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.

What Governor Quinn Could Learn from Governor Palin

There is good reason that the acronym of Illinois's nickname is LOL. True--it does stand for Land of Lincoln, but it is also indicative the fact that our state is the laughingstock of the country. We've been approaching a fiscal cliff for quite sometime. Our budgets are bloated, and our state continually borrows money. Our pension systems are massively underfunded, and our credit rating is being downgraded on a seemingly monthly basis.

Our pension problems are our latest fiscal fire. There are five state pension systems--one for legislators, one for judges, one for teachers outside of Chicago, one for state employees, and one for state university employees. Right now, these pension systems are underfunded by $83 billion  (although new rules in such estimates put that number at $206 billion) and have the potential to go bankrupt by 2018. The 67% state income tax increase and 46% corporate tax increase passed in  a lame duck session in early 2011 has done little if anything to help better fund education or help improve the pension situation.There are two ideas that have been pushed by Governor Quinn--pension reform and a federal bailout.   Pension reform was not achieved during the most recent regular session, nor a special session this past summer. The pension reform plan that Governor Quinn proposes includes increasing individual contributions, reducing cost of living adjustments, increasing the retirement age, and requiring that state pensions only be provided to state workers (i.e. make school districts responsible for providing teacher pensions). If implemented, these partial reforms would perhaps help, but in some respects, these changes would be considered merely nibbling at the margins. These ideas are not relentless reform.

In addition to his pension reform plans, Governor Quinn is toying with another idea to help stabilize the state's fiscal situation--a federal bailout. In his FY2012 budget speech, Governor Quinn stated (emphasis added):

 Consider the state’s unfunded pension liability as a mortgage on future public employees’pension payments. Illinois has a long history of high unfunded liability—a big, decades-long mortgage problem, a big risk. After fiscal year 2010, following losses from a deep recession, the unfunded liability sat at over 60 percent. While the pension reform of 2010 improved the situation by decreasing future liabilities—and certainly the economic recovery improved net assets for the pension funds significant longterm improvements will come only from additional pension reforms,refinancing the liability and seeking a federal guarantee of the debt, or increasing the annual required state contributions. Until one or more of these options is achieved, pension funding issues will persist.

So much for that Illinois state motto of "state sovereignty, national union"! When you become dependent on outside sources to hold up your debt and subsidize your failure you begin to lose your sovereignty. The same could be said about America as a whole with roughly a third of our debt held by foreign nations. The Illinois Policy Institute (a conservative think tank akin to a Heritage Foundation or Cato Institute) has pushed two key ideas to tackle the state pension problems. One is to change the pension funds from a defined benefit to a defined contribution system, which means that taxpayers no longer shoulder the liability of pensions and how they are invested. The other is to reject a federal bailout, as it would create "winner and loser" states throughout the country and runs counter to the constitutional concept of federalism. In short, the answer to Illinois' problems could simply be: "listen to Governor Palin".

This past week, Senator Jim DeMint of South Carolina joined with the Illinois Policy Institute to push for blocking federal bailouts of state and municipal pensions, and Senator Mark Kirk of Illinois had also made the same call in May 2011.  Federal bailouts for states have been discussed in recent years because of the woeful straits that states like Illinois and California have found themselves in. In December of 2010, Governor Palin wrote a piece against the bailout of states by the federal government:

American taxpayers should not be expected to bail out wasteful state governments. Fiscally liberal states spent years running away from the hard decisions that could have put their finances on a more solid footing. Now they expect taxpayers from other states to bail them out, which will allow them to postpone the tough decisions they should have made ages ago and continue spending like there’s no tomorrow. Most Americans would say these states have made their bed and now they’ve got to lie in it. They accepted federal dollars and did not voice opposition to the unfunded federal mandates, and they even re-elected politicians who foisted debt-ridden programs on them that could never be sustained. 

[...] 

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.

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.

 Cross posted here and here.

Illinois to Tax Offshore Drilling?

As if Illinois isn't already the political and economic laughingstock of the country, Governor Quinn is proposing to provide reason for infamy-- a tax on offshore drilling. You know all those oil rigs in Lake Michigan and the Mississippi River that we have "offshore", right? Per the Republic:

Gov. Pat Quinn believes oil rigs off U.S. shores may be key to saving Illinois about $75 million a year.  

The Democrat touched on an unusual proposal during his budget address Wednesday: requiring companies that drill in the outer continental shelf and profit from doing business in Illinois to pay a share of a corporate income tax in the state. He said doing so would close a tax code loophole. 

"For too long, we've had a revenue code that looks like Swiss cheese, with plenty of loopholes for the powerful. Many of these loopholes are based on politics, not economics," he said before legislators. "Why does Illinois give big oil companies the privilege of declaring their oil derricks in the Gulf of Mexico to be foreign countries?"

What does the state of Illinois have to do with the Gulf of Mexico? Well, some argue that the Outer Continental Shelf, underwater land that does not belong any state, but to the federal government. Why doesn't Governor Quinn then claim the treasures from the wreckage of the Titanic which could be claimed as an extension of the Atlantic Outer Continental Shelf?

How can closing a supposed tax loophole be considered a savings to the state? Savings come from decreasing spending, not from increasing revenue. Additionally, this proposal provide no savings to the people of Illinois who would pay higher fuel prices. That is in addition to the fuel taxes we pay that are 5th highest in the country. If Governor Quinn wants to really talk about savings--be it the hard earned money of Illinoisans or his own job, he should consider repealing the income and corporate tax hike he signed into law last year.

H/T Illinois Review