Illinois’ expensive retiree health care ruling

By Cate Long
July 7, 2014

Illinois

Illinois suffered a blow when the State Supreme Court ruled that public employee retiree health benefits are enshrined in the state constitution and may not be adjusted via legislation. Illinois has lost an important tool for reducing $56 billion of unfunded retiree health care liabilities and $100 billion in unfunded pension liabilities. These unfunded retiree costs outstrip the state’s $33 billion of net tax supported debt.

The Chicago Tribune wrote:

The Illinois Supreme Court ruled today that subsidized health care premiums for retired state employees are protected under the Illinois Constitution, signaling potential trouble for an overhaul of pension benefits that’s also being challenged in court.

Today’s ruling also could affect the city of Chicago’s ongoing phase-out of retiree health insurance subsidies, a program Mayor Rahm Emanuel was counting on to save millions of dollars a year, as well as legislation recently approved to modify the pension plans of city workers and laborers.

The 6-1 decision centers around a 2012 law that allowed the state to charge retired workers for health care insurance premiums, which many did not have to pay depending on how long they worked for the state.

Crain’s Chicago Business identified the trouble for the state in the court ruling (emphasis mine):

In one key paragraph, the court rejected the idea that the state’s budget crisis could justify a change in retiree benefits.

In its examination of the floor debate on the pension protection clause during the drafting of the state constitution in 1970, the opinion says: The intent of the pension protection clause was ‘to guarantee that retirement rights enjoyed by public employees would be afforded contractual status and insulated from diminishment or impairment by the General Assembly. In light of the constitutional debates, we have concluded that the provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.’

“Not the adequacy of the funding to pay for them” are scary words for a state with perennially stressed budgets. The court ruling has the potential to ripple through many layers of Illinois government and eliminate savings from various pension reforms. Ted Dabrowski of the Illinois Policy Institute wrote in an email about state retiree health costs:

Taxpayer cost in 2014 was $900 million. And a chart below show how it increases. The law that has been challenged by the Supreme Court would have allowed the governor, through his Central Management Services, to set the amount the state would pay for retiree insurance. But with the ruling, it means the governor cannot act to cut costs. The impact of the Supreme Court’s ruling depends on just how far Quinn has gone to cut costs.

Illinois

Chicago Mayor Rahm Emanuel had been expected to phase out the city’s 55 percent subsidy for retiree health care by January 2017 (but continue coverage for the oldest retirees). This was expected to save the city about $108 million a year. Thirty thousand retired city employees were to be shifted to Obamacare. The impact of the Supreme Court on these plans is yet not clear.

The State Supreme Court decision puts much of the pension and retiree health care reform into question in Illinois. This is not good for A3 (7) rated Illinois and Baa1 (6.5) rated Chicago. They needed a way to reduce retiree costs. Rocky times are ahead.

 

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