Thorner: Illinois pension debacle expands more each day

October 31, 2013

Wednesday, October 30, 2013

6a00d834515c5469e2019aff90d1ae970c-75wiBy Nancy Thorner –

Illinois Representative Jeanne Ives (District 42- R), in her Veto Session Half-Time Report, described the time spent as just typical days of minimal activity.  There was no serious pension reform, but there were increased spending requests, and discussions of tax incentives for large corporations to entice them to stay in Illinois.

To add insult to injury, Illinois has the worst-funded pension system in the nation ($100 billion and rising) with only 39 cents in assets for every $1 of obligations.

Shouldn’t the state of Illinois be reckoned with as a state having a financial crisis of gigantic proportions, given that the state is estimated to be $5.4 billion behind in paying its bills and where more than 20 percent of its budget is devoted to public employee pensions.  Additionally, Illinois also has the second highest unemployment rate in this nation.

Credit downgrades in recent years, based upon pension debt which places Illinois’ credit rating at the bottom of all 50 states, certainly gives credence to the urgent need to do something and NOW!   The consequences of Illinois’ low credit rating is that the state must pay more interest when borrowing money.

Also to be remembered is that in 2011 Illinois raised its income tax rate from 3 to 5 percent to pay down the billions owed in its backlog of bills, only to have the increased revenue go toward required pension payment.

Recently, Illinois Senate President John Cullerton made a complete turn-around from how he thought about pension reform a little over a year ago on September 12, 2012, when he met with the Tribune editorial board.  At that time Cullerton explained why public pension reform was his No. 1 priority for the 2013 legislative session:

It may not be the No.1 priority of the public because they don’t understand the significance of how this crisis affects the operation of state government, but those of us who know the state budget know this is essential because you wouldn’t have enough money to pay for health care or education.

Cullerton’s  tune was different, however, during a Sunday interview on WGN-AM with Tribune reporter Rick Pearson when he said:

Quite frankly, I don’t think you can use the word ‘crisis’ to describe it at the state. It’s something we have to deal with, but it’s not something that we’re on the verge of bankruptcy on.

Even though Cullerton is correct that states can’t file for bankruptcy, cities can.  Chicago does need pension reform at the state level to avoid becoming the next Detroit.

Cullerton then went on to tell Rick Pearson that the real agenda of those who brought “pension crisis” into the Illinois government vernacular had nothing to do with getting more money into education funding or other essential government functions, but instead about allowing the income tax to fall to 3.75% as scheduled in 2015.

Just how did we get in today’s pension crisis?  And Illinois does have a pension “crisis, and it is an accurate term.   The aim of pension reform is not to punish public employees or to force them to share the pain of those in the private sector who have seen their retirement plans dissipate in recent years. Instead, it’s about balancing state government priorities while ensuring the solvency of retirement funds on which public employees depend.

What are some of the most egregious mistakes leading to this present pension crisis?

  • Failing to make payments to the pension funds that would have kept them securely funded.  Sometimes the unions now blaming lawmakers for shorting payment to pension funds were the biggest cheerleaders for skipping payments.
  • SB 27 passed on Memorial Day Weekend of 2005, stiffed pension funds by $2 billion.  Supporters claimed that the worthwhile reforms it did contain would realize savings at $30-$40 billion through 2005, making it no big deal to replace the $2 billion.  That $40 billion in predicted saving somehow grew into a $100 billion pension debt eight years later.  Since 2009, both school funding and payment to the disabled have been cut steadily as pension payments have chipped away at the state budget.
  • Illinois computes its retirees’ annual pension raises using compound interest instead of simple interest because Governor Thompson signed the bill into law in 1989.

A 10-member conference committee is now working on a reform plan whose savings would fall between what the competing Cullerton and Madigan bills are projecting.  Democrat House Speaker Madigan’s bill would take an estimated $27 billion off the $100 billion pension liability and save taxpayers an estimated $250 billion through 2045, bringing all five of the state’s public employee pension systems to 100 percent funding.  Democrat Senate President John Cullerton’s bill, supported by public employee unions, would save $46 billion and bring the system to 90 percent funding.

According to Chicago Tribune reporter, Ray Long, a pension deal remains elusive, at least during the fall veto sessions, as politics has the upper hand. Any vote likely to take place would fall only weeks ahead of the deadline for candidacy petitions to be filed for next year’s election. Then too, Democrats don’t wish to alienate their traditional Democratic allies of government-worker unions.

Meanwhile, Republicans are voicing proposals for workers to be able to opt into a 401 (K) style plan, for there to be a minimum guarantee cost-of-living increase at 0.5% instead of 2%, and that retirement age be raised.  The latter is a non-starter for Democrats!

Meanwhile, Democrats are hoping that at least some Republican vote for pension reform “in order to share the blame for a controversial vote.”

As related by Senator Jim Oberweis (District 25 – R) in previewing the Fall Legislative Veto Session:

Especially aggravating is the fact that one sensible pension reform option is not even being considered   Senate Bill 2026 was proposed by the Illinois Policy Institute because it would pass constitutional muster, would immediately cut Illinois’ $100 billion unfunded pension liability by nearly half, and would protect the benefits earned to date by current government workers.  Future benefit would accrue in new defined contribution plans. 

Sponsors of the proposed Illinois Policy Institute pension reform solution in the House (House bill 3303) were Representatives Tom Morison (District 54 – R) and Jeanne Ives (District 42 – R).

With a backlog of more than six months of unpaid bills, the worst credit rating in the nation, and the worst funded pension of any state, and given that revenue projections show that Illinois may have $382.5 million more in tax revenue this fiscal year than was originally projected, any clear thinking and insightful legislator would reason that this Christmas tree-like monetary gift to Illinois from taxpayers should be used to pay down Illinois’ backlog of bills.

But like kids fearful that money left in pockets will burn holes, will Democratic legislators within the General Assembly be swayed by pressure directed against them to undo past cuts and likewise sanction new spending, such as?:

  •   Cook County wants $30 million to promote Medicaid enrollment.
  • The American Federation of State, County and Municipal Employees wants $112 million in pay raises — promised by Gov. Pat Quinn and approved by a judge — but not yet funded by the General Assembly.
  • The Department of Corrections wants $40.5 million to pay a lawsuit and back bills.

As stated by Matt Dietrich on October 24 in his article, Pension reform and tax cuts are separate issues: 

Right now, Illinois spends 24.3% of all its state-generated revenue on it pension payments and that number is climbing.  A lot of people mocked Squeezy the Python last fall, but the message was true.  Our spending on pensions is way out of proportion with what a government should be spending.  It’s increasing ever year and squeezing out funding for essential functions like education.

In 1996, pensions accounted for 3.6% of revenue.  Think about that.  From 3.6% to 24.3%.  By what measure is this a sensible allocation of state revenue?   

More bad news was related to Dietrich by way of the Civic Federation, which projects Illinois will be $5.8 billion behind in paying its bill at the end of the current fiscal year. (This month’s projection noted earlier was $5.4 billion.).

Perhaps even more unsettling is the shortfall or loss of an estimated $54 billion in revenue for Illinois should the partial sunset of the 2011 tax increase take place as scheduled halfway through fiscal year 2015:  a personal income tax rate reduction from 5 to 3.75% and a corporate tax rate reduction from 7 to 5.25%.  Even an optimistic forecast on savings from a pension reform bill would only amount to $750 million to $1.5 billion.

Republicans candidates for governor who favor a partial sun-setting of hiked 2011 income tax rates, need to present a specific plan on how they would deal with the massive $54 billion in revenue loss that would encounter in the wake of the sunset.

A leadership deficit in Springfield is hurting Illinois taxpayers at a cost of at least $5 million per day.  Each day that goes by adds another $5 million in interest payments on our pension debt.

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