Wednesday, January 9, 2013

A Modest Proposal

Illinois, We Have a Problem (you also have a solution)

Before making the first attempts to paddle the English Channel back in the late 1800’s, would-be swimmers used to sail large buoyant bags of reeds or plants to make sure it was possible or that tides would actually help bring them across the oftentimes 30 or more mile course.  After that, the swimmers themselves would brave the elements, treacherous tides, sudden storms and occasional jellyfish to transverse the narrows. 

Unlike our current politicians in the General Assembly, it never occurred to these would-be aquanauts to make the crossing with an anchor tied to a foot, an anchor that steadily increased in bottom bouncing poundage as the miles wore on.  But that is exactly what our best and brightest young politicians in Springfield (Nekritz, Biss, Cunningham, etc.) seem determined to do – no matter how many times others have gone before and failed.  They need to cut the weight

The ever-increasing weight is the ill-designed 1995 ramp (Public Law 88-593) requiring the payback of an unfunded liability of what is now $96 billion in exponentially increasing payments each fiscal year, payments which threaten other necessary services to citizens in Illinois.  In addition, it reminds every bond company from here to London that we’re deadbeats

Let’s – just for a moment – forget the current pensions, Tier One, Tier Two, and the pension protection clause.  Let’s concentrate on the problem for once.  Let’s speculate on a solution that does not create a constitutional conflict or an egregious punishment of the entire public sector for the sins of previous administrations.

In January of 2011, legislators in a lame-duck General Assembly passed a temporary income tax hike, one that was described by supporters as an immediate palliative to the state’s ailing finances.  You might remember that the plan passed by the barest of margins, and not one Republican backed it in the House or the Senate. Opponents warned that businesses would leave the state in droves.  Proponents promised it was temporarily necessary.  After his signature, Quinn proudly stated that “It’s important for their (citizens) state government not to be a fiscal basket case”  (  Agreement all around, still.

The same reports in 2011 proposed an expected increase of nearly $7 billion per year, but even that was not enough to stop the fiscal bleeding of the state.  Legislators found themselves cutting Medicaid benefits, adding taxes on cigarettes (not passed during the original income tax hike), and bemoaning the evaporation of the additional tax hike money.  Important note:  Budget director for Governor Quinn, Jerry Stermer identified the 1995 ramp to pay back the unfunded liability the greatest impediment to the state’s fiscal health. “The state now finds itself in the midst of those years with increased pension costs. Quinn budget director Jerry Stermer calls the payment plan ‘fiscal suicide.’ He notes the state's required contribution has nearly tripled: going from $1.71 billion in the 2008 budget year to $5.09 billion in the budget year that starts July 1” (  That’s last year.  That’s when the bill was only $83 billion.

Solution:  Make the 2011 income tax hike permanent.  Designate the additional 2% in income taxes (approx. $7 billion per year) solely for paying down the unfunded liability, which is now $96 billon. Discard/repeal the failing and fiscally injurious 1995 law called the “Ramp.”  Secure enough funding through sale of pension bonds to erase entire unfunded liability at suitable rate (that’s right, $100 billion at, say, 6.5%).  This will turn “soft” debt into hard debt and a guaranteed payment for let’s say 25 years in an amortized and consistent method to pay back bondholders. It can be done.  I’ve seen the numbers.

Benefits:  Bond companies will now have a commitment to timetables and repayments they do not have from Illinois yet.  They may be willing to assist in this re-amortization of expenses.  The annual payment will be known and unchanging as we the state move forward.  In time, as we crawl out of this recession, the economy in Illinois (5th highest GDP in all 50 states) will gear up and we will see a lessening of expense and a growth in revenue.  There would be no constitutional fight, and public sector employees’ contributions and good works would be honored.   Perhaps the term temporary can come back into fashion at some later date, but let's take a sensible direction.  

This constant battle to seek huge fiscal solutions by making a thousand small, and possibly unconstitutional cuts has bond houses reeling as much as fellow retirees and public sector workers.  Public sector organizations like We Are One have already stated they’d be part of the solution, but they will not be held responsible for the problem they did not create.  They did not create the problem that is Public Law 88-593.  Representatives Nekritz, Cunningham, Biss, and others did not create the problem that is Public Law 88-593.

Let’s fix the problem: Public Law 88-593. 


  1. “The 50-Year Funding Plan: The state attempted to address its unfunded pension liability in 1994, pursuant to a change in Illinois law created under Public Act 88-0593, which became commonly known as the ‘Pension Ramp.’ Intended to force increased allocations to the pension over time, this reform established a time frame during which Illinois was required to fund the current pension contribution the state owed for existing employees (the ‘Normal Cost’), plus make up unpaid contributions and the return thereon for prior employees, amortized over 50 years with a target of funding 90% of total actuarial liabilities by 2045.

    “Given that the total unfunded liability had grown so large [because of legislators’ incompetence and irresponsibility], the legislation created a framework that established a 15-year-ramp period, during which the newly mandated contributions Illinois had to make for current and past employees increased in gradual increments. Since these makeup payments increased annually, they became known as the ‘Pension Ramp’; that is, they ‘ramp-up’ over time.

    “The ‘Pension Ramp’ became operative in Fiscal Year 1996. Under the plan, if Illinois satisfied its obligations under the ‘Pension Ramp,’ the state's pension systems would have achieved a Funded Ratio of 90% by the year 2045. The initial 15-year ‘ramp-up’ period was designed to allow Illinois to adapt to its increased financial obligations, because there simply was not enough revenue to move immediately to the appropriate level percentage of payroll to fund the pensions systems or to amortize the liability over a shorter period.

    “Since it passed, Illinois funded the ‘Pension Ramp’ as required every year, except FY2006 through 2007. However, the annual increases in the required contribution under the intended ‘Pension Ramp’ vastly outpace natural growth in the state's tax revenue. This reality, coupled with the constitutional requirement that Illinois balance the budget, meant the state would have to cut spending significantly on services to fund the ‘Pension Ramp,’ particularly in out years. The net result, Illinois' fiscal system simply could not accommodate the significant contribution increases contemplated under the ‘Pension Ramp.’ The first major threat to the ‘Pension Ramp’ was averted with the sale of $10 billion of pension obligation bonds. Then, reverting to past poor fiscal practices, the state significantly underfunded pensions in FY2006 and FY2007, to maintain, and in some cases expand, services...”


    1. Glen Brown has taken the deeper (thinking) underwater camera below the surface to accurately describe the anchor our legislators will continue to wear unless they directly deal with the unfunded liability (anchor), not the normal costs to the public sector on a yearly basis. Remember please, this year's normal costs are actually less than last year's - and they are manageable. It is and always be the increases in the artificially drawn "ramp" that will pull the state down.

      Thanks, Glen.