By: Mitchell Serota*
The biggest problem facing our State is the Unfunded Actuarial Liability (“UAL”) of the five State-sponsored pension plans, which has officially been declared to be $133 billion. (I believe the real number exceeds $200 billion, but a discussion of how to determine the UAL distracts from the matter at hand.) To nobody’s surprise, this issue, which overwhelms all other issues by its enormity, is being shunted aside by the two principal gubernatorial candidates who would rather talk about toilets and Legionnaire’s Disease. Even in the debates, the UAL was given short shrift by television newscasters more concerned with keeping the candidates to two-minute time limits than probing for a substantive answer to the most pressing problem we face.
$133 billion is an enormous amount of “real money” that would impress even the late Sen. Dirksen. The population of Illinois is estimated at 12.8 million, which means there is an obligation for each citizen, from infant to superannuated senior, to pay over $10,000 in order to make good on the promise to the State employees. It need not be paid immediately, but it does have to be coughed up eventually. Put in this perspective, the taxpayer is more likely to gag than cough.
To lessen the crisis, Gov. Rauner proposes a framework called “Consideration.” Presumably, a Tier I State employee would be given a choice between cutting his pension cost-of-living increases or putting a lid on the salary that is included in the pension calculation. “Consideration” is not likely to pass the legal impediment known as the Illinois Constitution, and Rauner knows it. This “dead on arrival” idea seems less a serious solution than a cynical tactic to scare pensioners into accepting a cut or risk getting left with nothing.
Last year, Rauner spoke openly about his hope for federal legislation authorizing bankruptcy for states. That way, the pension conundrum would be left to the courts, similar to what happened in Detroit. With no other solution being offered, Illinois would be headed towards the distinction of being the first bankrupt state in the history of our nation.
J.B. Pritzker, for his part, recognizes that a constitutionally guaranteed promise has been made to State employees and it is his devout intention to keep it. That would mean each of us will have to pay the $10,000 figure mentioned above. In semi-private meetings, he had proposed paying off the UAL over 15 years. The intention is laudable, because the next generation of Illinois residents would not have to shoulder this crushing debt.
But what he does not say, and what I have estimated, is that to pay for this, flat rate income tax rates will have to increase from 5% to 9.5%. (My calculation shows the increase on households, assuming four individuals per household. If corporate income tax increases, the individual tax rate would not be as large.) The highest rate on the graduated income tax he talks about would be confiscatory. This, then, is his “dead on arrival” idea.
Simply stated, the incumbent will solve the pension crisis by bankrupting the State while the challenger will solve the crisis by bankrupting the people in the State. Two classes of citizens benefit from the absence of an honest debate of practical solutions: some elite pensioners and owners of moving companies.
*Dr. Mitchell Serota is a fully credentialed pension actuary (Fellow of the Society of Actuaries, Member of the Academy of Actuaries, Enrolled Actuary) who sits on two national committees focused on retirement plans in the U.S.
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