Illinois justices overturn state's landmark 2013 pension law

SPRINGFIELD, Ill. -- The Illinois Supreme Court forced the state Friday to find another way to fix the nation's worst government-employee pension crisis, ruling lawmakers "overstepped" by enacting a law that slashed retirement benefits to confront a budget deficit.

In a unanimous decision that frequently scolded state policymakers, the seven justices declared the measure former Democratic governor Pat Quinn signed into law 18 months ago violates the state constitution because it would leave pension promises "diminished or impaired."

The cash-strapped state must again grapple with a $111 billion deficit in what's necessary to cover its employee retirement obligations. The hole is so deep, the state has in recent years had to reserve up to $7 billion -- or one-fifth of its annual operating funds -- to keep pace.

The plan rejected by the justices was designed to whittle down the shortfall over 30 years, gradually but significantly slicing back pension benefits by erasing a 3 percent annual adjustment.

Lawmakers who spent years working toward a consensus acknowledged the ruling creates a dilemma for new Republican Gov. Bruce Rauner and Democrats who control the General Assembly.

"I'm not sure that any of the proposals that were considered would have passed" a court test, said Rep. Elaine Nekritz, a Northbrook Democrat who was a lead negotiator on the pension plan. "This problem will now be with us for two generations. And that makes me sad."

Most states faced the same public employee pension crisis, exacerbated by the recession, and took steps to remedy the problem. However, Illinois balked until Quinn and Democratic lawmakers overcame opposition from union allies and struck the deal, amid warnings it might not survive a court challenge.

The Illinois justices ruled the law represented not a last resort, but "an expedient to break a political stalemate."

Although the decision provides no blueprint for what should be done, the court said there were other options on the table for dealing with the economic crisis -- including raising taxes. The temporary income tax surcharge Quinn implemented in 2011 was allowed to roll back in January, after voters elected Rauner, who campaigned against it.

In a statement Friday, Rauner called the decision "fair and right." He called for a constitutional amendment that would allow the state to seek changes to future pension benefits without affecting benefits already earned.

Anticipating the court's decision, lawmakers had not counted on savings from the pension overhaul for several years. The state faces a $6 billion shortfall in the fiscal year that begins in July.

The Supreme Court's ruling dealt with a lawsuit filed by retired employees, state-worker labor unions and others. It was watched closely at the local level by city officials -- including in Chicago, facing its own pension crisis -- and school boards struggling with fewer dollars.

Against questioning by the Supreme Court in March, state lawyers in court had to defend decades of skipped pension contributions by the state that largely created the disaster. They attempted to end-run constitutional concerns by invoking "police powers" in times of crisis. The court scoffed, saying such measures were reserved for true, public-safety-threat situations.

Otherwise, "No rights or property would be safe from the state," Justice Lloyd Karmeier wrote in the court's opinion. "Today it is nullification of the right to retirement benefits. Tomorrow it could be renunciation of the duty to repay state obligations. Eventually, investment capital could be seized."

The law dealt with four of the state's five pension programs -- the Legislature did not include the judges' account because of the conflict posed by expected legal action.

The plan would have erased the 3 percent annual compounded cost-of-living adjustment hike added in 1989, replacing it with a formula that gave the increases on a portion of benefits, depending on years of service. Some would have had the option of freezing their pensions and contributing to a 401(k)-style plan.

It also would have delayed the retirement age for workers aged 45 and younger, on a sliding scale. Workers would have had to contribute 1 percent less to their retirements and the pension agencies would have been allowed to sue the state if it didn't contribute its full annual portion to the funds. Those were additions to help the matter survive a court challenge.

"This ruling is a victory for retirees, public employees and everyone who respects the plain language of our Constitution," said Illinois Senate President John Cullerton. "That victory, however, should be balanced against the grave financial realities we will continue to face without true reforms."