“People really misunderstand the nature of this whole problem,” Cullerton said in a radio interview. “Quite frankly, I don’t think you can use the word ‘crisis’ to describe it at the state level. It’s something we have to deal with, but it’s not something that we’re on the verge of bankruptcy on.”
“Top Illinois Democrat goes blind,” declared one Chicago columnist. “Cullerton throws taxpayers under the bus,” shrieked one downstate newspaper’s editorial pages. Perhaps the most creative of all those piling on, though, was Crain’s Chicago Business, which dubbed the Senate president “the Alfred E. Neuman of Illinois politics’” a reference to Mad magazine’s venerable, gap-toothed “What, me worry?” mascot. And those were the more polite responses.
The critics all recited a familiar litany: a near $100 billion gap between benefits promised public workers and the money likely to be available to fund them over the next 30 years or so; the worst credit rating among the 50 states; a stack of unpaid bills totaling some $7.5 billion, the second highest unemployment rate in the nation.
All worrisome to be sure, but Cullerton was correct that the pension systems’ unfunded liability is not a crisis in the sense of a problem that needs to be addressed immediately. For starters, much like a homeowner’s mortgage, the unfunded liability doesn’t have to be paid all at once, except in the highly unlikely event everyone decides to retire at the same time. Moreover, the retirement systems have not been funded adequately on an actuarial basis for 70 years or more, yet benefits always have been paid.
Red flags are present, of course. Consider the largest of the five systems for which Illinois is responsible, the Teachers Retirement System. “Without changes to the pension code to ensure sustained and adequate funding, TRS faces the very real possibility that in a few decades the system will not have enough money to pay benefits to retirees,” warned Executive Director Dick Ingram a few days after Cullerton’s comments. “We cannot guarantee that TRS will have enough money to pay the pensions promised to every member in the system.”
In the here-and-now, though, not years in the future, the $4.9 billion the system paid in benefits in Fiscal Year 2013 was more than covered by its $8.3 billion in revenue, thanks largely to a 12.8 percent return on investment, well above the long-term assumed rate of 8 percent. In fact, the system covering almost 400,000 suburban and downstate teachers has averaged a 9 percent rate of return over the last 30 years.
A more pressing problem — an immediate crisis if you will — is the backlog of bills, representing money owed state vendors for goods and services already provided, not an amount estimated by actuaries looking far into the future. Thanks to unexpectedly high income tax collections, the state was able to pay all of its FY 2013 bills from the state’s main checkbook account earlier than any time since 2009, state Comptroller Judy Baar Topinka reported last month. But many of the old bills were paid out of FY 2014 revenues, leaving Topinka and state agencies holding stacks of bills accumulated since July 1.
But the real crisis facing Illinois will come next spring, when Gov. Pat Quinn must propose and the Illinois General Assembly must enact a budget for FY 2015 facing the loss of more than $2 billion in income tax receipts as the temporary rate increases are cut back. Under the 2011 law, the state’s personal income tax rate will drop from 5 percent to 3.75 percent, and the corporate rate will fall to 5.25 percent from 7 percent, on January 1, 2015, the midpoint of the fiscal year.
The spending plan Quinn is slated to present to lawmakers on February 19 cannot propose spending more than the revenues the current tax structure will generate, under terms of a 2010 budgeting reform law. And the legislature can’t appropriate more than that, either. So the governor and lawmakers will have to figure out how to squeeze some $2.2 billion, according to some estimates, out of this year’s $35.5 billion general funds budget. While slashing a little more than 6 percent might seem an exercise in some needed belt-tightening, the reality is the cuts can’t come across-the-board.
More than $2 billion, for example, will be needed to repay past borrowing, and by law, the debt service on general obligation bonds has to be paid, even if no money is set aside for it. As an extra layer of protection for investors, the law can’t be changed — irrepealable and irrevocable are the statutory terms — until all bonds are retired.
Next in line are pension contributions, which current estimates put at close to $6.2 billion in general funds in 2015, about $200 million more than this year. The tab for Medicaid and state worker health care is likely to be $8 billion or so. Local governments are in line for maybe $2 billion, mostly through a program that gives them a slice of income tax collections. That totals about $18 billion, more than half the current general funds budget. So that means what remains — chiefly education, human services and public safety spending — must be sliced roughly 13 percent to meet the legal requirement that Quinn’s proposal can’t exceed estimated revenues.
Of course, some would note that lawmakers can change current law, for example to take another pension holiday or to eliminate some covered Medicaid services. True — but those changes would have to be enacted before Quinn unveils his budget unless the budget law itself is modified, none of which seems likely.
A more plausible scenario might be passage of so-called pension reform to reduce workers’ future benefits by more than $150 billion, which would allow budget-makers to set aside perhaps $1.5 billion less for the retirement systems, thus softening the blow of the expiring income tax.
In fact, Cullerton sees that as the goal of the 1-percenters and their allies in right-wing circles and the media who are so determined to slash retirement benefits.
“These pension (proposals) we’ve talked about will save annually anywhere from $750 million to $1.5 billion,” the Chicago Democrat said in the radio interview. “So you’re still going to have real huge cuts that we’ll have to make if we don’t raise that income tax higher than what they’re scheduled to go down to. But the pension reform then is about tax reduction — not about the solvency of the pension fund or about diverting money to spend more money for education.”
So even if pension benefits are reduced, the governor likely will have to announce deep cuts in aid to local schools, tuition support for college students, mental health and senior services and a host of other state programs popular with voters, roughly a month before the March 18 primary.
That will be a true crisis.
Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois at Springfield. He has been a member of the State Universities Retirement System since August, 1993.
Illinois Issues, December 2013