This commentary originally appeared in Crain's Chicago Business on June 11, 2015.
Instead of looking to policymakers and accountants for help with state pensions, reformers across the country realize they need to hire a few more lawyers.
Illinois Gov. Bruce Rauner has to deal with serious pension problems after a unanimous state Supreme Court shot down the 2013 reforms of his predecessor. The Illinois Constitution does not allow cutting promised pension benefits, but Rauner seems willing to take the legal steps necessary to make the reforms stick this time around.
Illinois is not alone. Reforms made by Oregon's state legislators in 2013 included a reduction in cost-of-living increases. But Oregon's Supreme Court ruled that the promises made to those retirees must be kept. The expected cost to the state pension plan, and to taxpayers, may add up to $4 billion, nearly $1 billion of that coming in the next biennial budget term. The state must pay back lost benefits, too.
This is not to say that courts always are obstacles—just ask Michigan legislators. That state's Supreme Court upheld changes to the teacher pension system. Signed into law in 2012, the reforms required teachers to contribute more to their pensions or face benefit cuts.
Because pension reforms always will face a legal challenge, creative changes are needed. Rauner's constitutional amendment is one such angle. Going after the power of public-sector unions is another. But even that tactic is no guarantee if government officials aren't willing to follow through.
WHERE IT DIDN'T HAPPEN
Consider New Jersey Gov. Chris Christie, who, with his eyes on the White House, pushed reforms in 2011 that ensured that his state would meet the annual required contributions to the pension plan each year, all while attacking labor unions. But as New Jersey muddles through a slow economic recovery, Christie has gone back on his own deal and now refuses to meet those contributions in order to pay for a massive state general budget shortfall.
Illinois should instead look toward Wisconsin for a solid holistic approach. Act 10, which reforms government employee unions, has enjoyed popular support as well as legal validity. Gov. Scott Walker pulled pension negotiations out of the very political negotiating process and insisted that government employees come back to the reality that the promised benefits would never materialize without serious financial problems for the state. Employees must contribute more to their plans and put some skin in the game.
Other changes made on the accounting of pensions in Wisconsin have helped. Illinois' pension plans use sky-high discount rates, ranging from 7 percent for the General Assembly system to 8.5 percent for the Teachers Retirement System. Compare that with Wisconsin, where the state plan's discount rate is 5.5 percent. This seriously distorts the real cost of outrageous pension benefits.
As controversial as the changes in Wisconsin might have been, they have worked. Pension reformers in Illinois must present to taxpayers and lawmakers the legal difficulties and financial realities that require swift action to government pensions.
Joe Luppino-Esposito is a Washington, D.C.-based policy analyst at the Texas Public Policy Foundation.