Restructuring Illinois’ Pension Problem

By Tim Hartman

Battle over public pensions in Pennsylvania by Tim Hartman

Illinois’ pension reform legislation, struck down as unconstitutional by a Sangamon County Judge in November, heads to the Illinois Supreme Court for oral arguments this week on March 11.

The case considers whether the state’s current fiscal crisis is an emergency justifying overriding the protection given to public pensions by the Illinois constitution.

The underfunded status of Illinois’ pensions and fiscal crisis has been well-chronicled. See for example Why Illinois is Going Bankrupt: Squeezy the Pension Python has its grip around the Land of Lincoln and Illinois’s Pension Absurdity. The underfunded pension liability in Illinois exceeds $100 billion making its status the worst in the country.

While the Illinois constitution seems perfectly clear, what about the emergency affecting the long-term public welfare of the state?

Pensions are a contract between the state governments and its public employees. But recently, such contracts have been restructured in the Chapter 9 bankruptcy cases of the City of Stockton, California and the City of Detroit, Michigan.

Whether such a result could follow in Illinois faces the following preliminary hurdle of the authorization to do so:

1. States cannot file for bankruptcy. What states can do is authorize municipalities within it to file for bankruptcy. According to James Spiotto, 12 states specifically authorize Chapter 9, and another 12 states conditionally authorize municipalities to file with permission. Illinois is one of 3 states that has a particular government agency that gives permission – the Illinois Power Agency – but no one else in Illinois has permission because it was not put in the legislation. Two states, Iowa and Georgia prohibit Chapter 9, and the remaining states have not specifically authorized it.

MunicipalBankruptcybyState

2. Illinois law currently does not include provisions allowing for its municipalities to file Chapter 9 bankruptcy, with the exception of the Illinois Power Agency. Mark McClenathan observes the Illinois Local Government Financial Planning and Supervision Act may provide a means for limited financial “relief” but does not include authorization to file a Chapter 9 bankruptcy case.

Absent a Supreme Court court ruling in favor of the Illinois Attorney General this week, it is clear that legislation and and/or a constitutional amendment permitting the necessary tools to address the crisis is needed. While no one in Illinois wants the result of diminished pensions or bankruptcy, the reality is that restructuring is a last resort which happens when everything else fails or is about to fail. Hopefully the government and unions in Illinois, as in other jurisdictions, can reach the needed sensible compromise in the interim.

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