Get this through your head, Illinois: The only ways to significantly reduce our state and local unfunded pension liabilities is through either 1) amending the state constitution to delete the pension protection clause, or 2) federal bankruptcy.
Our courts have been crystal clear on that. And the state constitutional amendment may well not work because cuts to pension obligations would still be challenged under federal constitutional principles. In any event, it would take many years to accomplish and litigate.
Instead of dealing with that reality, it looks like we’re heading into another round of diddling and deceiving, and one whopper of a dumb idea has been added to the mix, which I will get to.
The State Journal-Register has a preview of that upcoming round based partly on comments by Rep. Robert Martwick (D-Chicago).
Martwick’s primary idea apparently is to let pensioners trade off some of the automatic 3% increase they get in pension payments. That’s just another variation of the “consideration” approach. Yes, a fair, voluntary trade is probably fine with the courts. But why can’t anybody understand that the other half of the trade has to be equal and that part works against taxpayers, cancelling out the value of the pension cuts? That’s why the consideration approach can’t work by definition, as Chicago’s lawyers clearly explained in earlier litigation.
You should expect more action on some kind of consideration proposal — one for current employees that would swap some earned pension benefits against other benefits, like pay increases. Well, the consideration to be swapped should already have been taken away. Harsh, yes, but we have an emergency, folks, that’s been left unaddressed for years. In other words, since the courts won’t allow a reduction in earned pension benefits, other benefits should have been suspended long ago, as any private company would have done.
And as for any plan that trades a cash settlement for lower pension benefits, actuaries scoff because the first takers would be folks on their death beads, followed by overweight skydivers, heart attack victims and the like. That adverse selection destroys the mortality assumptions for the remaining pool of pensioners.
Then there’s “reamortization” — a fancy word for reducing for now the annual contribution by the state. It kicks the can to later years by letting the unfunded liabilities grow and compound faster than they would otherwise.
But it actually makes sense in a way! However, it should properly be labeled the “just don’t fund the damn things” plan, not reform. We’re already partially doing it in since contributions aren’t sufficient to stop liabilities from growing. Reamortization would blow the whole thing up sooner, which has lots of merit.
And here’s the big one which, according to the Journal-Register, will be subject to hearings in the General Assembly soon:
“‘A massive bond issue that would be applied to the state’s pension debt. The idea is the money could be borrowed at a lower interest rate than the state is essentially paying on its $129 billion pension debt.”
Yes, borrow to pay off our debt! Can’t wait for those hearings to see what kind of terms our lawmakers think they could sell those bonds on. Influential columnist Rich Miller seems intrigued by the simple elegance of the idea. Writing today, he said, “I don’t know that the state has to physically sell bonds. A buddy of mine contends that it might be able to just hand the pension systems a promissory note.”
We’ve sacrificed enough innocent pixels on “pension reform” ideas like these.
-Mark Glennon is founder of Wirepoints. Opinions expressed are his own.