Illinois Supreme Court Rejects Lawmakers’ Pension Overhaul

CHICAGO — The Illinois Supreme Court on Friday rejected changes that legislators made to fix a deeply troubled public pension system, leaving the state where it had started — with a significant budget crisis, a vastly underfunded pension program and no plan in sight.

All seven members of the state’s highest court found that a pension overhaul lawmakers had agreed to almost a year and a half ago violated the Illinois Constitution. The changes would have curtailed future cost-of-living adjustments for workers, raised the age of retirement for some and put a cap on pensions for those with the highest salaries. But under the state Constitution, benefits promised as part of a pension system for public workers “shall not be diminished or impaired.”

“Crisis is not an excuse to abandon the rule of law,” Justice Lloyd A. Karmeier wrote in an opinion. “It is a summons to defend it.”

In recent years, plenty of states and cities have wrestled with paying their pension obligations, but Illinois’s problems have been among the worst, leaving public sector workers uncertain about their retirements, the state’s budget strained and the state’s credit ratings sinking. Around the nation, political leaders have sought to solve the shortfalls, in part, by cutting pension benefits, and state constitutional provisions have emerged as one way to try to block such changes.

Here, the court’s finding on Friday was viewed as a victory for unions and state workers, but also a significant escalation of the state’s financial challenges, even as Illinois’s political landscape has grown more complex.

“Our path forward from here is now much more difficult, and every direction will be more painful than the balance we struck in Senate Bill 1,” said State Representative Elaine Nekritz, a Democrat, referring to the package of pension changes lawmakers passed at the end of 2013.

By then, Democrats who at the time controlled the state legislature and the governor’s office had been debating for several years how to solve the mounting pension crisis in a state where unions have long supported Democrats. Unions vehemently opposed the proposals, which they said undid promised pension benefits.

In the end, state officials argued, in essence, that the economic circumstances required extreme measures. By some estimates, the state’s pensions had been underfinanced by more than $100 billion — among the worst holes for public pension systems around the nation. So lawmakers agreed to a package that included the benefit changes over objections from workers and that, in exchange, was to lower workers’ pension contributions and require an increase in state payments into the system. The deal, signed into law by Pat Quinn, the Democrat who was governor then, was expected to save $160 billion over 30 years.

The court’s decision on Friday had long been predicted by legal experts here. In a 38-page written opinion, the justices sounded an unsympathetic note to suggestions that the state was forced to take drastic action when faced with what amounted to a financial emergency. The court noted that state lawmakers had, over decades, delayed or shorted what they should have contributed into the system, which covers state workers, teachers outside Chicago and others.

“The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid,” Justice Karmeier wrote. He added later, “It is a crisis for which the General Assembly itself is largely responsible.”

Labor officials lauded the decision. “We are thankful that the Supreme Court has unanimously upheld the will of the people, overturned this unfair and unconstitutional law, and protected the hard-earned life savings of teachers, police, firefighters, nurses, caregivers and other public service workers and retirees,” Michael T. Carrigan, the president of the Illinois A.F.L.-C.I.O., said.

Yet the ruling left the state’s fiscal future in doubt, and lawmakers themselves expressed uncertainty about the challenge ahead: how to solve a gaping pension deficit without taking away any benefits. The political environment, too, has grown more complex since Mr. Quinn was replaced this year by Bruce Rauner, the state’s first Republican governor in more than a decade.

After speaking to businesspeople here on Friday, Mr. Rauner said he had expected the pension changes to be overturned and had disagreed with how they changed retirees’ benefits. He said he believed that voters should consider a constitutional amendment that would mark a distinction between guarantees of benefits already earned and changes to future benefits. As it is, under the state’s Constitution, officials may assign new benefits to future workers, but cannot diminish benefits already promised.

“Rather than spend years in court, we’d rather do a constitutional referendum and try to clarify that benefits earned should be protected, but the future is unknown and it can be higher or lower,” Mr. Rauner said.

During his speech, Mr. Rauner issued a grave assessment of the state’s fiscal health, as he has in appearances around the state in recent weeks. “If Illinois was a corporation, it would probably need to file for bankruptcy,” he said. Still, Mr. Rauner said he has been in talks with legislative leaders and hoped to have a budget deal and a new pension solution in place by the end of the month.

Lawmakers sounded far less certain. A spokesman for Michael J. Madigan, the speaker of the State House, said he was reviewing the decision. John J. Cullerton, the Senate president, said he had long been concerned about the constitutionality of what lawmakers passed in 2013 and that he viewed the ruling as a victory for retirees, public workers and “everyone who respects the plain language” of the state Constitution.

“That victory, however, should be balanced against the grave financial realities we will continue to face without true reforms,” Mr. Cullerton said, adding that he was prepared to “work with all parties to advance a real solution that adheres to the Illinois Constitution.”

The decision could also have ramifications in Chicago, which is dealing with underfunded pension systems and a similar question: If pension benefits cannot be changed, how can the system be spared?

In 2014, Mayor Rahm Emanuel pushed Illinois lawmakers to approve a plan that would start to ease some of his city’s crippling pension problems by requiring some municipal workers to pay more for their retirement benefits and by granting smaller than expected increases in those benefits. The Chicago plan — which would affect two of the city’s pension funds and grew out of talks with some of the unions — appeared to face legal questions similar to those involving the state’s overhaul.

In a statement on Friday, Mr. Emanuel said the city’s approach would not be affected by the court’s decision in the state case “as we believe our plan fully complies with the state Constitution because it fundamentally preserves and protects worker pensions rather than diminishing or impairing them.”

In the State Supreme Court opinion, the justices took note of Illinois’s financial circumstances, but suggested that those were not enough to overlook the Constitution.

“The financial challenges facing state and local governments in Illinois are well known and significant,” the opinion read. “In ruling as we have today, we do not mean to minimize the gravity of the state’s problems or the magnitude of the difficulty facing our elected representatives. It is our obligation, however, just as it is theirs, to ensure that the law is followed.”