By: Ted Dabrowski and John Klingner
Solving Illinois’ pension crisis is one thing, getting Illinois politicians to tell the truth about the scope of the problem is another.
NPR recently interviewed Illinois’ four statehouse leaders on a variety of topics, but it was Senate President Don Harmon’s comments on pensions that deserves the most scrutiny. His language contained the typical errors and half-truths about the crisis and the solutions this state needs. Below are his statements that need to be corrected.
1. “The short answer is, on the legacy [pension] debt, we’re going to have to pay it.”
Like many Illinois politicians, Harmon underestimates – wittingly or not – just how big Illinois’ debt burden is. We are the nation’s extreme outlier when it comes to pension debts, both in nominal terms and on a per capita basis (See Appendix A). No state uses more of its budget to pay for pensions than Illinois does.
Moody’s calculations put Illinois’s total state and local retirement shortfalls at $420 billion, which is the equivalent of nearly $90,000 per Illinois household. That retirement debt will have to be paid down with ever-bigger tax hikes if the shortfalls aren’t significantly reduced by pension reform.
But Illinoisans are already taxed-out. They pay one of the highest overall state-local tax burdens in the country. In fact, Kiplinger calls Illinois the nation’s “least tax-friendly state.”
Harmon may think he can force Illinoisans to pay down those pension debts – for services already rendered – but he forgets Illinoisans can flee that burden by just moving to other states. Illinois is already a national outlier in out-migration, according to IRS data, and it was one of only three states to lose population over the last decade, according to the U.S. Census (See Appendix B).
For more information about why Illinois’ pension crisis will drive more residents out, see: Solving Illinois’ Pension Problem | Part 1: Illinois is the Nation’s Extreme Outlier
2. “…that transition from a tier one pension model to a tier two pension model will solve this problem over time. It’s a problem that took a century to get into this deeply, it’s going to take decades to get out.”
Tier 2 is not a solution. It does nothing to solve Illinois’ massive pension debts, which are entirely connected to Tier 1 workers and retirees. The growing number of Tier 2 workers does not reduce that debt.
The state’s number-crunchers report that even under the state’s overly-optimistic actuarial assumptions, pension costs will eat up over 25 percent of the state’s general fund budget for the next 25 years. And even that understates the problem for three reasons.
First, if investment returns in the pension funds fall short of assumptions or retirees live longer than currently estimated, then the burden on the budget – meaning Illinoisans – will be even larger than expected.
Second, those numbers in the COGFA graphic do not include the state’s $56 billion retiree health insurance shortfall, pushing the cost of retirements today closer to 30 percent of budget.
And third, political or legal pressure could force lawmakers to dismantle Tier 2 sometime in the future, significantly increasing the state’s pension obligations. Harmon even admitted Tier 2 will have to be changed, saying the plan grants “a much-reduced set of benefits, so low in fact, Social Security may ding us and force us to raise some of those benefits.”
How can Harmon say that all we have to do is wait for Tier 2 to eventually fix things, but in the same breath, admit that Tier 2 benefits will have to increase? Did he think no one would notice the contradiction?
In fact, increases to Tier 2 benefits have already begun. Lawmakers’ increased the benefits of downstate and suburban public safety workers in 2019 in an attempt to get ahead of any demands by Social Security to boost Tier 2 benefits.
Considering all that, waiting on Tier 2 to “solve” things is a terrible mistake.
3. “Those benefits are protected, not only by the Pension Clause, but also by the Contracts Clause of the state Constitution and the United States Constitution.”
Sen. Harmon is wrong on both counts. The state’s Pension Clause will not be an issue if it is amended by the people of Illinois, and the United States Supreme Court has long made clear that the Contract Clause is not an absolute. Using the guidelines the high court has provided, many courts in many circumstances have permitted modification of a variety of contracts. As to pensions in particular, experience in other states shows that, in the right circumstances, reasonable modification of pension contracts is permissible.
The two states with the most relevant changes for Illinois are Arizona and Rhode Island.
Arizona, which has constitutional protections that mirror those in Illinois, reduced its public safety pensions in recent years by amending its constitution not just once, but twice. Those opposed could have challenged those reforms under federal law, but five years on, no one has tried.
In the second example, recent municipal pension reforms in Rhode Island faced significant public-sector resistance. The state has no pension protection clause, so opponents claimed the reforms violated federal law, including the federal Contracts Clause. The Rhode Island Supreme Court rejected that argument, and the U.S. Supreme Court declined to hear an appeal, leaving the reforms intact.
The experiences in both states contradict Harmon’s claim that the state and federal constitution automatically prohibits any changes to pensions.
For a full explanation of why pension reform would pass legal muster, see: Solving Illinois’ Pension Problem | Part 3: Why Pension Reform is Legal
4. “A constitutional amendment would do nothing to erase the legacy debt.”
Again, that just isn’t true. Amending the pension clause of the Illinois constitution would allow structural changes to the benefits of current workers and retirees. As long as the reforms are “reasonable and necessary” and narrowly tailored to honor contract rights as best as reasonably possible, cutting legacy debts by altering pension benefits is legal under the federal Constitution’s Contracts Clause.
Both the reforms in Arizona and Rhode Island were successful in reducing legacy debts. Arizona reduced the compounding cost-of-living adjustment for police and fire retirees. And so did Cranston, Rhode Island, which implemented a 10-year suspension of their 3 percent COLA.
For a full explanation of why pension reform would pass legal muster, see Chicago Tribune Op-ed: Amending the Illinois Constitution: 50 words that can save the state
*********
Wirepoints is doing much more than just counter Sen. Harmon’s talking points. We took the time last year to create a comprehensive reform plan to solve many of the problems we’ve outlined above.
We’ve laid out the case for why pension reform is both necessary and urgent. We’ve scored a baseline reform plan for Illinois. And, importantly, we’ve made the case for why pension reform is legal, countering the claims that pension reform in Illinois is a “fantasy.”
Appendix A
Appendix B
Audio and summary 
If this bill passes, say goodbye to local control over all Illinois parks and expect to see open drug and alcohol use, needles, no sanitation and fire hazards, but no ordinary park users.
One of the actual fixes would be to let a real virus, meaning a truly lethal one (not a weak sister likes sarscov2) blow through the boomers and fix the pension “problem” naturally. The corrupt gov’t didn’t even want that done, though. Too bad for them, lol. Maybe this vaccine will off many of them just like Gates wants it to though, in the next 6-12 months.
Don’t like the truth? I’m not suggesting they do this, but it wouldn’t really matter anyway, since most people don’t die from this overstated and WEF/Gates created virus.
A constitutional amendment would do nothing because our judges are bought and paid off. We have a balanced budget amendment with no balanced budget. #2 is a foreign concept in IL. The Democrats are a totalitarian nazi party.
“our judges are bought and paid off” It’s not as much that the State Court judges are bought off and paid to rule one way, but rather, they are rewarded with political donations for their loyalty to the political system. You must plead fealty to the system to become a judge in Illinois. And after you plead fealty, you get slated, and then are rewarded with the political contributions. So it’s not really buying off judges, they are being rewarded for being part of the system to begin with. There’s a handful of judges around the state, usually in smaller… Read more »
You had a long winded way of agreeing with the fact that they are bought off.
No one has ever really answered the question of whether Tier 2 pensions are compliant with the Safe Harbor Act.. And why not just ringpost the current DB plans for every current member, allow them to continue to contribute and enjoy their earned and contractually required retirement benefit without diminishment. Every new employee goes straight to a 401k, 403b or 457b depending on job. Stop bleeding the mortally wounded patient. Oh wait, the unions own IL Govt. and would never allow it. And don’t confuse the ILSC crony banana republic bench with a real legal body. Ed Burkes wife is… Read more »
They don’t. I left my tier 2 pension because I was a ponzi for the older, less competent workers who did the same or less work than I did, yet got HUGE benefits I didn’t. At least I’m in TN and in a free place now, though. They can dodge bullets back in IL
Why NOT have the plan fiduciaries simply cap the annual payouts so that no pensioner gets more than $6,000 per month [or some other number] because that is the limit of what the fund can afford based on value of assets on hand plus realistic earnings plus realistic contributions. Don’t public plan trustees have immunity from personal liability? Would the court hold them in contempt if they refused to obey a court order to remove the cap? Could the trustees not turn over the problem to the court itself under its equitable powers over trusts? No doubt lots of lawsuits… Read more »
So your suggestion is…why doesn’t a judge not follow the law? It has nothing to do with the Supreme Court lacking the courage and everything to do with the ILSC following the law. Are you suggesting that a trial judge has more power and the final say over pension payments compared to the ILSC? “Sensible fiduciaries (trustees or judges) would ration available funds like they would water or food during a drought or famine.” Why? It doesn’t matter. You are making the classic mistake thinking the funding level of the pension funds has anything to do with whether or not… Read more »
Lots of judges don’t follow the law. #2 in Illinois, balanced budget amendment, and on and on and on. Pensions are next
The courts may step in and require more funding, but they can’t force anyone to stay and pay it.
Idiots like Pensions Cut don’t get it because they are biased, greedy slobs. Math and reality always win, and his pension is doomed. Pay as you go is unsustainable and in many cases not doable at all in cities and towns. It would take up at least 60% of the state budget to be pay as you go, so of course that won’t ever happen. This will become a federal issue, like Mark Glennon said when he owned your ass and you ran back to mommy. Pensions Cut pension is 100% doomed. I can’t wait!
I hope they get what they deserve (little) but you guys have been saying this for YEARS. Obviously, the game is rigged and it can last much longer than anyone ever thought. In the meanwhile, if the pension scum don’t have real assets with what they have been paid so far, they will be in for a rude awakening, but it’s the tax payers that got the real screw job.
PPF and JimBob, I am with JimBob on this. I wrote in detail to the same effect here: https://wirepoints.org/should-a-trustee-of-an-underwater-pension-cut-payouts-now-to-save-for-future-claims-wp-original/ . Pension trustees have a fiduciary duty to treat claimants equally and if a fiduciary concludes that, at the end of the day there will not be enough to go around for everybody, they should cut the huge, current payouts to protect future claimants. The conclusion that there won’t be enough is reasonable and it does not matter that the liability ultimately goes to the state or municipality because they, too, lack reasonable prospects for paying in full. It’s true, however,… Read more »
Also, the ISC is a corrupt, public union owned court that will have no say in the matter once pension funds go insolvent and things get dire. Their ruling was completely unrealistic and will be defeated by math. It will be a federal issue, as Mark said. Also, stop talking about Harvey. Harvey is a cesspool that no one cares about. That won’t be the case for the state or many other bigger, better cities and towns. This will be a federal issue and your pension will lose. Math and reality always win.
When will this be a fed issue and “they” lose John?
The IL Supreme Court has ruled that pensions are contract rights and must be honored under contract law principles. There is a separate body of law commonly known as trust law that occasionally intervenes — for example, where literal enforcement of a contract is not justifiable under equitable principles. Most lawyers understand this and most non-lawyers fail to grasp it. Contract law entitles landlords to collect rent and to evict tenants who don’t pay rent. A moratorium on evictions is an example where other considerations trump contract law. Trust law requires “fiduciaries” such as trustees to override a contract principle… Read more »
It’s a THING that they can do, but don’t have to and don’t plan to. There, fixed it.
The political IL Supreme Court in so many words said the State has the authority to confiscate private property – so keep raising taxes on the citizens. You have a better chance at a court in Communist China.
I’ve always known that we can solve the problem. I’ve also always known that the inmates run the asylum. Why would anyone collecting a pension want to reform the pension system? That’s why it will never happen especially in Illinois. This state is far too corrupt to correct the corrupt pension problem.
Those collecting pensions should be leading the parade for reform, since they are in line to lose the most when pensions cannot be paid. But they seem to want to destroy the state first before they lose their pensions anyway. Hard to understand that kind of thinking…
“Hard to understand that kind of thinking” That might be because you’re not wearing their moccasins. Truth is always in the eye of the beholder.
“Truth is in the eye of the beholder”. Through what eyes do they see any possibility that these pensions will be paid as promised? Certainly not with any eye on reality.
This topic has been covered here ad nauseum. I know the arguments and counter-arguments. You may as well. We shall see!
Idiots like Pensions Cut don’t get it, but you do. Math and reality always win, and his pension is doomed. Pay as you go is unsustainable and in many cases not doable at all in cities and towns. It would take up at least 60% of the state budget to be pay as you go, so of course that won’t ever happen. Pensions Cut pension is 100% doomed.
People are numb to all of this – nothing changes in Illinois. And IL just got a Red State bailout. Nope, not gonna happen.
For the time being, the non taxation of pension income keeps a lot of people happy here in Illinois and the high pay rates for most trades and professions in greater Chicago keep people here as well. A lot of people do benefit from the current system and they, making up a near-majority of the voting public, suffice to maintain the system. Most of the people hurt by it are apathetic or actually think they benefit from it. One of the features of the system is that people who benefit from it in trivial ways, like getting a parking ticket… Read more »
True only until the aquifer runs dry. We see contribution increases that do not keep up with mounting liabilities. We see nothing likely to change that trend other than (perhaps) federal bailouts. The future is inherently unknown. We can plan for it or just let it happen. Plan or no plan, it’s likely to be a legal mess. That means the lawyers will end up with a lot of the money that could have been paid to pensioners. There are ways to “plan” where pensioners would have an upside if the worst predictions don’t materialize. Pensioners seem to have opted… Read more »
The fact is once the next recession/downturn his it will be lights out and game over. Thanks for playing. We have not had a recession since 2008. Longest economic expansion in US history. Keeping the NIRP/ZIRP policies in place during the longest economic expansion ever was another bright idea by the esteemed Harvard MBA brainiacs running our country, so when that downturn does finally ARRIVE we will not be able to counter it with lower interest rates for stimulation. And when that downturn finally does arrive then the entire system will not only fail, it will fail so spectacularly that… Read more »
-So how to benefit (or protect yourself at least) if or when this happens?
-How far will central and federated “brainiacs” go with a 2.0 version of another New Deal?
Here are a few other government Ponzi schemes.
$96 Trillion in Unfunded U.S. Medicare and Social Security Benefits.
By Adam Andrzejewski.
May 05, 2021
http://www.realclearpolicy.com/articles/2021/05/05/96_trillion_in_unfunded_us_medicare_and_social_security_benefits_775259.html
Eventually this pension debt problem will solve itself, albeit catastrophically. As a proponent of small government, the YUGE pension debt has done what no politician has ever been able to do – force the state to say no to any new spending programs. Need money for disabled people? Sorry, we can’t afford it. Need money for schools? Sorry, we can’t afford it.
When Governor Quinn talked about “shared sacrifice”, the only people sacrificing were the proletariat class that were dumb enough to work in the private sector. The privileged public employees won’t have their standard of living reduced at all.
Every year the state adds new spending programs.
That’s the only way the can stay in office
Harmon wants to re-amortize the pension debt…again. That’s his solution. I know this because I’ve heard him talk about it. He explained how ludicrous the payment ramp is over the next 25 years (failing to mention, of course, we’re already half way thru the original 50 year payment plan), said it’s not fair to place that burden on his (our) children, how we’re attempting to solve a problem that has existed over 70 years in a short time frame. That’s his reasoning. He has thoroughly convinced himself of this. Eventually, we’re going to see legislation that pushes the pension funding… Read more »
I think that’s right. One huge can-kick. Just stick it to the kids.
But won’t IL be rated junk if they do that, which means they can’t? The pensions collapse if IL goes junk.
I mean pretty sure I am correct that IL will go junk if they did that. You, Ted, or John can tell me otherwise, but I think it is true.
Never, it will always stay “just above junk” thats where the Moodys customer base wants it. High yields guaranteed by the enslavement of the citizenry. Illinois government is not the only enemy here, markets and Moodys will be glad to collude with Harmon. The two of them together will sell us into slavery, its a “win win” for them.
I moved. I wasn’t sold into anything. At any rate, the pensions, in time, are doomed.
John, maybe. I don’t know. But Rick’s comment below may be right. I would think Harmon and others would feel out the rating agencies before any proposal. Always remember how rating agencies were portrayed in The Big Short. It is accurate.
If you plan to live in Illinois over the next 30 years, get used to the word austerity. This is what happens when the power mongers reward themselves, friends and family at the expense of everyone else. Either you reconcile yourself to being a patsy, or you leave the state. There is no fix that the Democrats will consider, as it would harm them. It simply will not happen.
Nobody in their right mind is going to live in Illinois in 30 years unless the people rise up force the legislature to fix this. Without reform the whole state will implode, slow at first, then fast. Hopefully smart people will be able to get out before property values collapse.
im not going anywhere…..cuz im gonna get free Six Flags tickets when i get my covid 19 vaccination!!
Who the hell would live here in the next 6 months let alone the next 30 years? If you want to get out you can make it happen.
One of the problems Wirepoints –and all of us — face, is that this is just too complicated for the average voter to understand. And when someone with a big fancy title like “President of the Senate” says something, the average voter believes it. At least up until lately. I know first hand that union BA’s (business agents) are running around telling members and retirees not to worry. The Constitution is on your side and the Democrats will protect you. That’s enough for most folks to hear, so their appetite for any more research just isn’t there. It will take… Read more »
Every year that passes without pension reform is another year current retirees push the pain to future generations. Even if we tried to implement pension reform today, it would take years to pass the GA and years to get through the courts. But each of those years, retirees would go unscathed while today’s workers inch closer to a diminished pension while subsidizing those current retirees. Delay, delay, delay. That’s their plan. Works great if you’re retired, not so much if you’re a 40 year old teacher. By the time pension reform comes along, the 40 year old will have just… Read more »
You are exactly right, especially when you have arrogant clowns like Ralph Martire from the Center For Tax and Budget Accountability (He should just change the name to Center for Tax) spewing his BS that Harmon is parroting.