The Illinois Supreme Court May 8 struck down legislation passed in 2013 that would have scaled back state employee benefits.
The high court cited in its decision a clause in the Illinois Constitution that says pensions are a contractual agreement “which shall not be diminished or impaired.” It also indicated lawmakers had other options at their disposal to alleviate the pension backlog, such as tax powers, that were never employed. A temporary income tax was being used in part to plug the pension hole, but that tax expired this year.
After months of uncertainty, the Supreme Court decision gave employees assurance that the current benefits structure would not change, barring a constitutional amendment or any other legislative proposal that could survive a constitutional challenge.
U. of I. President Bob Easter, who retired May 17, said the court’s decision may yet lead to a legislative solution.
“Although the ruling leaves the pension issue unresolved,” he said, “it is an important next step and may provide guidance as elected officials consider other alternatives.”
Easter said university representatives continue to work with legislators to create equitable solutions for the pension and budget crises.
University representatives recently testified at a budget committee hearing that the Urbana campus’s economic impact on the state of Illinois was $6.4 billion last year.
Walter Knorr, the university’s chief financial officer, said recently the state’s annual appropriation is about $670 million, but the level of support has dwindled in the past 30 years, having once covered about half of the university’s operating expenses. Today, even before proposed cuts are added, direct state funding covers about 15 percent of operating costs. The state also is responsible for health and pension benefits, and other “on-behalf” payments, which equal about three times that amount.
Knorr said the annual appropriation would be at its lowest level since the 1950s if the 31.5 percent cut proposed in Gov. Bruce Rauner’s budget was instituted.
There also have been discussions at the state level about transfering some employee benefit costs from the state to the university.
Easter said whatever the outcome in the state Legislature, some modicum of future pension system stability would be welcome.
“Pensions are a key element in a competitive compensation program that is critical in recruiting and retaining faculty and staff,” he said.
Having pension questions settled would make recruiting less difficult, he said. The Supreme Court decision protected employee benefits, but it also created more uncertainty for legislators trying to make up for a pension fund shortfall that is $111 billion and growing.
According to press reports, legislators have gone back to the drawing board to address the state’s pension, structural and long-term budget problems. Strategies at their disposal include refinancing, service cuts, raising taxes or some combination of those options.
But the environment is foreboding. On May 12, Moody’s Investor’s Services, citing the Supreme Court decision, downgraded Chicago’s bond rating to junk status, making it more expensive than ever for the city to borrow.
Some have speculated that the state – already carrying the lowest bond rating in the country – also will be downgraded in light of the court decision.
The U. of I.’s bond rating is four levels above the state’s rating, though that also could be tested as budget projections include cuts to higher education of nearly a third.
Earlier this year, the U. of I. endured a budget rescission of 2.1 percent from the current budget, equaling an $18 million cut.
Meanwhile, departments across all three campuses have been asked to find ways to reduce costs and increase efficiencies.
