Unfunded Liability vs. Pension Reform:
When we listen to Governor Pat Quinn or the Chicago Tribune decry the problems facing Illinois after years of underfunding the pension systems, we catch the words “pension crisis” over and over. Yesterday evening at the gathering of the West Lake Shore Unit of the IRTA, I tried to make clear that it is not nor was it ever a “pension crisis.” It is instead a debt issue called the unfunded liability. Our legislators need to understand that as well. To do otherwise – to continue to call the problem a “pension crisis” - is to paint public service as an onerous drain on the past, current, and future of the people of Illinois.
Public service is anything but that.
The unfunded liability – the result of decades of little or even no payments by the state to match the contributions made by millions of past and current employees now reaches an estimated $83 billion. To understand the enormousness of this arrogant breach of responsibility, we can examine Governor Quinn’s mantra that for every day the General Assembly does not act; the state loses another $12.6 million. That amount, sufficient to run four or five small businesses for three or four years, is only a fraction of the debt Illinois now owes in the unfunded liability. In fact, $12.6 million is only 1.5/10,000th of the actual $83 billion.
The cost of not addressing this debt crisis has begun to disrupt the state’s ability to provide needed services at an increasing rate.
The enactment in 1995 of a flawed Public Law 88-593, also called the Pension Ramp Up – exacerbates the inability to solve the debt the General Assembly now faces. The bill set forth an ambitious schedule of increasing payments, both actuarially and logically unsound, which was designed to bring the five pension systems into 90% funding by 2045. Instead, the Ramp Up has created an escalating required payment that increases so rapidly (especially in a slow or depressed economic period) that honoring the payments will take greater and greater portions of the general revenue fund in each successive year. According to the Office of the Governor, the debt is now taking 13% or more of the general revenue fund. Next year’s jump in required payment will be nearly 20% - from this year’s $4 billion to next year’s 5.09 billion (http://wuisnews.wordpress.com/2012/08/21/center-for-tax-and-budget-accountabilitys-ralph-martire-on-pensions/ ).
Instead of a Ramp-Up, the debt (unfunded liability) needs to be restructured and amortized as any real, sensible credit repayment plan should be. In other words, the payment this year should be the same as next year, and so on until the debt is repaid. The “mortgage” could be reconfigured for a date well beyond 2045. Remember when we all purchased that house or auto? At first the payments seemed daunting, but over time they became a manageable part of our monthly budget. For the state, the pain in the initial years would be offset by the knowledge that the annual amount necessary to pay back would remain unchanged in the decades to come. Likewise, this method would provide for a stable expectation for needs in each year’s budget process. Perhaps even the bond rating company Standard and Poor’s would take notice of this new responsibility.
So far, the bills that have been brought forth by members of the General Assembly to fix the debt crisis have consisted of cuts to the benefits previously provided and perhaps guaranteed by the Illinois Constitution in Article XIII, Section 5. If the past and currently proposed bills are typical, legislators in Illinois are seeking the wrong solutions: trying to fix an enormous debt and an impossible pay-back scheme by taking benefits from retired, current and future workers. Even if such scapegoating were not morally reprehensible, it will not generate the funds necessary to pay down the debt the General Assembly has accrued.
The director of the Center for Tax and Budget Accountability Ralph Martire warns that all of the proposed cuts to benefits passed collectively will provide only millions; in fact, he adds that such a draconian solution will only provide about 25% of the monies needed to deal with the ongoing debt (unfunded liability). The coercive and cynical choices between health care or compounded COLA’s, the increases in contributions, the consideration of taxing retiree income, capping benefits, extending age requirements – will not solve the debt problem in Illinois. Taking millions from the public sector will not generate the billions needed to resolve the debt crisis.
In order to generate the billions of dollars needed to resolve the debt crisis, we need to change the current tax structure from a flat tax to a graduated tax system. Illinois is one of only seven states left in the country to hold to an antiquated flat tax system. Yesterday evening, I described the latest loss of a dynamic business enterprise to our neighbor state Iowa. A global company from Egypt, Orascom, has decided to build its $1.4 billion operating plant four miles away from Illinois’ border. The head of the company, Nassef Sawiris, described the unpromising look of Illinois’ balance sheet as reason for the decision. In fact, Iowa has a graduated income tax system. According to the Center for Tax and Budget Accounting, replacing our flat tax system with the system Iowa has in place would provide an additional $6.3 billion in annual revenue. In addition, the move to a graduated tax would bring tax relief to nearly 94% of all taxpayers in Illinois.
In January, a lame duck General Assembly will reconvene. Madigan has hinted that “pension reform” may be accomplished in that session. It would not be unlikely for Governor Quinn to call for a special session in January before the swearing in of new legislators on the second Wednesday. You will remember that the last tax increases in Illinois were accomplished in a January lame duck session. Speculation places the possible number of lame duck legislators at between 25 and 40. Also, consider that bills need only a majority in January, not the super-majority needed in November.
It is my hope that this information helps you in your conversations with your legislators. Please contact your representative and senator now.