It’s Not the Pension (Entirely), It’s the Debt

Dead End“If something cannot go on forever, it will stop.” – Herbert Stein’s Law

In his budget address this week, Governor Rauner made big news by proposing that the employer portion of the normal costs of teacher pensions be shifted from the state to local school districts. While I’ll have something to say about that shortly, I’d like to focus on what the “cost shift” is not.

There are two aspects of Illinois’ pension crisis that need to be kept separate from one another if we’re to have a sensible discussion of how to fix either one.

The first is the “normal” cost, which is the amount that must be set aside each year to pay for current-year accruals to the pension funds. That’s an ongoing obligation that, for lack of a better description, is forward-looking based upon salaries paid in the current year.

The other aspect, and in my mind the more difficult one, is the debt that has been allowed to pile up over past years because of chronic underfunding, investment performance that hasn’t kept up with investment assumptions and overly-generous benefits granted without thought of how they were going to be paid for.

The debt portion is not part of the cost shift proposal. Only current employer costs are included in the shift. It’s the debt portion I’d like to discuss here.

Since the Illinois Constitution is pretty plain in its language dealing with the enforceability of pension obligations, there’s no getting around the fact that the debt will somehow have to be paid (short of a Constitutional amendment removing the guarantee, which just ain’t going to happen, at least in my lifetime).

I’ve been harping on the debt issue since before I took my seat in the House, and it’s finally getting a hearing. The State Universities Annuitants’ Association (SUAA) has proposed that the state borrow $107 billion to fully pay down the underfunding. A hearing was held several weeks ago in the Personnel and Pensions Committee in which a professor from the University of Illinois laid out the borrowing plan and discussed how it would work.

I want to make it plain right now:

I AM NOT IN FAVOR OF BORROWING $107 BILLION TO PAY DOWN THE UNDERFUNDED PORTION OF ILLINOIS’ PENSION SYSTEMS. ALL THIS WOULD DO IS TRANSFER THE RISK OF LOSS FROM PENSIONERS TO BOND HOLDERS WITHOUT ADDRESSING THE UNDERLYING PROBLEMS WITH OUR PENSION SYSTEMS.

With that out of the way, I do want to commend Representative Robert Martwick for starting the conversation of how we get out of this mess. In spite of what you might have read, he’s not proposing that this plan be adopted, he’s on record as saying that he doesn’t know, and the reason he brought it before the committee is not because he thinks it’s such a great idea, but unless we at least start that conversation, we’re never going to get anywhere. I wholeheartedly agree.

There are several other proposals that have been floated for reducing the debt, most of which involve buying pensioners out of their entitlement by paying them some discounted amount of the present value of their future payments (here, here, here and here). All of these proposals are worth looking at, not because they’ll be the silver bullet that solves the problem, but that they all move the needle toward a lower level of pension debt, eliminating the low-hanging fruit, as it were. Also, I think all of them are constitutional.

On Tuesday there will be another hearing of the Committee in Chicago to discuss other possible means by which the debt can be paid down. If you’re interested in learning more, the hearing will be streamed live on ilga.gov. You should take the time to listen because, after all, it’s your money.

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One Response to It’s Not the Pension (Entirely), It’s the Debt

  1. Bill sergeant says:

    The state constitution allowing pension protection should be challenged to the U.S. supreme court as un constitutional because it only protects public employees and not private employees unions pension there by being discriminatory . Then the system should be restructured limits on how much a person can collect, no double dipping and based on how much they pay in , not one person collecting a pension paid in enough to receive the benefits they are getting ,if you can’t do this Illinois is Doomed

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