An escalating pension crisis, a wasted summer, and The March of Folly.
By: Mark Glennon*
The fate of Illinois will not be determined by most of this summer’s headline issues, important as some of them are. It will be determined by how the pension crisis is resolved — or not resolved. Hundreds of billions of dollars owed with very little available for payment have crippled all the myriad levels of government in Illinois, and some 200,000 public pensioners who either need or want their money (depending on their circumstances) will be facing cuts.
And the crisis is growing rapidly.
What’s been done in the past few months on pensions? The summer has been spent wringing hands over what the Illinois Supreme Court will do and little else. There’s no indication that anybody in Springfield has worked out, even behind the scenes, contingency options in anticipation of the next legislative session, different possible rulings from the court, or changes that may come from the November elections.
And nothing was done to halt expansion of the crisis, despite available measures.
First, here’s why the crisis is escalating:
– Recall how we were warned during the run-up to the pension bill last year that Illinois was losing $5 million per day on the six state pensions. Nobody is looking at it that way recently, but that loss continues because implementation of the bill was stayed, and it is likely to be entirely voided. The true total is worse. Adding in the 650-plus other county and municipal pensions and other factors impacting the pensions, the crisis is likely growing at a rate over $10 billion per year. (A change in June in one assumption by just the Illinois teachers’ pension alone added another $6 billion to the unfunded liability.)
– With the stroke of its pen in the Kanerva decision, the Illinois Supreme Court added some $50 billion of entirely unfunded liability for healthcare benefits for state retirees to the constitutionally protected pension obligation. Free speech, due process, privacy, life, liberty, pensions and now healthcare (for public pensioners only), as the court reads the constitution. Never mind that the constitution never mentions healthcare benefits and never mind how fast healthcare costs escalate. Tens of billions more for healthcare for municipal retirees are also protected under the decision. Further healthcare obligations accrue every day in numbers not reported, against which there is no funding, reserve or budget entry.
– We’ve abandoned even the pretense of avoiding the brazen conflict of interest judges have in ruling on the constitutionality of pension reform. The legislation for state pensions excluded the judges’ pension, a sham in itself, as we explained here. But the Kanerva decision is written so broadly that it includes healthcare for all pensioners, including judges, and the court’s opinion doesn’t even mention the obvious bias the judges had in their ruling. We’ve pulled off the fig leaf and let judges have their way with taxpayers fully exposed to the blatant conflict of interest.
– Credible research showing a pension crisis worse than officially reported continues to be ignored. For example, a detailed research report from JP Morgan in June on state pensions, which which struck us as a must-read, went entirely unreported in Illinois. Among it’s conclusions are that the portion of Illinois tax revenue that would have to be devoted to fixed payments (primarily pensions) would zoom from 17% to 40% if you use the right numbers and wanted to fix the pensions. Even using Illinois’ own published assumptions, that report says the state is only paying about 76% of what it should be paying each year to get on a payment schedule that would eventually make the pensions healthy. And it wouldn’t help much, that report says, to do the things pension “reformers” typically claim would be adequate, like reducing COLA increases by one percent, capping healthcare benefits at the 80th percentile, and increasing employee contributions by two percent (say, from 5% to 7%).
– Lastly, and most importantly, one group has not been sitting on it’s hands, and it’s unwittingly worsening everything. Public unions this week moved for an expedited ruling to constitutionally void virtually all legislative attempts at pension reform. Reform opponents in the legislature, with help from do-nothings and can-kickers (which included many Republicans), initially preferred to let pension litigation drag out, so procedural measures that might have expedited a court ruling were omitted from last year’s bill. Apparently, unions now see the probability that Rauner will win and that the legislature will tip at least a bit more against them after the November election. Smelling blood from their Kanerva win, they now want a quick kill in the courts. Evidently, they are thinking that winning would generate a scramble for new action, which they hope would be a tax increase they could push through with lame duck friendlies.
What could be done to stabilize the crisis?
This part is easy. It should have been done long ago, though Springfield has no interest in doing it: Halt some or all appropriations for salary increases, contribution into the pensions, or other money important to pensioners, or escrow those amounts pending sensible resolution. Eden Martin, a prominent lawyer, put it this way: “No pension reform, no funding increase.” Authorization for municipalities to do the same thing could also be legislated. Remember that the constitution only prohibits reductions in pension benefits paid out, but it does not mandate contributions in. Instead, Springfield has gone the opposite way, passing funding guaranties that force appropriations into the pensions.
With both Springfield and the courts on their side, unions have made it clear they have no interest even in talking about pension reform. Not one dime’s worth. “There’s no room to continue discussion,” as one of their spokesman put it last month. Only a big hammer will change their attitude.
This being August, I saw a writer on a different topic play with the title of historian Barbara Tuchman’s book, The Guns of August. That’s a regular thing in August — making allusions to the title or using variations on it. That book about how the world stumbled into World War I doesn’t relate here here, but it reminded me of another one by the same author that certainly does relate, The March of Folly. It’s about how governments sometimes, somehow, pursue policies contrary to their constituents’ own self interests.
Doing nothing is in the interests of neither taxpayers nor pensioners. Pension cuts inevitably will be part of the resolution, one way or another, because the math simply doesn’t work otherwise. Given that reality, the numbers worsen with inaction, growing both the costs for taxpayers and the pension cuts to come. Waiting for decisions from biased courts is no reason to avoid at least attempting to stabilize the problem. Bogus assumptions and bad actuarial work accomplish delay, only, because actual numbers ultimately trump projections.
Folly marches on. Pure folly — by both unions and Springfield.
*Mark Glennon is founder of WirePoints, Inc.