From Ralph Martire of the CTBA: Finding Revenue in Illinois
From Ralph Martire of the CTBA
THE PRESCRIPTION TO CURE WHAT AILS ILLINOIS
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."