Saturday, June 6, 2015

From Ralph Martire of the CTBA: Finding Revenue in Illinois

From Ralph Martire of the CTBA

State Journal-Register posted May 20, 2015   
  CTBA's Ralph Martire

"It's relieving to know that, as a matter of Illinois state constitutional law, words in the English language actually have the meanings identified in the dictionary - which is really what the Illinois Supreme Court ruled when it held that the "pension reform" legislation of 2013 was unconstitutional. 

That law attempted to reduce the significant - as in currently north of $100 billion - unfunded liability in the five state pension systems by cutting benefits of current workers and retirees. That's verboten, because the Illinois Constitution specifically provides that public pension benefits in Illinois "shall not be diminished or impaired." 

Emphasizing the constitution's "plain and unambiguous language," the court found that "the clause means precisely what it says: if something qualifies as a [pension] benefit .... it cannot be diminished or impaired." 

Score that as a win for Merriam-Webster.

Does this decision mean Illinois must raise taxes? No. Regardless of how the Supreme Court ruled, Illinois actually has needed to raise taxes for decades. Indeed, the outsized unfunded pension liability isn't the cause of Illinois' fiscal problems; rather it's a significant consequence of poorly designed tax policy.

In fiscal year 1994, the aggregate unfunded liability across all five state systems was $17 billion. That sounds like peanuts given the size of the problem today, but it meant the systems were only 37 percent funded, a far cry from the 80 percent recognized as healthy.
The reason Illinois had accrued $17 billion in pension debt at that time had nothing to do with generous benefits and everything to do with debt. Even then, the state's flawed tax policy wasn't working in the modern economy.

There's been a longstanding imbalance between revenue growth and service cost growth, which prevents Illinois from sustaining the same level of services from year to year. This creates a real challenge for politicians, because $9 out of $10 the state spends on services goes to education, health care, social services and public safety. Cutting those core services every year is hardly a blueprint for re-election or good public policy.

Raising taxes always scares politicos, no matter how rational or needed the increase would be. So decision makers consistently chose a third, irresponsible path: using the pension systems like a credit card, diverting revenue that should have funded the normal cost of retirement benefits to instead fund current services.

This avoided the need for service cuts or distasteful tax increases, while allowing constituents to consume services without paying the full cost thereof in taxes.
It became such a political crutch that the practice of borrowing from what was owed the pensions to fund services was codified into law as part of the 1995 pension "funding ramp."

This ramp so aggressively borrowed against the pensions that it ballooned the unfunded liability from $17 billion in 1994 to $54 billion in 2008 - when the Great Recession hit and financial markets crashed. It accomplished this boondoggle by using an amortization schedule that was so back-loaded it resembled a ski slope, calling for annual payments in excess of $16 billion in out years.

It's this goofy debt repayment schedule that's causing problems. 

Now that we know the Illinois Constitution means what it says, the only viable and constitutional solution going forward is replacing the current back-loaded repayment schedule with a longer, level dollar amortization that permits payment of all retirement benefits when due, increases the funded ratio to a point that's considered healthy, and is affordable so that bond rating agencies have confidence payments will be made.

And Illinois still must raise taxes so it finally has the means to sustain core services without irresponsibly borrowing to pay for them."


  1. Most recently on the "goofy debt repayment":

    “Starting in 1995, yet another funding plan was implemented by the General Assembly. This one called for the legislature to contribute sufficient funds each year to ensure that its contributions, along with the contributions by or on behalf of members and other income, would meet the cost of maintaining and administering the respective retirement systems on a 90% funded basis in accordance with actuarial recommendations by the end of the 2045 fiscal year. 40 ILCS 5/2-124, 14-131, 15-155, 16-158, 18-131 (West 2012). That plan, however, contained inherent shortcomings which were aggravated by a phased-in 'ramp period' and decisions by the legislature to lower its contributions in 2006 and 2007. As a result, the plan failed to control the State’s growing pension burden. To the contrary, the SEC recently pointed out:

    “‘The Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. The resulting underfunding of the pension systems (Structural Underfunding) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.’ SEC order, at 3. That the funding plan would operate in this way did not catch the State off guard. In entering a cease-and-desist order against the State in connection with misrepresentations made by the State with respect to bonds sold to help cover pension expenses, the SEC noted that the State understood the adverse implications of its strategy for the State-funded pension systems and for the financial health of the State. Id. at 10. According to the SEC, the amount of the increase in the State’s unfunded liability over the period between 1996 and 2010 was $57 billion. Id. at 4.5 The SEC order found that ‘[t]he State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.’” (Emphasis added.) Id. at 4 (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).

  2. I think your new Cover Photo is utterly awesome. Very, Very Clever!!!