The state of Illinois and many of our municipalities are drowning in unsustainable pension costs. We must act to save the state from itself.
Brief background: Since World War II, Illinois has been underfunding and overpromising its five state employee pension systems. For example, half of all judges receive more net pension benefits the day they retire than they did the last day they sat on the bench (at $188,000 and up). I also know of persons receiving state pensions of more $300,000 a year.
It should be noted that many State of Illinois retirees receive modest pensions. And all paid in their contributions as required, though such did not generally cover funding for the many over-promised, costly benefits added over the years, such as the minimum annual 3 percent compounded increase in benefits.
Largely as a result of such pension “sweeteners,” each of Illinois’ nearly 13 million citizens is on the hook for at least $10,000 (Moody’s, the financial services firm, suggests it’s more like $20,000) in unfunded state pension obligations, and an unknown additional amount for local pensions.
Local police and fire pension funds are arguably in even worse shape than at the state level. Space limitations here force me to save that crisis for a later column.
In 1994, Gov. Edgar and the legislature enacted a plan of progressively increasing state payments for pensions, so that by 2045 the assets set aside would equal 90 percent of the amount necessary to fund future benefits.
These increased state payments have now reached $10 billion a year. This is equal to almost one-third of state general funds revenue and is the primary reason we have one of the highest state and local tax burdens in the country.
If our state pensions were fully funded, as they are in Wisconsin, Illinois would spend about $3.6 billion a year, rather than $10 billion, to meet its ongoing pension obligations. This difference is equal to 30 percent of the revenue from the Illinois individual income tax.
Illinois must cut pension benefits where they are excessive, and also reduce the oppressive pension burden on our state budget. But how?
The Illinois Supreme Court has said emphatically in unanimous decisions that our state constitution guarantees pension obligations, and they cannot be cut.
In response, the Civic Committee of the Commercial Club of Chicago mounted an effort several years ago to challenge this state guarantee on the legal theory that the state’s power to save itself from itself overrides the constitutional guarantee. The Illinois Supreme Court brushed off the effort without even a hearing on the merits.
The Illinois Supreme Court must be persuaded that the situation has subsequently become worse than dire and the merits of the Civic Committee case should be heard. (I have an idea for using the political system to get the court’s attention, but that also will have to await a later column.)
Chicago attorney James Spiotto is a leading national expert on government finance. Spiotto notes that required spending for pension benefits can sometimes force reductions in appropriations for essential services, such as child welfare and education, to levels that harm the public welfare. If so, he writes that federal bankruptcy authorities can in theory intervene to reduce pension obligations.
I believe Spiotto is correct that essential services are being squeezed at present in Illinois. However, I believe his theory will be a decade or more away, if ever, in being applied to state pension systems.
In the meantime, several lawmakers have proposed a buyout option for participants in the state pension systems. In essence, they could receive a lump sum now in return for giving up later pension payouts, on the theory that a bird in hand is worth two in the bush. This idea might save several hundred million in annual state appropriations and should be pursued.
In Illinois, my generation (I am 77) created our pension mess. The present generation is paying for our “sins” with oppressive, unfair tax burdens. Then, if all goes according to plan, by 2045 the burden will be erased, and the post-2045 generation will get off almost Scot-free, that is, will have a very minimal annual pension burden.
Thus, I propose a re-set of the program to fund our pension obligations and unfunded obligations, just as we did in 1994. The “pig would continue moving through the python,” and still be digested, but more slowly.
I estimate we could do so and “save” about $2 billion in present annual spending for pensions. This would spread the burden onto the post-2045 generation and help Illinois address its present crisis. My conservative friends are outraged by this suggestion.
Our state constitution and the state high court have put us in a box.
The re-set is an awful idea. Given the present constraints, I cannot come up with anything less awful. I invite reader ideas.
We must save Illinois from itself.
JIM NOWLAN is a former Illinois legislator, agency director and aide to three governors. Nowlan can be reached at firstname.lastname@example.org.