Monday, March 4, 2013

The North Star for Fixing Illinois's Pension Problems

85 billion dollars. That is the amount of money that the much discussed federal sequester purportedly "cuts" from the federal budget. That number is also $11 billion smaller than $96 billion Illinois pension system shortfall, although some calculations put it at upwards of $206 billion. It is the worst funded pension funds in the country at only 39% funded. In recent years, politicians in Springfield have nibbled at the margins on pension reform, implementing reforms for new employees, but doing little to deal with the pension shortfalls for current state employees and retirees. Governor Quinn noted in his budget speech last month that he created a working group of legislators tasked to develop a plan by mid April. Governor Quinn also noted in his speech that the payment due to the pension plan is $5.2 billion this year, a whopping 15% of the general fund budget. Democratic Speaker of the House Mike Madigan proposed a pension reform plan last week that was quickly rejected by the House. This proposal would have done the following:
The proposals would have completely eliminated cost-of-living increases for retired workers or eliminated them until the pension system was 80 percent funded compared with 39 percent funded now. They would also have raised the retirement age to 67 for pension eligibility and required public sector workers to contribute 5 percent more to the cost of their pensions. 
A separate plan put forward by Nekritz [a House Democrat] and Republican House leader Tom Cross, which has received the most support so far in the process, would include most of those elements but would not be as harsh. It would freeze cost-of-living increases for six years and require state workers to contribute 2 percent more toward the cost of pensions.
Madigan's plan also received a lot of blow back from public sector unions like AFSCME, as his proposals arguably are a reduction in pension benefits which are unconstitutional under Article 13, Section 5 of the Illinois Constitution. Cross's plan would make a hybrid system of defined benefits (the current system) and defined contribution (similar to 501Ks).  It should be noted that Madigan has been in the Illinois House for over forty years and has been Speaker for over 30 years. Representative Tom Cross has been in the House twenty years. Their calls for reform now ring pretty hollow considering they presided over many of the budgets that have led to the massive shortfall. Additionally, considering Madigan received more than $150,000 from public sector unions for his 2012 election alone, any "fighting" with unions is likely nothing more than political theater. There are additional plans being proposed as well. Deputy Majority Leader, Lou Lang, is proposing that the "temporary" income tax hike passed in late 2010 would be made permanent, the retirement age would be raised, and  employee contributions would be increased. The Illinois Policy Institute, a free market think tank, has proposed a plan that would in part shift pensions from a defined benefit to a defined contribution plan:
The only way to end Illinois’ pension crisis is to move benefits for all future work to a defined contribution system. The Illinois Policy institute’s solution cuts unfunded pension debt in half and includes a defined contribution plan as the main pillar of its pension reforms while protecting already-earned benefits for state workers.
Representative Tom Morrison of Palatine has proposed a plan that would incorporate a define contribution plan as part of the reform. The bill synopsis reads:
Amends the Illinois Pension Code. With respect to the 5 State-funded retirement systems: Provides a new funding formula for State contributions, with a 100% funding goal and amortization calculated on a level dollar amount. Provides that no additional service credit may be accrued and no automatic increase in a retirement annuity shall be received. Provides that the pensionable salary of an active participant may not exceed that individual's pensionable salary as of the effective date. Provides that State-funded retirement systems shall establish self-directed retirement plans for all active participants and all employees hired on or after the effective date. Provides that all active participants shall have the option of participating in a self-directed retirement plan. Provides that these changes are controlling over any other law. Effective immediately.
Such a defined contribution pension reform approach has been successful in other states, like Alaska.  As Governor Palin wrote in a Facebook post in December of 2010:
My home state made the switch from defined benefits to a defined contribution system, and as governor, I introduced a number of measures to build on that successful transition, while also addressing the issue of the remaining funding shortfall by prioritizing budgets to wrap our financial arms around this too-long ignored debt problem. When my state ran a surplus because we incentivized businesses, I didn’t spend it on fun and glamorous pet projects for lawmakers – though that would have made me quite popular with the earmark crowd. In fact, I vetoed more excessive spending than any governor in our state’s history, and I used the state’s surplus to bring our financial house in order by paying down our unfunded pension plans that some other governors wanted to ignore. This fiscal prudence didn’t make me popular with the state legislature. In addition to vetoing hundreds of millions of dollars in wasteful spending, I put billions of dollars into savings accounts for future rainy days, much like most American families do in responsibly planning for the future. I also enacted a hiring freeze and brought the education budget under control through a commitment to forward-funding. I returned much of the surplus back to the people (it was their money to start with!) through tax relief and energy rebates. I had proven as the mayor of the fastest growing city in the state that tax cuts incentivize business growth, and though the state legislature overrode some of my veto cuts and thwarted an additional tax relief request of mine, the public was supportive of efforts to rein in its government. 
It’s one thing to veto spending and reduce the size of government when your state is broke. I did it when my state was flush with revenue from a surplus – though I had to fight politicians who wanted to spend like there was no tomorrow. It’s not easy to tell people no and make them act fiscally responsible and cut spending when the money is rolling in and your state is only 50 years shy of being a territory and everyone is yelling at you to spend while the money is there to build. My point is, if I could fight this fight in Alaska at a time of surplus, then other governors can and should be able to do the same at a time when their states are facing bankruptcy and postponing this fight is no longer an option.
What did this reform do for Alaska? As I wrote last Fall, it has improved Alaska's fiscal health:
The reforms that Governor Palin implemented helped lead to a 34.6% decrease in total liabilities during her tenure. In fact, Alaska is third best in the nation in the percentage of its pension system that is funded. Additionally, due in part to pension reform and other fiscal measures implemented by Governor Palin, Alaska's credit rating has twice been upgraded by Standard and Poor's and once by Moody's since 2008. In addition to the bias of the media and the ill intentions of the GOP establishment, Governor Palin's stellar record is not as well known as it should be because she prevented problems from reaching a tipping point by nipping them in the bud. She didn't have to put out the proverbial fiscal fire because she removed the kindling before the fire could start. That doesn't mean, though, that governors on both sides of the aisle can't learn from her by implementing the reforms that helped make Alaska one of the most fiscally sound states in the country.
Illinois has both the worst funded pension system in the country and the worst credit rating. Our legislators and governor would do well to look to a proven pension reform north star to solve the state's Alaska -sized pension problems.

 Useful links:

  HB 3303: Rep. Tom Morrison's pension reform bill
  HB 3411: Rep. Tom Cross's pension reform bill
  HB 2375: Rep. Lou Lang's pension reform bill
  HB1154 and HB1165: Speaker Madigan's failed pension reform bills

 Contact information for Illinois state representatives can be found here and state senators here.

Crossposted from Illinois4Palin.

1 comment:

  1. Why don't pensioners across different countries form a universal association? I will lessen discrepancy and increase harmony among different pensioners.