By: Ted Dabrowski and John Klingner
Kudos to Rahm Emanuel for broaching the subject of a constitutional amendment for pensions and for using cost-of-living adjustments as an example of why the amendment is so necessary. His recent speech on fixing Chicago pensions was a disappointment on many levels, but at least he’s sparked a discussion that lawmakers have largely avoided till now.
The possibility of an amendment in Illinois has experienced a revival of sorts since Arizona recently amended its constitution for a second time. Already, the Chicago Tribune, Crain’s and Mayoral candidate Bill Daley have supported an amendment in some form. And COLAs are finally being recognized as a key driver of Illinois’ pension crisis.
However, it would be a mistake – as some may be tempted to do – to think that an Illinois fix is as simple as COLA reforms via a narrow, Arizona-style constitutional amendment. Instead, Illinois needs an amendment that’s as broad as possible if it hopes to fix the pension crises playing out all over the state.
Collectively, Illinois governments owe more than $400 billion in pension debts alone, based on Moody’s most recent methodology.
Its a particular problem for Rahm Emanuel, as Chicagoans are the most swamped of all. Each city household is on the hook for $140,000 in overlapping state and local retirement debts.
Limited, narrow reforms passed by a limited, narrow amendment won’t relieve residents of that impossible burden.
Arizona matters because its pension protection clause is similar to Illinois’. That state has successfully passed two amendments to its constitution in recent years, first in 2016 for police and fire workers and again, in 2018, for correctional workers and lawmakers.
Both amendments came after the unions agreed to reforms at the negotiating table. The reforms changed the COLA formula from maximum 4-percent COLA increases to one based on inflation, with a maximum of 2 percent. The reform also introduced defined contribution plans for new workers.
Arizona didn’t actually repeal its pension protection language with either amendment. Instead, it narrowly amended the pension clause each time, carving out exceptions for each reform bill.
The problem with Arizona’s approach for Illinois is that it’s piecemeal. Illinois is in too deep a crisis to go through that process for every reform it needs.
Instead of creating specific work-arounds of its protection clause, any Illinois amendment should repeal the protection clause and say expressly that the state may modify past and future pension benefits notwithstanding the state constitutional contract clause or anything else in the Illinois constitution that might conflict.
That would allow lawmakers to craft specific reforms at each level of government, from munis to Chicago to the state, without having to amend the constitution every time. Pensioners might still challenge reforms under federal law based on the contract clause in the United States Constitution, but Wirepoints’ view is that they’d ultimately fail.
Emanuel justified his support for a constitutional amendment by criticizing the expensive cost-of-living benefits many Chicago municipal retirees receive. Those workers get guaranteed, compounded 3-percent COLAs each year, one of the major drivers for unfunded liabilities for both Chicago and the state. Those increases have far exceeded inflation and were described by Emanuel as going against progressive values: “The fact is, a 3 percent compounded COLA in an era of very low inflation is not progressive and not sustainable.”
Consequently, much of the media has focused on reducing COLAs as the top-line reform goal.
That’s a problem, because Illinois needs as much flexibility as possible when coming up with solutions. Different pension plans have different problems, so various reform ideas – from decreased COLAs, to higher retirement ages, to increased employee contributions, to new defined contribution plans for current workers – need to be considered. Think how different Harvey’s fiscal problems are from Chicago’s or the state’s.
Means-testing benefits is also important. Illinois should focus on pension spikers, double dippers, etc., while protecting low-level pensioners.
Not to mention that voters will more likely support a constitutional amendment with comprehensive changes when those changes are part of the discussion from the beginning.
A better plan
Emanuel’s push for an amendment matters because there’s little chance Illinois or Chicago can escape collapse without reducing their massive pension debts. A constitutional amendment is the path to getting those reductions done in an orderly way.
It’s also far more preferable to a chaotic insolvency scenario – for both government workers and ordinary residents.
But for things to work, Illinois needs its amendment to be broad and its reforms to be comprehensive.