The United States is facing a nationwide public pension-funding crisis, with some estimates of total state unfunded pension liabilities exceeding $4.7 trillion at the end of 2014. The Illinois pension funds, which provide retirement payments for 479,000 state and local workers, are insolvent. The actuarial unfunded liabilities for Illinois’s pension plans stood at $111 billion for fiscal year 2015, according to official estimates. Without a new federal remedy, the situation will only worsen as the population of state workers ages and retires. Massive pension obligations are crowding out Illinois’ ability to fund essential services such as police, disaster assistance, education, healthcare and others that are key to the general welfare. Illinois’ public pensions receive extensive protections under state laws. As a consequence, bipartisan pension reform proposals have been struck down by the State Supreme Court, pitting the payment of pension obligations against providing essential state services, and using up more general revenues just to keep up with pension fund payments. If left unchecked, many workers in Illinois, and throughout the United States, could be left with dramatically-diminished or no pensions. A minor change to federal bankruptcy law would provide a new tool to allow Illinois and other states to reform their own pensions so they don’t become a burden to the federal government. Article 1 of the U.S. Constitution grants Congress the power to enact “uniform laws on the subject of bankruptcies.” This paper proposes that Congress create a new section of the U.S. Bankruptcy Code, Section 113, a “Limited Proceeding to Ensure the Undiminished and Unimpaired Performance of Essential State Services.”
The provision would give state legislatures and governors the option to remedy fiscal crises attributable to pension obligations, notwithstanding local laws that prohibit changes to such obligations. If they so choose, state legislatures and governors would be authorized to enact pension benefit changes only after determining that funding obligations impair the performance of essential state services; and would publish the basis for their determination, conduct public hearings, and file a proceeding in a bankruptcy court identifying the changes.