By: Mark Glennon*
Governor JB Pritzker on Monday gave perhaps his most deceitful performance yet on Illinois’ pension crisis in interview at the Economic Club of Chicago, which handed him a full hour of uninterrupted spin. He did it while explaining his opposition to amending the Illinois Constitution to allow for pension reform, which is the only legal route, short of bankruptcy, to real reform.
We are fed up with this kind of deception, so let’s fact check his comments in detail and, on a couple points, compare them to the state’s most recent bond disclosure document, which isn’t much better.
The buyout sham
There “are better ways to reform pensions,” Pritzker said. He offered only two examples, the first being the state’s pension buyout program. Under Illinois’ pension buyout programs, he claimed, 20% of those retiring are accepting a cash buyout equal to 60% of projected pension benefits. He claims a that a study shows it will save “billions and billions,” perhaps $25 billion.
Pritzker should have read the state’s basic disclosure statement, called an Offering Statement or OS, issued earlier this month for its most recent bond offering. It tells a very different story. It reports that only 818 workers and retirees who are eligible for either of the state’s buyout programs have applied for one. That’s less than 2.3%, not 20% as Pritzker claimed. That’s being generous because Pritzker was specifically referring to the particular program that offers a full buyout of all pension benefits at 60% of their value. The OS, though not entirely clear on this, says As of September 30, 2019, no SURS members have elected that buyout option. SURS, for university pensioners, is the only pension for which the OS has specific numbers on that program.
I reached out to Pritzker’s press secretary to ask where he got his numbers but have received no response.
And what about those huge savings Pritzker claims? The OS says “The State is unable to quantify the amount or timing of any [reduction in pension liabilities] at this time.” In other words, Pritzker brags about savings to the public but the state says something different when the penalty would be securities fraud.
Nobody has produced any proof of savings for the buyout programs from the start, and it’s probably because the savings will be trivial. Alleged savings from it were “plucked out of thin air,” as one journal for government professionals put it. There was no actuarial analysis or debate, and the “savings” were dishonestly used in the 2019 budget to justify a bogus $400 million reduction in state pension contributions. The Civic Federation in July published an analysis showing savings to the state pensions of just $13 million for the fiscal year that had just ended. For perspective, that’s less than two-tenths of one percent of what taxpayers contribute to pensions each year.
Finally, the buyout program imposes costs that nobody is talking about. The state authorized $1 billion of new bond borrowing to pay for the buyouts, $300 million of which were sold earlier this year. But because of the low take-up in buyouts, just $115 million has been used, according to the OS. The rest is sitting idly while taxpayers pay interest on the bond at 5.7%.
And don’t the buyouts destroy the standard actuarial assumptions behind life expectancy for those who don’t take the option? Those who take the option undoubtedly include many who, for whatever reason, don’t expect to live long. That negative selection bias invalidates assumptions behind the remaining pool of pensioners. If that impact has ever been measured, we haven’t seen it.
In short, the buyout program is the “shammiest of shamtaculars,” as actuary Mary Pat Campbell wrote earlier. Pension actuary and Forbes columnist Elizabeth Bauer has long ridiculed the program, too. Our sources inside the government say no material savings should be expected.
Consolidation does little
The second example of a “better way” to reform pensions, according to Pritzker, is the pending consolidation of investment functions for suburban and downstate police and firefighter pensions.
But that’s extremely limited, since police and fire pensions represent less than five percent of the state’s total unfunded pension liabilities. The concept is not replicable for our bigger pensions and, even for the smaller pensions covered by the proposal, savings are speculative.
There’s something else about the pending consolidation legislation that is getting increasingly suspicious and potentially huge, though Pritzker didn’t talk about it. Aside from consolidation, the bill also contains a supposed fix for Tier 2 pensioners in those police and fire funds. Tier 2, for all workers hired after 2010 under any pension in the state, is a separate problem because it’s unfair to those workers and may run afoul of federal minimum safe harbors.
But the state already passed legislation in 2017 purporting to fix the problem by replacing it with a new Tier 3. However, Tier 3 was never implemented and the legislation has become a zombie, as we put it earlier. There are no signs it ever will materialize. The pending consolidation legislation takes an entirely different and less convincing approach to fixing Tier 2. Why? Will that be a precedent for our other pensions? We suspect so, but nobody is saying.
The problem is that nobody will put a price tag on the cost of fixing Tier 2, whatever the approach may be. That may account for the silence. The bond OS from earlier this month punted on the issue in a very evasive way. After discussing Tier 3, but not the other approach, it says,
TRS, SURS and SERS [the state’s three big pensions] are currently analyzing the long-term impact that Tier 3 will have on their respective financial positions. The State makes no prediction as to the impact such reform will have on the Retirement Systems or the State’s contributions to TRS, SURS and SERS going forward.
Some disclosure that is. “Still working on how much this will cost,” it might as well say. How many more years do they need? And it’s simply not credible to believe that, with the legislation passed two years ago, nobody has made some estimate of the cost. That ought to be made known to bond buyers and the general public. We suspect the cost of fixing Tier 2, however it is done, may be huge and that the state is hiding the problem. The Civic Federation also raised this concern recently, focusing primarily on the new approach in the pending consolidation bill. An honest discussion of our pension problems by Pritzker would have included this issue.
No legal obstacle to a constitutional amendment
Pritzker also repeated a standard public union talking point about why a constitutional amendment would be a waste of time. He said pension reform after an amendment would still be struck down under the Contract Clause of the United States Constitution.
We won’t dwell on that because we have written so often already about why it’s false, and our position was validated by the Rhode Island Supreme Court in the first decision directly on the issue.
Politically impossible – because they make it so
Pritzker’s final reason for opposing a constitutional amendment to allow for pension reform is one that should always make your head spin: It wouldn’t get the votes needed in the General Assembly to get on the ballot, he said.
He might as well have said “because we’re not going to vote for it, that’s why.” It’s just another version of “not politically feasible.” With Pritzker and the General Assembly committed to doing whatever public unions want, well, why bother to ask about real pension reform?
Pritzker should have added something else to what he thinks isn’t politically feasible in Illinois: honesty.
*Mark Glennon is founder of Wirepoints.
For further reading on these topics, see our earlier articles:
- Consolidation of Illinois police and fire pensions: a good idea with limited impact and many risks
- Illinois’ botched Tier 3 pension reform: Zombie legislation?
- Rhode Island Supreme Court Shows Illinois The Way On Pension Reform
- Sham Buyout Solution For Illinois Pensions Now Being Exposed
- Local pension investment consolidation is sensible but risky
- How Illinois’ police and fire pension consolidation bill went from good to bad
- Why Chicago’s Lightfoot should push for a pension amendment, not tax hikes
- There’s No Legal Reason Not To Pursue An Illinois Constitutional Amendment For Pension Reform
- Arizona Amends Its Constitutional Pension Protection Clause. World Doesn’t End.