Without pension reform, ‘Land of Lincoln’ on borrowed time and money

November 17, 2011

Thursday, Nov. 12, was set as the final day of a two-week fall session where pension reform, approval of Chicago casinos and tax changes to aid businesses were to have addressed.  Shamefully Illinois lawmakers fled Springfield for their homes leaving the crisis issues unaddressed and in limbo, but with an agreement to return for a one-day session on November 29th to survey what they failed to accomplish on multiple fronts. 

The worst crisis by far in Illinois is the potential collapse of the state’s pension system that is already the most underfunded in the nation.  Illinois has racked up an estimated $139 billion in obligations — $85 billion it can’t pay — and it will keep growing.  

To add to the out-of-control situation, while Illinois Lawmakers have been underfunding pensions, they have been sweetening the pension benefits of public employees which remain out-of-sync with happenings in the private sector.  Illinois state retirees also get an automatic 3% annual pay increase regardless of the rate of inflation.

It is highly unlikely that pension reform will be addressed when legislators meet for their one-day session on November 29.  Strong and intense Union opposition exists to any pension reform that seeks to raise public employee pension contributions.  As it was, Unions brought hundreds of their state workers, teachers and police officers to Springfield during the fall legislative session to shout down legislation that would have forced them to pay more toward their pensions. 

Beside the issue of increased pension fund contributions, the issue of constitutionality also looms large between those supporting pension reform and labor-led opposition.  Unions use state law to back up their claims that pension benefits cannot be reduced from the moment a worker is hired through his retirement. 

Nearing the end of November pension reform seems to be in limbo, but is it really?  Proponents of pension reform are attempting to get around a clause in the State Constitution that defines a pension as a contractual commitment which can’t be altered, through amending the bill so workers would have three choices from which to select.  All of the choices would focus on contributions rather than on benefit cuts.  The arguments being:  1)  Volunteered changes by the worker, and 2) Increased contributions are not technically the same as benefit reductions.  To be expected, Unions are not buying into the arguments.

It might surprise many to hear that the Teachers’ Retirement System in Illinois ranks #4 in the ten funds that top the list of state funds with “risky” investment strategy, meaning the lion’s share of investments are in in fixed income or cash holding.  There is a risk factor of 81.5% with total assets of $31.3 billion.   

The Teachers Retirement System is also the largest and costliest of Illinois’ pension programs.  In March of this year the system was nearly $40 billion short of what is needed to cover future benefits — the deepest financial hole in 20 years of state records.

Another surprise is that despite Union ads which tell of teacher’s paying their fair share into their retirement funds, a study by the Illinois Policy Institute — “Teachers’ Pension:  Who’s Really Paying” — found that many teachers contribute nothing, instead taxpayers shoulder the burden:  

“In nearly two-thirds of districts across the state, teachers don’t contribute the full ’employee share’ toward their pensions.  In fact most of these districts don’t require their teachers to contribute anything toward their own retirement.  Instead, the contributions are paid for or “picked up” by school districts — and by extension, local taxpayers.”  http://illinoispolicy.org/news/article.asp?ArticleSource=4457

Ultimately it will be Democrat House Speaker Mike Madigan who will decide whether to call the pension reform bill for a vote.  And why shouldn’t Speaker Mike Madigan delay calling a vote until the spring session convenes in January?  In this way he would spare his Democrat legislators from making potentially troublesome vote just before their constituents go the polls on March 20th.  I will let you decide whether Speaker Mike Madigan and his House Democrats can be pegged as cowards or are they just shrewd?

According to the Civic Committee of the Commercial Club of Chicago a delay into the spring session would tack on an additional $7 billion in unfinanced liabilities and interest on pension bonds. 

Meanwhile, Democrats in control of the House and the Senate advocate taxing as the way out, along with borrowing more money.  Can Illinois afford to borrow more money?

In February of this year Illinois borrowed $3.8 billion.  At the time, and because Illinois was perceived as the state most likely to default on its obligations by the financial markets, the state had to pay a higher interest rate spread than any of the other 49 states (Paying the highest interest rates of any states indicates a heightened risk of lending markets closing to Illinois.)  The state’s default interest rate can be attributed to the insolvency of its pension system.  Reducing the default rate is possible only through reform of the pension system.

It’s also unfair to private sector citizens here in Illinois who are worried they will outlive their own savings, only to have to pay more in taxes for the lavish retirement packages of government workers.    

Unless pension reform is enacted the $5.8 billion spent this year — more than $1 of every $6 of the state’s operating budget — will rise to $6.3 billion next year, to $7.7 billion in five years, and to $8.2 billion in 10 years.  In time the public pension system will be devouring all the state’s money with nothing left over for schools, care for developmentally disabled, payment of overdue bills, etc. 

All of us have the opportunity to make a difference in supporting and voting for candidates who don’t have their heads buried in the sand.  A change of rule is a must in Springfield.  Until then Unions will hold the feet of the elected Majority to the fire by demanding that employee pensions for their workers out pace those received by private sector employees.   

Illinois cannot continue on its current path.  Its pension system insolvency is jeopardizing the future of the “Land of Lincoln.” 













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