End and Means: Legislature Should Work Smart, Not Just Hard, on the Pension Fix

Apr 1, 2013

Charles N. Wheeler III
Credit WUIS/Illinois Issues
For someone with a penchant for stream-of-consciousness speechmaking, Gov. Pat Quinn’s budget address last month was notable for its laser-like focus on the need to address the state’s mounting pension debt, now approaching $100 billion.

The oft-repeated theme: Ever-mounting pension obligations are crowding out funding for education and other core services.

“There are too many priorities that have been cut to the bone due to inaction on pension reform,” the governor said at one point. “And it is only a preview of the pain that is to come if this General Assembly does not act decisively on comprehensive pension reform.”

Quinn’s proposed solution, which would rely heavily on suspending cost-of-living adjustments for retirees, “requires hard votes,” he told lawmakers. “But every day you wait to vote on this matter the problem gets worse.”

No one would argue with the governor’s assessment that tackling the pension problem is hard work. But sometimes it’s just as important to work smart, an option that Quinn and legislative leaders seem to have overlooked.

Case in point: The governor’s proposal and virtually all the pension reform measures introduced to date include reducing benefits now provided to public workers under the five state retirement systems, in clear violation of the constitutional guarantee that pension benefits cannot be diminished or impaired.

House Minority Leader Tom Cross, a Republican from Oswego, and Rep. Elaine Nekritz of Northbrook, the Democrats’ lead pension negotiator, for example, are sponsoring legislation that would raise retirement ages, eliminate cost-of-living increases after the first $25,000 of a pension, and require workers to pay more, among other provisions. The proposal would save some $167 billion over 30 years, sponsors calculate.

Meanwhile, Senate President John Cullerton, a Chicago Democrat, is pushing a plan that would offer public employees a choice between keeping their current COLAs but forgoing state-subsidized health care, or keeping health care in return for accepting smaller cost-of-living adjustments, for an estimated savings of $66 billion to $88 billion.

Cullerton believes offering covered workers an option gets around the constitutional ban on benefit impairment because they would be voluntarily accepting reduced benefits. Others are not so sure, likening the “voluntary” choice to that offered by the armed robber: “Your money or your life.”

Any enacted benefit-cutting plan is sure to be challenged in court, sponsors acknowledge. But they seem to be pinning their hopes on the Illinois Supreme Court agreeing that the state’s fiscal problems are so severe that the legislature had no other viable alternative but to override the Constitution, exercising the state’s police powers to deal with an emergency. After all, the argument might go, bond rating agencies and national accounting standards say we should have pensions fully funded in 30 years, and the only way to do that is to cut benefits.

Even assuming for the moment the justices buy that line, the benefit reductions won’t take effect for many months, if not years, while the unfunded liability grows.

More likely, however, would be a decision that what the rating agencies might want, and what the nonbinding accounting standards might say, don’t trump the clear constitutional language. Indeed, as a sovereign entity, the state has alternatives — raise taxes, cut other spending, reamortize the debt — that belie the notion that lawmakers have no choice but to disregard the Constitution. Moreover, the current problem is the result of past governors and legislators of both parties failing to adequately fund the systems for decades, so to plead “emergency” now is somewhat akin to the guy who kills his parents, then asks the judge for mercy because he’s an orphan.

But why run the risk of a prolonged — and likely losing — court fight when other, clearly constitutional options are available? Granted, anything that doesn’t involve benefit cuts probably won’t satisfy the corporate moguls and their editorial page shills who seem motivated by a visceral loathing of public sector workers. But sound public policy shouldn’t be held captive to special interests.

Instead, Quinn and legislative leaders would be well-advised to consider seriously a refinancing proposal developed by the Center for Tax and Budget Accountability, a bipartisan Chicago-based research and advocacy think tank.

The current crisis, the center argues, is the direct result of a 1995 law intended to bring the retirement systems to 90 percent funding by 2045. That legislation so back-loaded the payment schedule that the unfunded liability will continue to grow until FY 2030, topping out at $133.4 billion, while the required annual state contribution will keep on rising to reach $17.6 billion in 2045.

“To be clear, this repayment structure is not a creature of actuarial assumptions nor actuarial requirements but is purely a legal fiction the state imposed upon itself to kick the funding can down the road,” said Ralph Martire, the center’s executive director. “So, to solve the real problem creating pressure on the state’s fiscal system, the state has to re-amortize the debt repayment schedule or the fiscal pressure will not be alleviated.”

What the center proposes is to retire about $85 billion of the pension debt through flat, annual payments of $6.9 billion through 2057, with iron-clad guarantees that future lawmakers can’t take any more pension holidays. Added to the debt service each year would be the employer’s share of normal cost — the value of benefits public workers earn in a given year — estimated at $1.7 billion in FY 2014, $44 million less than this year, according to the Commission on Government Forecasting and Accountability, the legislature’s fiscal gurus.

In fact, the state’s normal costs are projected to decrease substantially over the next 33 years, to slightly more than $700 million in 2045, largely because the state won’t have to pay anything for teachers after FY 2038, when payroll deductions are forecast to more than cover the value of benefits earned each year.

The immediate drawback is that the center’s plan would cost some $1.8 billion more next fiscal year than the $6.8 billion retirement contribution Quinn requested, money the state doesn’t have now but could find. One possible solution: Borrow the money, and use a new revenue source — the state’s take from new gambling casinos or from closing some of the governor’s targeted loopholes, for example — to repay the bonds. And by FY 2021, the state contribution under the center’s plan actually would be slightly less than under current law; over time the plan would save the state some $35 billion.

Would the rating agencies balk at a plan that achieves just 90 percent, rather than full, funding of pension obligations and that takes 45 instead of 30 years to get there? Perhaps, but then again, they might prefer a practical solution that’s stable, predictable and clearly constitutional over a benefit-cutting scheme that’s likely to be tossed out by the court after several more years of uncertainty and mounting fiscal pressure.

Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois Springfield.

Illinois Issues, April 2013