Debt Option #2: Amend the Constitution

The previous post dealt with a proposal to address the issue of our debt, laying out a “front-loaded” increase in payments to our pension debt so as to avoid ever-increasing payments due in future years. That post was written under the assumption that there’s no way we’ll ever be able to change the level of benefits already accrued and payable.

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This post deals with the major sticking point that prevents us from having a serious discussion about pension reform, that is, the guarantee of benefits contained in Article XIII, Section 5 of the Illinois Constitution:

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“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

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This clause isn’t about debt; it’s about benefits and what we’re going to do about them going forward. It’s the clause that every state worker points to when somebody tries to bring up the suggestion that maybe they ought to pitch in and do something about our fiscal mess.

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They’ll say “but I paid my fair share, now you want me to actually give something back?” Actually, they haven’t paid their “fair share”, they’ve paid what their unions negotiated for them, and it’s utterly insufficient to pay them what they’ll receive upon retirement.

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The Supreme Court has consistently ruled that the pension guarantee clause means just what it says, so all of those sweeteners added onto public pensions (i.e.: guaranteed 3% COLA) can’t be taken away once they’re given. So we’re going to have to amend the Constitution if we want to get around the pension guarantee clause.

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Good luck with that. The unions that wield the whip hand here in Illinois would never let the Legislature come close to putting that on the ballot. Arizona recently amended its Constitution to limit pension benefits, but the circumstances that allowed that to happen are vastly different than they are here, so don’t hold your breath. You may ask about calling a convention to rewrite the Illinois Constitution, which was last done in 1970. Since 2008 there have been over 400 resolutions to do just that, but of course they went nowhere.

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But before we move on to the next possible means of fixing this mess, let’s have a moment of honesty, shall we?

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To the extent the Legislature failed to pay its required contribution into the funds over the years, it’s clear that it bears much, if not the lion’s share of the blame. It quietly acquiesced to unrealistic investment return estimates so as to keep the amount it did pay into the plans to an absolute minimum. The Blagojevich pension holiday of 2004 and 2005 didn’t help, and neither did the crash of 2008.

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However, there are other players in our little drama who’ve not been exactly blameless, among them:

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  • School Districts: Since 2005, if a school district gave a pay increase in excess of 6% (since reduced to 3%) to an employee within the last several years before retirement, the district was forced to pay a “penalty” to the Teachers’ Retirement System (TRS) to offset the additional pension costs that increase would create. The penalty wasn’t enough to fully deter them from giving out massive pay raises to administrators in the final years leading up to retirement. Two things are notable about this “reform”:
    • Once the employee retired, the entire payroll cost for that employee goes off the district’s books, so why should the district care? The State’s now on the hook for the entire pension cost, calculated on the higher final average earnings.
    • It also created higher property tax bills to pay the additional salary and penalty plus the additional pension cost to the State.
  • Union Employees: Every time the subject of pensions is brought up, the first people we hear from are the rank and file, who point out that they’ve paid in every cent they were supposed to, that none of this is their fault. Wrong. Public union employees bear the responsibility for the leadership they elect. The membership sat idly by when those same leaders went to Springfield and told legislators that it was OK to not fund the pension plan if the money would go into the education budget. They knew what was going on and said nothing, figuring that the State would have to come up with the money somewhere. To now say that they’re entitled to collect from the taxpayers that which their own leadership bargained away is hypocrisy. To the extent members of the other unions sat on their hands while their representatives bargained away their pensions, they don’t have any cause to complain now, either.
  • An Apathetic Public: Pensions are negotiated between the unions and the people of this state through their representatives, both state and local. Like it or not, the people of Illinois are a party to this transaction, and if they don’t care enough to get rid of those who are supposed to be representing them at that table, they’ve got no more right to complain than the union members.

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So it’s clear that nobody’s coming to the table with clean hands. But try using that as an appeal to reason.

Posted in Cost of Government, Illinois Budget, Illinois Constitution, Public Pensions | Tagged , , , | 1 Comment

Debt Option #1: Front-Loading Pension Payments

Long before I was elected to the House, I’ve been talking about Illinois’ pension crisis (here, here, here and here, to name a few). Since that time, our accumulated pension debt has risen from “just” over $100 billion to somewhere in the neighborhood of $133 billion.

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Our annual payments to the 5 State plans is climbing every year as a result of the “Edgar Ramp”, a compromise bit of legislation which provides that payments to the plans will increase each year until they reach $20 billion in 2045, when the plans are supposed to be funded at 90%.

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The Center for Tax and Budget Accountability (CTBA) has suggested a proposal to resolve the pension debt crisis by re-amortizing the payment schedule, creating a level-dollar plan that CTBA says will save the state $67 billion and gets the pension systems to 70% funded by 2045. To bridge the higher contributions called for in the first several years of the re-amortization plan, CTBA suggests issuing $11.2 billion in “pension obligation” bonds. The proceeds from these bonds would be used to “front load” the payments due to the pension funds over the next 5 years, and would presumably allow the remaining payments to the fund to become a level to mildly decreasing obligation as opposed to the increasing payments under the ramp. Between 2019 and 2030, the payments to the fund would be greater than would be due under the ramp, but beyond that would stay flat and then decline. The chart below shows CTBA’s estimate of the effect of the front-loading.

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CTBA

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Without going too deeply into the weeds on this, the CTBA proposal differs from the pension bond issuance that happened under Governor Blagojevich, because the proceeds from these bonds are meant to be paid into the plans over and above the normal payment required under current law, while the Blago-bonds substituted for money which was used for other budget items and not paid into the plans (the so-called “Pension Holiday”).

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While the idea of moving to a level-payment option has attractions, there are several things which make this particular proposal a risky proposition:

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  • The proposal’s “re-amortization” plan is to achieve 70% rather than 90% funding by 2045, which keeps the plan underfunded for a longer period of time;
  • There’s no intention of achieving a higher funded ratio unless asset growth is more favorable than projected.  With current actuarial funding assumptions ranging between 6.75%-7.25%, that’s a pretty high bar that we haven’t been able to meet over the past number of years, which has led to an even higher level of unfunded debt;
  • The plan seeks to achieve “cost savings” by issuing $11.2 billion in pension obligation bonds. This is not savings; it’s nothing more than adding hard debt to the current debt and shifting of the risk of loss from the pension funds to the bondholders. The proponents are banking pretty heavily on achieving gains from investment returns higher than the interest paid out to bondholders. Given Illinois’ current bond rating, the interest rate on those bonds is likely to carry a pretty high premium. Throw in a recession, which is pretty much a certainty over the period of time that these bonds will be outstanding and you won’t even get that.

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If, between 2019 and 2030, when the level option becomes less than the payment due under current law (see figure above) Illinois can find $4 billion per year in actual budget cuts and cost savings in the operation of State government to fund the increased up-front payment, this plan may work. But given this state’s fragile fiscal situation, piling up debt with the hope that things will all work out over the next 25 years is asking an awful lot.

Posted in Cost of Government, Illinois Budget, Public Pensions | Tagged , , | 1 Comment

What to Do About Illinois’ Debt (And Death is Not an Option)

With more than $7 billion of unpaid bills and (depending on who you ask) $130-$200 billion in unfunded pension liabilities, a credit rating hovering just above “junk” status and people and businesses fleeing in droves, there are no easy answers to what it will take to pull Illinois out of the financial abyss in which it finds itself.

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The Illinois Supreme Court has consistently ruled that accrued pension benefits to be paid to retired state employees cannot be “diminished or impaired”. As a result, 25% of the State’s General Revenue Fund (over $8 billion in 2019) is used to pay accrued and unfunded pension liabilities, and this amount is scheduled to increase (the “Edgar Ramp”) every year to almost $20 billion by 2045. This is money that was diverted in the past to dispense the type of governmental goodies that politicians are only too happy to give, especially when they know they won’t be around when it comes time to pay the bill.

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This is real debt, and the State’s unwillingness to confront it is the primary reason why we find ourselves in the financial condition that we’re in. Its origins are many:

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  • Years of chronic underfunding of pensions;
  • Pension benefits guaranteed by the State Constitution which were granted with had no corresponding increase in funding;
  • Unbalanced budgets that spent money that those crafting the budget knew would never materialize;
  • And on, and on and on.

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But at this point, why it happened is really beside the point. The bill has come due. All of those new programs that were created out of thin air or with money that was diverted from the pension plans have created an unsustainable burden upon Illinois’ finances. Guaranteed increases to state pensions and inadequate oversight of state appropriations have brought us to this place.

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When you’re confronted with a crappy situation, there are only crappy solutions; all the good ones have been taken. A progressive income tax, legalizing marijuana, building new casinos nor any combination of these are going to pay this bill. But doing nothing is not an option any more, either. The only possible solutions I see which could possibly put the State on a path to fiscal sanity are:

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  • Front-load a massive payment on our pension debt. One suggestion is to issue “Pension Anticipation Bonds” to partially fund the pension shortfall and then flatten the amount going toward pensions in the future at the current level (approximately $7 billion/year) in order to get us off the “Edgar Ramp”;
  • Amend the Illinois Constitution to eliminate or modify Article XIII, Section 5, which guarantees that pension benefits may not be “diminished or impaired”.
  • Lobby Congress to amend Chapter 9 of the U.S. Bankruptcy Code to allow Illinois to file for bankruptcy;
  • Raise taxes (income, sales, motor fuel taxes and user fees).

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I’m going to try to explain each of these alternatives in turn, and then I’m going to put it to you to in the form of a survey to tell me which of these admittedly lousy alternatives you’d vote for if you were sitting in my chair. And remember, death is not an option.

Posted in Cost of Government, Illinois Budget, Public Pensions, State Government | Tagged , , , | Leave a comment

Going to Pot in 2019? (Part 2) What’s the Rush?

If we’re going to legalize the production and sale of marijuana, there has to be a regulatory framework that fulfills the intent of the legislation drafted to do that, while at the same time doing everything within our power to anticipate and avoid the inevitable unintended consequences that will accompany it. Those who oppose legalization have legitimate concerns, and those folks need to have a voice at the table.

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Much of the discussion surrounding legalization revolves around the amount of money that the State will get in new tax revenue. There’s nothing like a good “sin tax” to get a politician into a foaming lather, promising to raise millions by taxing activities that everyone agrees aren’t necessarily good for us and which are borne primarily by those who indulge. Smoking, drinking and gambling are lodestones of every promise to balance the books on the backs of someone else. Our incoming Governor has mentioned using pot revenue to fund education. (Remember when they said that the Illinois Lottery would go to pay for schools?) The outgoing Chicago mayor wants to use it for pension relief. Talk about fishes and loaves.

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The best estimate of the amount of tax revenue the state would generate is anywhere from $350-$700 million per year. Political scientist Kent Redfield says the number is probably closer to the former than the latter amount. “In terms of what it means for the state budget or economy, it’s a significant amount of money, when the state needs an overwhelming amount of money.” When you’re $133 billion in the hole and still digging, that’s an understatement.

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The way the product is to be taxed is also a matter of concern. If the major source of revenue is expected to be the sales tax (both state and local), I suggest that you take a look at this article, which discusses the plummeting price of marijuana that comes about from increased production arising from a competitive marketplace. As the landscape of legal sales expands, prices will most likely continue to fall and those rosy revenue estimates may become ever more optimistic.

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Now let’s talk about who’s going to be doing the growing and selling under this legislation. Companies are already lining up to take advantage of legalization.

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But first, let’s step back for a moment and consider what it is we’re trying to do here. Kelly Cassidy, the House sponsor of the legislation, has said:

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“Our goal is to destroy that illegal street market that makes our communities less safe. Our goal is not to bring in some massive fortune that’s going to solve all the problems of the world, because it’s not.”

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When Cassidy says something like that, I believe her. She’s a good legislator (though we don’t agree on all that much), she’s thoughtful and she’s honest. So let’s use that statement as the basis for opening a dialogue on how the regulatory structure should look.

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Going to Pot in 2019?

MarijuanaMany, many years ago when I was a freshman at the University of Illinois, I’d come back to my dorm room in dear old Scott Hall (Da Ritz) after class, and to get to my room, I had to wade through a cloud of marijuana smoke wafting from under the doors of practically every room on the floor. That, and the ubiquitous refrain of “Smoke on the Water” that played at an ear-splitting level from morning ‘til night from the room next door are two things that I’ll remember forever, and not in a good way (especially Smoke on the Water; God, how I came to hate that song).

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I say that to ease into the discussion of what will probably become the top story in Springfield in the upcoming session: legalization of recreational marijuana.

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Marijuana regulation started as a patchwork of state laws early in the 20th Century, and was then subjected to national regulation as a tax act in 1937. It was officially outlawed for any use, including medicinal, by the Controlled Substances Act of 1970. So we’re not dealing with ancient history here.

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My own view on marijuana use is one of complete ambivalence; much like the view that Jefferson had about religion: “[I]t does me no injury for my neighbour to say there are twenty gods, or no god. It neither picks my pocket nor breaks my leg”. To be fair, Jefferson said in the same breath that: “The legitimate powers of government extend to such acts only as are injurious to others” (what a quaint notion) and there are those who in good faith say marijuana use both picks my pocket and breaks my leg because of public safety concerns of impaired driving, the social cost of its use and health care costs attendant to its misuse. I’ll use the rest of this post to try to hit the high (no pun intended) points.

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In 2012, Colorado and Washington State legalized the production, distribution and sale of marijuana for recreational use, followed by Alaska, Oregon and Washington D.C. in 2014. Colorado’s experience has provided much of the focus when arguments are made against legalization here in Illinois, and that’s what I’ll focus on here.

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Before that, however, there’s one major difference between the means by which Colorado legalized marijuana and the effort to legalize it in Illinois: Colorado’s legalization was the result of a statewide ballot initiative to enshrine legal marijuana into the state Constitution, while Illinois’ effort to legalize will be brought forth through legislation. This is a critical distinction, because by going through the legislative process, there can be a closer examination of what works and doesn’t work in ballot initiative states. Many of the more egregious excesses reported from Colorado can be laid at the feet of the means by which they got there. Say what you want about Springfield, but Illinois’ legislative approach will provide a much more sober and measured approach to this issue and allow for changes to the law without having to change the state Constitution (see: Illinois State Pensions, guaranteed). If we’re going to do it, this is the right way to go.

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The first objection to legalization is that it will increase usage. Opponents cite a 2015 report from the Rocky Mountain High Intensity Drug Trafficking Area (RMHIDTA) (I hope John Denver’s estate is getting a royalty from this) which indicates that one-third of 18-25 year olds in Colorado reported using cannabis the previous month, up from 21% in 2006. The only problem is that Colorado didn’t legalize until 2012, so it’s unclear what this statistic is meant to signify; it certainly doesn’t support a large increase exclusively due to legalization. It also states that teen use increased since legalization, when there is evidence to indicate that teen use has in fact fallen.

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