The Supreme Court in Illinois has thrown out proposed pension reforms designed to reduce the $100 billion funding shortfall across its five public pension plans.
In a ruling on Friday, the US state’s supreme court declared the reforms, which were originally introduced in 2013, were in breach of a clause in Illinois’ constitution protecting employees’ pension payments from being changed.
Illinois’ five pensions are among the poorest-funded in the US, with an aggregate funding level of just 41.1% in June 2013—a figure that was almost unchanged in more than 40 years, the Supreme Court noted in its ruling.
“The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and… it is a crisis for which the General Assembly itself is largely responsible.” —Illinois Supreme CourtCredit rating agency Standard & Poor’s placed Illinois on negative watch following the ruling, meaning the state is more likely to have its rating downgraded. Illinois is already the US’ lowest ranked state by all three major credit rating agencies.
However, in a statement following the ruling, Fitch Ratings said the court’s decision was “not a surprise” given the strength of benefit protections.
Illinois’ General Assembly initially proposed to reign in its pension shortfall by delaying the age at which members can first claim a pension by up to five years, as well as capping the amount of salary used to calculate an individual’s pension. Annual pension increases were also slashed. Introducing the proposals in 2013, Senator Kwame Raoul claimed the reforms would save $21.4 billion.
The reforms were derailed by a clause in the state’s constitution, introduced in 1970, designed to protect members’ benefits and force the Illinois government to fund its pension liabilities without breaking pension promises.
“The law was clear that the promised benefits would therefore have to be paid, and that the responsibility for providing the state’s share of the necessary funding fell squarely on the legislature’s shoulders,” the Supreme Court said in its report. “Accordingly, the funding problems which developed were entirely foreseeable. The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and… it is a crisis for which the General Assembly itself is largely responsible.”
The Supreme Court’s ruling can be accessed on its website.
Last week, Oregon’s Supreme Court ruled against reforms to its state pension, a result that is expected to see the Oregon Public Employees’ Retirement System’s funding shortfall balloon by as much as $5 billion.
State governments across the US are grappling with sometimes crippling public pension shortfalls. Last year, SEC Commissioner Daniel Gallagher warned that the total unfunded liability across local and state pensions nationwide could be as much as four times bigger than the $1 trillion official estimate.
“To fully fund these public pension shortfalls, every household in the US would need to pay $1,400 per year for the next 30 years,” he said.
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