Word for word, the clause protecting public employee pensions may be the most consequential sentence in the Illinois Constitution. The key phrase promises that pension benefits, once granted, are a contract that cannot be “diminished or impaired.”

The prohibition has far-reaching impact because pensions are about more than just retirement checks. Decades of underfunding, combined with imprudent borrowing, have caused Illinois’ pension debt to pile up, and the rising cost of trying to catch up crowds out spending on schools, public safety, health care and the environment. It also puts the state’s credit rating at risk.

The problem is so large that no fix would come easily. But the pension clause magnifies the difficulty, closing off paths to reforms that might otherwise be equitable, reasonable and legal.

The clause was included after only superficial debate at the 1970 constitutional convention. But one group was paying attention: the state’s pensions commission, with members appointed by then-Gov. Richard Ogilvie. And the commissioners were not pleased.

In a report released after the convention adjourned, the commission issued a stern rebuke. The pensions clause makes even the most wrongheaded commitment permanent, the group warned, and an insolvent system can’t afford to pay benefits — no matter what the so-called contract says.

“Errors in judgment may become impossible to rectify if the result would impair or diminish benefits,” the commissioners wrote. And with a final harrumph, they concluded: “The provision will loom large and forbidding in future years in its effect upon the formulation of pension policy.”

They got that one right.

Today, the pension clause is a key factor constraining Illinois’ ability to creatively repair its deeply underfunded pension system. The restriction has left Illinois stuck in place even as states across the country are experimenting and innovating, saving billions while still dealing fairly with retired workers.

The state of other states

In Louisiana, Maryland, Wisconsin and other states, retirement benefits now adjust based on factors such as the funding level or investment performance of their plans. In Michigan and Pennsylvania, employees’ required contributions may rise or fall if the actuarial profile of the workforce shifts.

Retirees in California, Kansas and Nebraska in some cases can benefit directly if their plans’ investment results exceed expectations. And pension systems in Colorado, Georgia, Rhode Island and Tennessee offer hybrid plans, mixing traditional defined-benefit programs with new defined-contribution plans, in which retirement checks can vary based on the plan’s investment results. In fact, a study by the National Association of State Retirement Administrators found that every state has initiated at least one major reform since 2009.

Over the last decade, Arizona and Rhode Island have adopted some of the most impactful improvements, each with relevance for Illinois. In both cases, an unnerving event helped catalyze demand for reform. Arizona experienced a free-fall in the financial stability of its pension system. In Rhode Island, a high-profile municipal bankruptcy helped coalesce a move for reform.

Arizona is often cited as a model for Illinois to consider because it, too, has a pension clause. It took just a single decade for Arizona’s pension system to drop from 142% funded in 2000 to 67% funded in 2010, due to disastrous investment decisions. By 2015, the funding ratio fell to 48%, landing it among the nation’s weakest retirement systems.

Demands for reform flew in, prompting an assortment of negotiators from varying backgrounds into action. For instance, it paired pension-reform experts from the libertarian Reason Foundation with leaders of some of the state’s biggest unions.

Months of talks led to elimination of 4% annual compounded cost-of-living increases — even more lavish than the 3% compounding for the majority of Illinois pensioners! New hires were required to split pension contributions 50/50 with their employers, and the maximum salaries on which pensions could be based were cut by about half, to $110,000. A new governance structure was also introduced.

All this, despite a pensions clause in the Arizona constitution that was just as foreboding as the one in Illinois.

But Arizona’s negotiators came up with a nifty fix: By amending the constitution with language that specifically codified the agreements reached in negotiations, they essentially wrote their changes into the state’s founding document. The changes withstood the inevitable legal challenges.

Asked to explain how this all happened, Leonard Gilroy of the Reason Foundation put it simply. “The thing that didn’t happen was unions getting a cramdown. That did not happen. In fact, they were at the table with us.”

Bryan Jeffries, then president of the Professional Fire Fighters in Arizona, took a bottom line view: “Everyone in the system is going to have to take a haircut if we want the system to survive and thrive,” Jeffries recalled.

Rhode Island’s reform was spearheaded by Gina Raimondo, a former venture capital investor who stepped into her first elected office, as the state’s treasurer, in 2011.

Liquidity issues at municipal pension systems threatened to put the state into insolvency, and a sudden bankruptcy filing by the tiny town of Central Falls prompted Raimondo to spring to action. She persuaded a special session of the legislature to pass reforms she had developed: a temporary hold on cost-of-living increases, an increased retirement age, and a hybrid pension plan including 401(k) plans for new employees.

Comparisons with Illinois aren’t obvious. Arizona’s politics are considerably more conservative than in Illinois. While Rhode Island is far smaller, and the state’s constitution is more lenient than the one for Illinois, the key lesson is this: In a deeply Democratic, pro-union state, capable politicians worked with their supporters in the union movement to forge a resolution that was politically difficult but vitally necessary.

Not incidentally, Raimondo became governor, then secretary of commerce — her career catapulted forward by the emergency work she did in fixing her state’s pension system.

Constitutionally unconstrained

Illinois’ pension underfunding, at $140 billion last year, is smaller than only California’s. Still, the options available in Illinois are limited. Most of the reforms cited so far, from Arizona and Rhode Island to all the other states, would likely not pass review by the Illinois Supreme Court.

Since this state’s current constitution was passed in 1970, only one major pension reform has taken place. The introduction of Tier II benefits — replacing cost-of-living increases that compound at 3% annually with slower-growing retirement checks; increasing the retirement age to 67; reducing the ability to “spike” retirement benefits with pay raises in an employee’s final years at work — was legal because it did not affect existing employees. Tier II applies only to workers hired on or after Jan. 1, 2011.

Two years later, in the depths of the Great Recession with the state cutting budgets and the pension debt rising despite sharp increases in contributions to the pension funds, the General Assembly went further.

It passed sharp cuts that affected existing workers, prompting a lawsuit that went to the state Supreme Court — which promptly vacated the reforms. “The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and...it is a crisis for which the General Assembly itself is largely responsible,” wrote Justice Lloyd Karmeier for a unanimous court in May of 2015.

The contract rights of employees and retirees trumped the state’s obligation to serve and protect the population, the court found.

Today, the structural weakness of the state’s pension system has not gone away. While it took crisis conditions to prompt reforms in Arizona and Rhode Island, many other states have adopted reforms chiefly because leaders in government, unions and the private sector acted in ways both fiscally responsible and morally sound.

I once believed a constitutional amendment was needed for meaningful pension reform. There seemed no other way to bring all parties to the table in a balanced negotiation that would share costs and benefits equitably among the stakeholders: workers, employers, taxpayers, retirees and the public officeholders ultimately responsible for meeting the state’s obligations.

The Arizona case shows there can be a role for an amendment, to sanction an agreement reached after good-faith negotiations. The Rhode Island case shows the power of innovative and determined leadership.

The pension refunding proposal floated by the Civic Committee in February, which would not require an amendment, shows that a once-stalwart advocate for constitutional change sees a potential path toward reform without changing the constitution.

Gov. J.B. Pritzker made his stance clear when he spoke to the Civic Committee last March: He is against an amendment and doesn’t think he could get one passed by the legislature . Fortunately, the record shows an amendment is not a prerequisite to reform.

With an improved pension regimen, the state budget will be sounder, with more funds available for schools, hospitals and police; retirement incomes will be reliable; taxpayer money now spent on interest payments and catching up with the funding schedule will go toward government services instead. Chicago and all of Illinois will be better for it — now and for generations to come.

Part Three of this five-part series is coming on Thursday.

Better Government Association intern Clare Zhang contributed reporting.