with the hope of dodging liability… Read more »
That’s an equally as good idea,the pension cap would be great, but even cutting off the millionaire pensioners isn’t enough when there are just so many employees living off the state. As for assignment of contracts: credit cards, mortgage companies, car loans, CDO’s, etc are assigned all. the. time. Your Walmart credit card used to syncrony bank. Now it’s capital one. Creditors assign rights, it’s built into the contract. And meet the new lanrdlord – same as the old landlord. Or what about assumable mortgages? You could even argue that the state of IL in the pension issue is just… Read more »
Apparently you think at least some pensioners would go for a guarantee of a pension if it were reduced by some amount amount others judge as reasonable–something superior to the Pension Clause in your mind. If the IL Constitution means squat then any agreement made in lieu of it and thought to be superior likely means even less. You might get a few takers, but most are likely to interpret as I have suggested.
The Illinois Constitution as interpreted by the Illinois Courts violates various principles of the Federal Constitution including those frequently mentioned on this site: it interferes with republican government and interferes with the inherent sovereignty of the state government. No legislature can tie the hands of a future legislature to correct problems that arise in the future in pursuance of a Higher Public Purpose. The Bauer article cited in the opening comment makes it crystal clear that the Illinois courts are virtually alone in their interpretation of a “contract rights” pension clause in a state constitution. In this sense the Illinois… Read more »
Your idea may be sound in theory, but any bankruptcy proceeding for your quasi-governmental pension agency had better not occur too quickly lest the whole process be interpreted as a sham designed purposely to accomplish that outcome. Thus, it should be given fully adequate resources at least equal to the prior year’s funding, ongoing supervision and sufficient multi-years of time to be distanced from the time of its creation or its doomed. Creating it one year and declaring its bankruptcy a year or two later isn’t the way to garner support. Five years later? Maybe, but again it should be… Read more »
But it’s not a sham. That’s the purpose of bankruptcy, to shed unnecessary debts and liabilities to ensure a better future for the filer. And moving the state’s pensions to separate pension funds, instead of state agencies, like WI, opens that door to have the pension file bankruptcy.
You’re sounding a bit like “The Donald” making that phone call where he says he wants no quid pro quo, then goes on to tell exactly what he wants to make his transaction happen. He got away with it, but your plan seems equally, transparently a sham as I see it. To make it appear otherwise there would have to be “business as usual” for a considerable period of time and multiple years of it in my estimation.
But bankruptcy is not a sham! People and companies and quasi-municipal corporations file bankruptcy all the time in all sorts of situations. It’s totally OK to screw your creditors in bankruptcy, that’s why entities do it.
The unions would probably sue based on the intent is to diminish or impair pensions by declaring bankruptcy, based on what you wrote.
Duh!
” the intent is to diminish or impair pensions by declaring bankruptcy,”
This is not a cause of action and is not a basis to bring a case in federal bankruptcy court. And the unions have no standing anyways, only the pensioners.
The entire purpose of this scheme is to file bankruptcy and screw the pensioners to save them.
“This is not a cause of action and is not a basis to bring a case in federal bankruptcy court. And the unions have no standing anyways, only the pensioners.” Yes, you are correct, and some group(s) representing pensioners would surely do so.
“The entire purpose of this scheme is to file bankruptcy and screw the pensioners…..”. And you seem certain this is good logic as the courts would weigh this whole idea; that’s the part
I find hard to accept.
Good Faith includes: “(i) The debtor’s subjective beliefs; (ii) Whether the debtor’s financial problems can be addressed by chapter 9; (iii) Whether the debtor’s motivation for filing is consistent with the purposes of chapter 9; (iv) The extent of the debtor’s pre-petition negotiations, if practical; (v) The extent to which the debtor considered alternatives to chapter 9; and (vi) The scope and nature of the debtor’s financial problems.” https://www.jonesday.com/en/insights/2008/06/rediscovering-chapter-9-as-financial-woes-of-municipalities-escalate You’re saying that the bankruptcy would be filed in bad faith – above are the definition of good faith. The (i) IL’s pension plan are objectively insolvent; the (ii) financial problems… Read more »
I have no trouble with the concept of “good faith negotiations.” You’ve covered that term nicely. But, at its heart you’ve openly said that “The entire purpose of this scheme is to file bankruptcy and screw the pensioners…” If there’s ANY hint that’s as described its not going to happen if approached that way where the courts are the deciders. You’ve “poisoned the well” at the very least.
“Screwing creditors” is the same as “a means of reducing the unfunded liability portion of a municipality’s pension obligation or otherwise compromising a municipality’s pension debt.” When I file bankruptcy, American Express thinks that I did it to screw my creditors, but, I view it as readjusting my balance sheet using the bankruptcy code due to insolvency. LIke I said, this is esoteric, and never gonna happen with a D supermajority in the legislature, but it’s a SUREFIRE way to get around the misinterpreted pension saving clause, and certainly politically less difficult than getting a pension amendment. I’m just throwing… Read more »
To that point there are public sector retiree associations in Illinois, and retiree chapters in some unions.
For example, IEA Retired.
“So the key to all of this is to shove off the pension plan from the state to quasi-municipal organizations, a separate pension fund that is NOT part of the state, but it’s own quasi-municipal corporation, separate from the state.”
– Such an action would require the Illinois General Assembly to pass a bill which becomes a Public Act?
Yes, seems easier than a constitutional amendment. and can pass at 12:00 am on a saturday night like so many other bills in our legislature. I know my ideas are esoteric but I believe this is one path to get the pensions into federal court where the ‘contratcts clause’ and ‘pension savings’ clauses are irrelevant for purposes of federal bankruptcy law.
Few bills pass at 12AM on any night. It’s good to know what’s done elsewhere. This proposal goes in the category of theoretically possible but politically impossible in the ILGA at this point. And the category of how other states have set up their their pension funds in a way that allows benefits to be diminished. Due to the pension sentence in the state constitution, someone would sue claiming that such an ILGA Public Act is a scheme to diminish benefits, which in fact is the case. is one of your points that such a case would be appealed to… Read more »
The most significant bill to pass this session, the Reproductive Healthcare Act aka the Legalized Infanticide also known as Sacrifices to Moloch, passed at 11:30 pm on a Friday night. So it’s not completely unheard of to pass controversial legislature under the cover of darkness in the middle of the night. “Due to the pension sentence in the state constitution, someone would sue claiming that such an ILGA Public Act is a scheme to diminish benefits, which in fact is the case.” What I’m trying to say is that Bankruptcy doesn’t care about the IL constitution. it is irrelevant. Chapter… Read more »
The Reproductive Healthcare Act (Senate Bill 25 in the 101st General Assembly) passed the Senate on Friday May 31, 2019 at about 11:30PM and the House on Tuesday May 28, 2019 in the late morning or early afternoon. The end of May is one of times during the year when the late night / early morning votes are more likely to take place, since the legislators are up against a deadline imposed by the calendar maker(s) prior to what is typically the summer recess / break. Characterizing such late night / early morning votes as “like so many other bills”… Read more »
The only place to challenging pension reductions would be in bankruptcy court. Sure, pensioners would attempt to make arguments that the pension savings clause means that pensions can’t be modified in bankruptcy, but that’s nonsense. They will lose.
Keep in mind, these are the same people who argue that a constitutional amendment to reserve the pension savings constitutional amendment is unconstitutional. Think about that convoluted logic. This means that there are some constitutional amendments can NEVER EVER been undone because even constituational amendments can’t undo previous amendments. That’s nonsense.
Unfortunately, it won’t work. The state cannot offload it’s liability. The state is directly liable to pensioners if the pension defaults, and in fact the courts have said that they are obligated to fund the pension when funding gets down towards zero.
What happens when the state can’t pay all debts that are contract rights? Say bondholders and retirees Can the state or its treasurer be sued by the creditors in question? There’s a case in Michigan (Musselman 2) holding that separation of powers precludes a court from ordering legislators to appropriate money. I know Michigan has a court of claims where tort actions can be filed, but I’m not sure whether a contract action could be filed. Understandably state legislators put in office by and for public employee unions may be eager to pay pensions to those constituents but how would… Read more »
Yes, unpaid creditors can sue the state and they have most of the normal collection remedies as other creditors. Bondholders have certain preferences and additional rights as do pensioners. We’ve written about that often. In Harvey, a court ordered a property tax increase specifically to fund pensions.
Our constitution says pensions are merely a contractual right. Contracts can be assumed, or rejected, or renegotiated, in bankruptcy. Contract damage in pensioners case receive very little protection as they are general unsecured creditors. Due to the everyone’s unfamiliarity with bankruptcy law, I need to remind you that the pension savings clause in the constitution is worthless in federal district court. It means nothing. It only means something to the 9 self-interested hacks on the IL supreme court that didn’t want to see their own pensions diminished. I’m telling you, get the pension into bankruptcy, any way you can, in… Read more »
I disagree, that’s why the state pension issue should get into federal bankruptcy court. The goofs on the IL SUPREME COURT lead by none other than by the wife of totally corrupt Ed Burke….they have no say, no say at all. I’m telling you, it can be done Also, not sure why you missed today’s Real Clear Politics opinion piece about IL. The author suggested IL dissolve, off load all its liabilities, and then regain statehood as, I guess, the 51st state? It would take vote of congress to do so. This to me seems ever crazier than trying to… Read more »
Our views on this legal issue were summarized in plain English here: https://wirepoints.org/governor-pritzker-its-you-whos-in-fantasy-land-about-an-illinois-constitutional-amendment-for-pension-reform-wirepoints/ They are precisely in accord with this Crain’s article and the late Jim Spiotto’s, and were affirmed in the Rhode Island decision last year. The legal analysis is clear. There remains only a fact issue, particular for each pension and sponsoring unit of government, about whether the particular reforms are needed to effectuate a higher purpose.
What I was simply trying to say in earlier comment was HOW (by what means /at what point) is it determined that “Higher Public Propose” is being crowed out by pension obligations. What is considered “reasonable”. According to Bauer article, attempts in Oregon & Montana to base pension reform on “Higher Public Propose” is being crowed out by pension obligations was rejected. But even in being rejected there must have been some rational to based decision on, some attempt to measure burden of pension obligations vrs “Higher Public Propose”. Although, given Oregon, Montana as well as all are hundreds of… Read more »
There is no cut and dry definition of reasonable.
Look at Ford Heights, East St Louis, Cairo, etc.
When will it be reasonable for the State to allow them to declare bankruptcy, cut pensions, etc.?
It’s pretty clear from those examples that public sector pensions, retiree, healthcare, bonds, etc. come before property value, quality services, public safety, etc.
That’s a long, arduous process if every individual city, village, town, county, and quasi-municipal corporation has to go Chapter 9 to reform their pensions. That’s why I advocate for the insolvent pension funds themselves to go bankrupt.
The long arduous process keeps those in political power for a longer period of time.
There’s no short answer to that. Without question, the worst off municipalities would pass the test. I’m also confident the state would pass it for its pensions, provided the reforms are properly fitted to the need for reform. Sorry there’s not exact answer, but that’s the way it is. You have to look at the specific reform in light of circumstances at the time. Keep in mind that the state and most municipalities are always sinking, so it’s only a matter of time that larger pension cuts would be deemed acceptable.
The State of Sinking Ships.
Perhaps when the peak of the Laffer has been reached for all possible revenue sources (as evidenced by declining revenue for all revenue sources), then it would be considered reasonable to allow pension cuts.
That would include future revenue sources such as tax services, tax retirement income, legalize prostitution to be competitive with Las Vegas, convert all interstates to toll roads, etc.
There’s all sorts of revenue sources, since the status quo narrative is we have a revenue problem.
The value of your property at such time is a frightening thought.