Tennessee pension case might carry message for Illinois
A Chicago think tank says the message sent by a recent federal appeals court ruling in Tennessee could have reverberations across the country, including in Illinois.
The three-judge panel ruled that pensioners are not automatically entitled to cost-of-living adjustment (COLA) increases.
"The message for Illinois is that the federal courts don't see cost-of-living increases as part of pensions per se," Ted Dabrowski, vice president of policy at the Illinois Policy Institute, told the Sangamon Sun. "Instead, the federal courts see COLA increases as something of an add-on."
In its decision, the U.S. Court of Appeals for the 6th Circuit ruled that COLA increases are not automatically subject to the Contract Clause of the U.S. Constitution.
The case, Frazier v. City of Chattanooga, involves Chattanooga’s pension for its firefighters and police officers, four of who sued the city over a 2014 amendment to their pension plan that they said is unconstitutional. The amendment changed the pension plan's COLA adjustment from an automatic 3 percent increase to a variable rate based on the consumer price index.
That 3 percent annual COLA adjustment is a vested benefit that cannot be changed under Chattanooga law, the pensioners argued, but the court rejected that claim, affirming a lower court ruling that the COLA increase was not a base benefit.
Illinois public employee retirees are guaranteed at least 3 percent a year in COLA increases.
"That's part of the problem with Illinois pension problems, the COLA increases," Dabrowski said.
This is problematic because those allowances are compounded and calculated for pensioners who often expect to receive double -- or more -- in retirement benefits than they received in pay when they were working, Dabrowski said.
"That has become prohibitively expensive for taxpayers in Illinois," he said.
Pension issues in Illinois have been a problem for a long time, but they became exponentially worse for Chicago Public Schools (CPS) on Dec. 1, when Gov. Bruce Rauner vetoed a $215 million bill to bail out its pension fund. CPS needed the money to close a massive hole in its pension fund.
Things are even more dire for the state's public pension crisis -- the worst in the nation, according to Bloomberg. Illinois’ pension debt increased to $130 billion in 2016, up from $111 billion in 2015, according to an Illinois Policy Institute report, which cites the Commission on Government Forecasting and Accountability.
Last spring, former state Rep. Ron Sandack (R-Downers Grove) called for the state to declare bankruptcy, and similar sentiments were expressed by others in the state.
However, the state cannot legally declare bankruptcy, though Chicago and other state municipalities can.
Solutions are disappearing, particularly since May 2015, when the Illinois Supreme Court unanimously ruled unconstitutional a state pension law, signed in 2013 by then-Gov. Pat Quinn, to scale back government worker benefits. Then in March, the high court unanimously struck down state legislators' attempts to rewrite some public employee pension funding rules.
Nationwide, underfunded government pensions amount to about $1.3 trillion that really can't be paid, according to a recent Business Insider report.
The Tennessee case indicates an area in public pensions that at least the 6th Circuit said can be cut, Dabrowski said.
"That's an interesting message for Illinois, where there's already a history of pensions always going up," he said.
However, the Illinois Constitution appears to protect COLA increases in public pensions, which would make it difficult for a similar case to come up in Illinois, Dabrowski said.
"At this stage, it does not have much applicability in Illinois," he said.
Even when cutting or eliminating COLA increases from existing and future public employee pension benefits, it would not resolve pension issues in Illinois, Dabrowski said.
For an example of that, Chicago need look no farther than Detroit, where pensioners got 35 cents on the dollar when that city filed for bankruptcy protection in 2013. When the dust settled, Detroit was allowed by the bankruptcy court to cut $7.8 billion from payments to its retired employees and $4.3 billion from retirement health care benefits.
With Detroit bouncing back, Michigan recently said Detroit has projected a $35 million surplus for the current budget year. The city's projected 2024 pension obligations will jump to about $83.4 million, a 75 percent increase, overcoming the temporary breathing space provided by bankruptcy.
"The problem just keeps growing," Dabrowski said. "Until governments rein in and apply solutions to their pension problems, they're going to continue to have pension problems."