Is pension reform dead in Illinois?

In June 2014, in response to attempts by the state to reform government-worker health-care costs, Illinois’ Supreme Court found these benefits to be protected by the state’s pension clause ­– even though retiree health-care benefits are nowhere to be found in the state pension code. As a result, many assume that if the state can’t...

In June 2014, in response to attempts by the state to reform government-worker health-care costs, Illinois’ Supreme Court found these benefits to be protected by the state’s pension clause ­– even though retiree health-care benefits are nowhere to be found in the state pension code.

As a result, many assume that if the state can’t touch health-care benefits, no one should expect the Supreme Court to find Senate Bill 1, which partially reforms government-worker pensions, constitutional.

Therefore, Illinois seems to be left with no real solution to its twin problems: a $100 billion shortfall in its five state-run pension plans and a $56 billion funding hole for government-worker retiree health-care benefits. The problem is now so large the state would have to shut down its core government operations – no education, health care or public safety – for four to seven years to restore the solvency of its government-retiree benefit plans.

Is it time to run for the borders to avoid massive tax hikes and cuts in core government services?

At first glance, that just may be the thing to do. Illinois has been hollowing out at the rate of one person every 10 minutes since 1995 due to domestic outmigration. And without real reforms to the debt crisis, we should expect more of the same. Other states will gladly accept Illinoisans and their talents.

But don’t pack up yet. There are four reasons why reform still has a chance:

1. The Constitution’s pension-protection clause is not absolute. Supreme Court precedent allows the state to modify its contractual obligations when doing so is necessary to serve an important public purpose – and saving the state from insolvency and economic disaster is an extremely important public purpose. Expect the Supreme Court to deeply consider the massive cuts to core government services, including funding for classrooms, police services and health care for the poor that will occur if SB1 is not passed.

2. The court will consider the state’s precarious fiscal situation. The nation’s three credit agencies are watching Illinois’ reform efforts like hawks. Any misstep by the state and Illinois’ rating – already the nation’s worst and just three notches away from junk-bond status – will tank further, causing the true fiscal crisis to finally hit. To understand the consequences of further credit downgrades, check out what’s happening in Puerto Rico.

3. Detroit’s bankruptcy has proven that, even with constitutional protections like those in Illinois, government workers aren’t truly protected once the cash runs out. In fact, even though Detroit’s pension-funding levels are far healthier than Illinois’, government workers recently voted to cut their own pensions and retiree health care as part of the bankruptcy proceedings. Amazingly, more than 70 percent voted in favor of the bankruptcy plan – which will force the city to cut the government workers’ $4.5 billion in health-care benefits by 90 percent, eliminate cost-of-living adjustments, or COLAs, for some, and slash pension checks by as much as 4.5 percent.

Detroit’s workers realized it was in their best interest to approve the cuts. It was better for them to take the hit to their benefits under the bankruptcy plan rather than rejecting all reforms and losing even more benefits under an imposed, harsh settlement.

So, if the Illinois Supreme Court doesn’t allow reforms through SB1, government workers in Illinois will find themselves eventually voting to reform anyway, in an attempt to preserve whatever benefits they can.

4. Illinoisans don’t want to share the same fate as the residents of Detroit. For too long they’ve been hoodwinked into trusting a political class that’s let them down for decades. That’s why a recent Gallup poll showed Illinoisans had the nation’s lowest level of trust in their politicians, at 25 percent.

If SB1 fails, the pension crisis will hit Illinoisans at the local level harder than ever. State funding for education will be cut. Public-safety spending will be slashed to free up cash for skyrocketing pension payments.

Taxpayers won’t put up with Illinois’ deteriorating financial condition for much longer. Higher taxes coupled with cuts to services will only drive frustrated taxpayers and overburdened businesses to other states.

The possibly of real pension reform should not be discounted by anyone, least of all the Illinois Supreme Court. After all, such reform is happening all over, even in Democrat-controlled states. Deep-blue Rhode Island passed landmark pension reform only a few years ago, moving public employees to hybrid, 401(k)-style plans, including current workers.

And Rhode Island has not been alone. In all, a total of six states have in some way transitioned out of a traditional state pension system since the Great Recession.

The bottom line is that real pension reform is coming; either because the Illinois Supreme Court allows it or because government workers will be forced to vote for it, just as Detroit’s workers did. It’s only a matter of time.