Far more than politics at stake in pension debate
BY DAVID ROEDER Business Reporter August 16, 2012 11:19PM
Mike Phillips, of Vandalia, Ill., and other union protesters, supporters, and labor leaders, boo Illinois Gov. Pat Quinn in protest saying he is betraying the Democratic party's tradition of supporting working men and women, on Governor's Day at the Illinois State Fair Wednesday, Aug. 15, 2012 in Springfield, IL. (AP Photo/Seth Perlman)
Updated: September 18, 2012 6:25AM
It’s back and as stubborn as ever: the Illinois Pension Fund Debate.
The state’s underfunded and, by many reckonings, overly generous pension funds get a day in the legislative spotlight Friday. Gov. Pat Quinn called the General Assembly into session to deal with the issue, picking a day in which Illinois House members are expected to be in Springfield anyway.
They are scheduled to vote on expelling a member accused of taking bribes, so perhaps Quinn thought he could shame them into doing other business. But he can’t compel a pension solution, short of locking the four legislative leaders in a storage closet until they agree.
That tactic might have to wait until things get desperate, although Quinn has been arguing that the state is close to that point. You’ve heard the dire “Illinois is broke” comments before and perhaps wrote them off as blather, but the seriousness is real.
The debate comes down to two numbers: $83 billion and 43 percent. The first is the estimated unfunded liability of the five pension systems the state operates. The second is the unfunded part’s portion of total liabilities.
The financial picture is the worst for any state pension system.
But perhaps a better way to think of the problem is that pensions have morphed into a monster eating the state budget. Under current law, the state must set aside more money yearly as a pension contribution, leaving less for other state functions.
In fiscal 2013, that amounts to more than $5 billion. Jerry Stermer, Quinn’s budget director, said that if you add payments for debt Illinois issued for past pension contributions, the total is greater than annual state aid to education.
The monster is growing. A report by the Civic Federation, a fiscal watchdog, found that state pension payments were about 7.5 percent of the state’s general revenue fund in fiscal 2002. Currently, it’s about 15 percent and projections show it increasing during this decade to 27 percent.
Anybody with a political sense will ask, why the emergency session? Won’t the crisis be around in the same form after the November election?
It will, but the risk in the meantime is that agencies that rate the state’s bonds will downgrade them, forcing taxpayers to pay a higher interest rate and knocking the budget more out of whack. John Sinsheimer, director of capital markets in the Quinn administration, said he worries that one agency, Standard & Poor’s, could hand the state a “double downgrade,” cutting its rating by two levels. S&P has threatened a ratings cut this year.
A double downgrade could take state bonds out of the top-rated “A” level that signifies investment grade. “It’s a long time until November. The state has a lot of debt to issue between now and then,” said Laurence Msall, president of the Civic Federation.
What are the proposals on the table?
Quinn has one that aims to make the pensions 100 percent funded by 2042. Current projections are for 90 percent funding by 2045, but that assumes ongoing growth in state contributions.
The governor wants to raise employee contributions by 3 percent, reduce cost-of-living adjustments and phase in a higher retirement age. And he wants to transfer the cost of pensions for suburban and Downstate teachers to local districts.
Republicans have called the plan an unconscionable shift of a cost to local property taxpayers and pronounced the plan dead.
Senate President John Cullerton (D-Chicago) has backed a limited plan dealing with only two state pension funds, and only one of the three that have the lion’s share of the assets. It would give retirees a choice of continuing to get free health insurance, itself another state debt issue, or taking a maximum 3 percent cost-of-living increase each year.
Supporters agree that the bill is barely a half-measure, but might be the only legislation that’s doable before November. Detractors say it’s ineffective and that state worker unions will sue over it, creating a court fight that would further set back pension reform.
The Cullerton bill could come to a vote, although House Minority Leader Tom Cross (R-Oswego) has branded it “nibbling around the edges” and has said he’ll vote only for comprehensive reform.
Democrats are nervous about angering their base in public-sector unions. Republicans, sources said, are feeling pressure from their fund-raisers to avoid helping Democrats claim any progress on pensions.
Both sides would rather voters not bestir themselves over an $83 billion gap. During this fall’s campaign stops, legislators don’t want questions about their three choices for closing it: reneging on promises to retirees, raising revenue or cutting spending on other government services.
So don’t give a second thought to billion-dollar numbers and bond ratings.
The politicians are counting on you.