By Karen Pierog
CHICAGO May 5 Now that the Illinois House of
Representatives has passed a plan to repair a state pension
system underfunded by $100 billion, attention is turning to the
meaning of three words in the Illinois constitution: "diminished
Those words cap a clause that is designed to force Illinois
to meet obligations to its retired public sector workers. And
the state's labor unions have vowed to go to court if the bill
that passed on Thursday, backed by the powerful Democratic House
Speaker Mike Madigan, becomes law.
Reduced cost-of-living increases, increased employee
contributions and other changes violate the constitution, union
Years of skimping on contributions and the
investment-sapping effects of the financial crisis have come to
a head in Illinois, where about one-fifth of the state's general
revenue in the next fiscal year will be owed to its pension
The constitutional issue is far from simple. Madigan told
Reuters on Thursday that he intentionally tailored his bill to
stand up against a constitutional challenge. But others who have
studied it - including a lawyer for another powerful Democrat,
Senate President John Cullerton - say the unions may have a
The pending legal challenge has created uncertainty in
Illinois, as well as with analysts and investors in the state's
bonds. For some though, the comprehensive approach of Madigan's
plan seems to be offering at least a measure of relief that,
after years without progress, pension reform could come to
Illinois, which has the lowest credit rating among states.
Robert Amodeo, asset manager at Western Asset, which has
$460 billion in assets, called the approval of pension reform by
the Illinois House a positive development - though far from
"The fact that the state has seriously begun to address the
pension problem is a welcome development," Amodeo said.
If the Madigan plan wins Senate approval and is signed into
law, he added, "we will look very closely at investing in those
The Madigan measure sets a cap on salaries used to determine
pensions, limits cost-of living adjustments on pensions for
future retirees, increases retirement ages and hikes worker
pension contributions. It introduces cost-saving changes to
calculating the state's annual pension contributions and also
exempts pension changes from collective bargaining.
For the constitutional battle, the most important part of
the bill is an introductory "statement and findings." The
lengthy passage is targeted at the clause in the state's 1970
constitution that describes public employee pensions as "an
enforceable contractual relationship, the benefits of which
shall not be diminished or impaired."
Madigan's preamble argues that the state has a right to
amend pension promises when other vital interests are at risk.
It lists numerous fiscal woes facing Illinois as annual payments
to its five pension funds top $6 billion.
"The General Assembly finds that the fiscal crisis in the
state of Illinois jeopardizes the health, safety, and welfare of
the people and compromises the ability to maintain a
representative and orderly government," the bill states.
Asked by Reuters if the opening section was designed to
inoculate his bill against constitutional challenge, Madigan had
a simple response: "Yes, it was," he said.
Legal experts said Madigan's approach would present a court
with a balancing of interests: the obligations to retirees
versus the state's duty to protect health and welfare.
The constitutional provision is not absolute, argues Tyrone
Fahner, a former Illinois attorney general who is president of a
business executives' group, the Civic Committee of the
Commercial Club of Chicago. "The state cannot commit suicide" in
order to preserve pension benefits, Fahner said. "They have the
absolute power to preserve the state and its basic functions."
Ann Lousin, a professor at John Marshall Law School who was
a researcher at the 1970 constitutional convention and wrote a
book about the Illinois constitution, said Madigan's approach
could invite a court to look at other options available to the
state. For example, Illinois does not tax pension or Social
Security benefits as many other states do, but the House adopted
Madigan's bill rather than fixing the pension problem with a new
"The court will want to know if you've done all you can,"
Union representatives say they can win a lawsuit based
strictly on the constitution's pension clause.
"By making unilateral cuts in constitutionally protected
benefits, this bill fails to pass constitutional muster under
the Illinois Constitution either under a pension clause analysis
or a contracts clause analysis," said John Stevens, a partner at
law firm Freeborn & Peters, and legal counsel to a coalition of
Illinois labor unions, at the bill's sole House hearing on
The Senate in March passed a bill sponsored by Cullerton,
the Senate president, that addresses constitutional challenges
by giving retirees a choice between cuts in pensions and access
to state-sponsored health care in retirement. And this week
Cullerton began working with unions to fashion a new proposal
the unions will not challenge in court.
Eric M. Madiar, Cullerton's chief legal counsel and author of
a widely respected white paper on legal issues relating to
pension reform, said Cullerton is keeping constitutional review
in mind at every step. "We have decided to take a different
approach that appreciates what the law is and work within the
law to frame it rather than have this risky approach," he said.
But State Representative Elaine Nekritz, the House's
point-person on pension reform, said the Madigan bill is both
good law and good policy. "I believe it's constitutional and
necessary for us to dig ourselves out of a financial hole," she