Last week, the Illinois Supreme Court struck down a desperately needed overhaul of that state’s massively underfunded pension system. The case has chilling implications for Albany as well as Springfield — and for New York City as well as Chicago.

That’s because the Illinois ruling was based on a constitutional provision that, nearly verbatim, tracks New York State’s, which defines membership in a government pension system as a “contractual relationship, the benefits of which shall not be diminished or impaired.”

In 2013, Illinois’ then-governor, a Democrat, had agreed with a Democrat-dominated Legislature to a pension reform law raising the retirement age for younger state employees and capping automatic cost-of-living increases for all retired workers.

The Illinois high court said it was unconstitutional for lawmakers to “diminish or impair” pensions that retirees had begun collecting. The court also disallowed the attempt to reduce benefits not yet earned by people still working in government.

New York officials have long assumed that their own constitution would be interpreted in the same way — entitling public employees to earn all the benefits offered by the public pension system on the day they were hired.

That’s why every round of public pension changes adopted in Albany since the 1970s has applied only to newly hired “tiers” of employees. This limitation makes it impossible to wring quick savings from a system that demands the most from taxpayers when they can afford it the least.

During the 1980s and ’90s, under lobbying pressure from public employee unions, the New York Legislature rolled back many of its own prior pension reforms and sweetened benefits nearly back to their old levels — where they’ve been locked in ever since, thanks to the constitution. Just last year, Gov. Cuomo vetoed legislation that would have begun to reverse some key changes he pushed through in 2012.

In contrast to Illinois, which has an unusually severe pension funding shortfall, New York’s state government pension funds are comparatively healthy. That’s because courts here have required the state and its localities to (more or less) make their required annual pension fund contributions — at a cost of billions of dollars in added taxpayer spending.

But New York City’s pension funds are not nearly as well off, even though tax-funded annual pension contributions in the city have risen $8 billion over the past 15 years and now amount to 10% of the city budget.

As of 2013, the assets of the five city retirement systems totaled roughly $125 billion — but were $70 billion to $150 billion short of matching their liabilities, depending on how they were measured. The firefighters’ pension fund was the weakest; even using its own preferred standard, its assets were just 54% of what the fund needs to make good on its promises.

In a worst-case scenario — say, a repeat of their 2000-2010 market experience, marked by extreme volatility and no net investment gains — New York City pensions could descend further into dangerously underfunded territory.

Illinois provides an extreme example of the havoc wreaked by such problems when they fester long enough.

In Chicago, last week’s court decision threatens to nullify deals Mayor Rahm Emanuel had made with some of his city’s unions. At the state level, the ruling left the state’s new Republican governor, Bruce Rauner, scrambling to avert deep spending cuts or tax hikes.

Rauner now says he will propose a constitutional amendment making it clear that current public employees are not entitled to pension benefits they have yet to earn.

A similar proposal to reform New York’s constitutional pension guarantee, sponsored by Assemblyman Mike Fitzpatrick, a Suffolk County Republican, is about to surface in Albany. Needless to say, such a reform has virtually zero chance of passing in the labor-dominated Legislature anytime soon.

But future generations of New York taxpayers will look back and wish it had.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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