Illinois' Constitution Does Not Have to be a Financial Suicide Pact

The Illinois State Supreme Court ruling in Kanerva v. Weems cast a dark and foreboding shadow over Illinois' already gloomy financial picture and may create a backlash that will end with a significant change to the Illinois Constitution.

In Kanerva, the Court found that state retiree health insurance subsidies are protected by the "impairment" clause of the Illinois Constitution. This clause reads as follows:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefit of which shall not be diminished or impaired.

The immediate ramification of the ruling is that a class action lawsuit against the state's authority to reduce the health insurance subsidies can proceed. The 2012 legislation to eliminate the full health insurance subsidy and require state retirees to pay some portion of the cost was an important piece of the overall state fiscal reform puzzle. This is big money. Here's what the State Journal-Register reported in May of 2012 as the bill was winding its way through the legislative process:  

House Minority Leader Tom Cross, R-Oswego, a co-sponsor of the bill, said the state spends $876 million on retiree health insurance. He said 78,000 state retirees pay no premiums for their health insurance, something that costs nearly $7,400 per person.

The Court's decision appears to have wiped out hundreds of millions in savings to Illinois taxpayers. But the broader ramification concerns how the Court is likely to rule on legislation to reduce pension benefits for existing employees of state and local governments. 

Prior to this ruling, the impairment clause was largely understood as applying only to benefits awarded under the Illinois Pension Code. In what can be viewed as nothing less than an ill-timed bombshell for Illinois taxpayers, the justices ruled that all of the benefits that are limited to, conditioned on, and flow directly from membership in the state's public pension system must be considered to be benefits of membership in a state pension or retirement system. In short, retiree health insurance subsidies qualify for protection under the "impairment clause" and, consequently, cannot be reduced. 

I'm admittedly not a constitutional scholar, but the reasoning employed by the Court on this point strikes me as a pretty radical reach in logic. Here's what appears to be the crux of the Court's argument:

“Health care benefits are not referred to in the pension clause, but neither is there any limitation imposed concerning them,” according to the Illinois Supreme Court. “It is a well settled principle that pension rights should be liberally construed in favor of the rights of the pensioner.”

Simply put, because the Constitution doesn't explicitly say that health insurance benefits are not covered by the pension impairment clause, then we're just going to presume that they should be included. With apologies and all due respect to the justices, this appears to be tortured logic. It's also chilling that Kanerva was a 6-1 decision.

In stating that "pension rights should be liberally construed in favor of the rights of the pensioner," the Court has likely tipped its hand that it will find a handful of bills that reduce benefits for state and Chicago municipal employees unconstitutional. The 2013 law that reduced benefits for 4 of the 5 state-funded pension systems was estimated to save $160 billion over 30 years (insofar as these estimates are accurate). It now appears more likely than not that these savings will not materialize once the Court rules on the law. State leaders will have to go back to the drawing board and revisit pension reform without any expectation that public employee unions will cooperate by negotiating an agreement. Why should union leaders cooperate if they believe that the Illinois Constitution and Supreme Court are squarely on their side?

And that's why Illinois taxpayers may need to choose between considerable and permanent tax increases or a serious effort to change the state constitution. The latter solution presents a more attractive option to voters, but will potentially set in motion a battle royal between voters and entrenched public employee unions. 

Fox Chicago has a good segment on the Kanerva decision.