August 30, 2014

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Illinois Pension Reform – or Rip-off? PDF Print E-mail

Pensions are on the way out. Over a half-century of workers receiving adequate wages, cost effective health care, and pensions is nearing its end. It appears the vast majority of Americans have no voice, as unions decline, supplanted by corporate wealth and power, as state and federal government have become minions to corporate hegemony. Illinois Senate president John Cullerton, whose caucus is dependent on union dollars, must have downed a mickey of truth serum when he told WGN radio on October 20 that the state’s massive public employee pension debt ($100B) and nation’s lowest credit rating is not a “crisis,” but instead “an issue being pushed by business backed groups seeking lower income taxes at the expense of retiree benefits.” For example, see tax cuts/incentives for corporations to remain in Illinois – ADM, OfficeMax, Univar….
Nevertheless, Cullerton used heavy arm twisting tactics to secure passage of the bipartisan bill, that is, worked out by the four legislative leaders – Madiganistan Emperor Mike Madigan (D), rookie Jim Durkin (R), Cullerton (D), and Christine Radogno (R). The pension reform bill narrowly passed Tuesday, December 3, in the Senate, 30-24, with 10 Republican yeas, and 62-53 in the House, with 15 Republicans on board. Gov. Pat Quinn, seeking re-election next year though only 34 percent of respondents in a November Public Policy Poll approve of his job performance, signed Senate Bill 1 as soon as it reached his desk. “Illinois is moving forward,” the governor exclaimed. “This is a serious solution to address the most dire fiscal challenge of our time.” Serious indeed, Quinn made the famously ridiculous statement he was put on earth to solve the pension problem. Cullerton dryly noted after the vote, “Now he’s justified being on this earth.”
Quinn can’t put the worst-in-the-nation – most scandalous – state pension fiasco in the rear view mirror fast enough. Employee unions, planning legal strategy for months, will sue in state courts. The “We Are One” union coalition said, “Senate Bill 1 is attempted pension theft, and it’s illegal. Once overturned, its purported savings will evaporate, and the state’s finances and pension systems will be left in worse shape.” The unions will go into court armed with a one-sentence provision of the 1970 Illinois Constitution that defines pension benefits as “an enforceable contractual relationship” that “shall not be diminished or impaired.”
The Illinois Supreme Court will be the final arbiter of this 300-page legislation, which the libertarian Jacksonville Journal-Courier denounces as “A feel-good response that throws retirees under the bus, is likely to wind up in the courts, and doesn’t address any of the underlying problems in the state’s pension system. It has just enough gimmickry to help lawmakers going into an election year appear to be concerned – and thus re-elected – but in the end will be little more than sticking a Band-Aid on a mortal wound.” Our man in Springfield, Sen. John Sullivan, D-Rushville, saw through the smoke: Voting “No,” the fair-minded and astute senator said: “This proposal has a drastic and negative impact on both current and retired employees, and – I believe – it has serious constitutional issues. I understand the enormous need for pension reform, but this isn’t it. Retirees have planned and saved based on promises from the state. It has to be our job to fund equitable solutions without breaking those promises. I wouldn’t be surprised if we are back here in a year or two voting on a new plan after the courts find this one unconstitutional.” Well done, Senator! However, you can probably expect fewer crumbs from Emperor Madigan.
Just what is this reform/not reform bill? You can read the fine print, but in a nutshell, this compromise will push back the retirement age for workers ages 45 and under, on a sliding scale. The annual three percent cost-of-living increases for retirees will be replaced with a system that only provides the increases on a portion of benefits, based on how many years a beneficiary was in a job. Some workers will have the option of freezing their pension and starting a 401 (k) style defined contribution plan. Workers will contribute one percent less to their retirement, and their retirement systems may sue the state if it doesn’t make its annual payments, which is the CAUSE of the present $100 billion predicament. The four legislative leaders say the bill will save $160 billion over 30 years. But is Illinois only in hock for a $100B pension debt? No! More smoke!
First, this bill only affects about a half-million current and retired state government workers, teachers outside Chicago (Chicago’s pension debt, $7.1B for city teachers and $19.5B for police, fire, laborers and municipal employees, was not piggy-backed on this bill), and public university employees. Emperor Madigan deftly omitted judges from the mix so none would be biased or have a conflict of interest if this train-wreck, there’s that term again, appeared before their court. He told the Chicago Tribune last spring he was confident his original version of pension reform, which is the basis of Senate Bill 1, would be found constitutional by at least four of the state Supreme Court’s seven justices. Why do we fall for such hypocrisy?
Second, the state’s unfunded pension liability would reach about $374B over the next 30 years if no changes were made. The new law cuts that price tag to an estimated $214B. So the projected $160B in savings does not, as some sneaky politicians want you to think, balance the state pension albatross. Taxpayers, including private sector workers who will be lucky to have any pension let alone generous cost-of-living adjustments (COLAs), will fork over about 20 percent of the state’s annual revenue on feeding the pension funds and paying down pension bonds (yes, the state got stupid and borrowed money to make up for raiding pension intended funding). Left unsaid is how much of the state’s general fund will be left for education and other state services. It may be an oxymoron, but lawmakers will have to be disciplined in making annual, actuarially required pension payments. They will be to be disciplined on other state spending: closing state facilities, reforming Medicaid, reducing the state workforce, holding the line on discretionary spending, negotiating modest contracts with employee unions, relying on conservative revenue projections and resisting the temptation to borrow money for day-to-day expenses.
Some don’t think legislators have the necessary discipline to avoid the state’s economic demise. Kenneth Griffin, CEO of Citadel, a Chicago based global hedge fund and asset management firm, decried: “This isn’t a reform, but rather a fiscal death sentence. The state would be stuck with pension funding requirements that squeeze out all other priorities and tie the hands of future leaders…. Absent extraordinary economic growth, our state is going to collapse under the weight of generous pension promises made by union leaders and politicians. Our state’s taxpayers will see the 67 percent ‘temporary’ tax increase converted into a permanent tax increase. And soon we will hear that even further tax increases are needed to meet our obligations. This is the price we are all going to pay for sending the wrong leaders to Springfield for too many years.”
So, who’s for and who is against Senate Bill 1, and why? As stated earlier, politicians whose horizon stretches only to the next election mostly favor any “pension reform” they can sweet-talk the voters into believing is legitimate and serious. Yet, many, including conservatives and private sector folks, believe Senate Bill 1 falls short by not “going far enough.” The Wall Street Journal (WSJ), December 2, blasted the headline – “Illinois’s Fake Pension Fix.” The conservative beacon shows state Republicans no love, calling them a “useless minority” as the “most dysfunctional state government lives down to its reputation.” Ouch! The WSJ’s editorial board called Senate Bill 1 “a scam, not a reform.” They believe “Democrats in Illinois have dug a $100 billion pension hole, and now they want Republicans to rescue them by voting for a plan that would merely delay the fiscal reckoning while helping re-elect Governor Pat Quinn. The cuckolded GOP seems happy to oblige on this quarter-baked reform… In return for their votes Republicans ought to demand durable pension fixes modeled on the reforms that Democrats in Rhode Island passed in 2011 [and is being defended in state court], which suspended cost-of-living adjustments and modified future benefits for all current workers. Municipalities including Chicago should also be covered by any reform.”
Who knows how this charade will end, but the halcyon days of post-World War Two working class prosperity are gone. Wages are stagnant, the well-intentioned but disastrous Obamacare will encourage more companies to dispense with employee health insurance, and pensions, public and private, will also eventually be reduced to the glossary of history books.