25% or more of Illinois’s state spending goes to pensions. And it’s the disabled, among others, who see the consequences. Published by Jane the Actuary View all posts by Jane the Actuary
17 thoughts on “Forbes post, “Get Your Priorities In Order, Illinois””
Re: Forbes post, “Get Your Priorities In Order, Illinois”:
We are tired of the ill-advised forums, half-baked letters and biased editorials that blame public pensions for the lack of money in Illinois, and we are tired of the media’s omission of the most significant facts about public pension debt and anyone who talks or writes about spending money on pensions overtakes spending on children’s education, public safety, and human services because of failed pension reform.
Most Illinois politicians, businesses, and pundits do not care whether teachers and other public employees have contributed responsibly to their pension funds or that teachers will receive [little to] no Social Security when they retire. They do not care whether retired teachers’ and other public employees’ defined-benefit pension plans are a fundamental source of economic stimulus to communities in Illinois and the only retirement income for hundreds of thousands of people. They do not care that the State of Illinois has not consistently paid its full constitutional and obligatory contributions to the public pension systems throughout the decades; thus, the unfunded liability (the debt service owed) has increased to approximately 80% of the pension payments needed today. Furthermore, the money that should have gone to the public pensions was diverted to other operating expenses and special interests’ groups.
An even more blatant irresponsibility is that the State of Illinois saved billions of dollars, for instance, by not paying what actuaries have calculated the Teachers’ Retirement System should have received throughout the years: money that was earmarked as deferred-earned income for teachers in Illinois. This continuous theft and deceit enabled the State of Illinois to provide services for its citizenry without raising taxes.
It is obvious Illinois politicians do not possess the resolve to take on an inadequate fiscal system that fails to generate enough revenue growth to properly maintain state services and pay state expenditures for health and social services, education, government, transportation, capital outlays, public protection and justice; nor do they possess the resolve to take on a re-amortization of the unfunded liability they had created.
Be that as it may, what should Illinois politicians do? 1) Stop favoring corporate interests rather than the interests of the citizenry. 2) Transform the state’s failing revenue system and unfunded pension liability. 3) Defend the Illinois and U.S. Constitutions.
On the link below I have listed some of our struggling union members here in Illinois. Even without spiking their final compensation amounts this group does exceedingly well albeit in a totally unsustainable way. Through the recently reintroduced spiking increase by the Governor the liability will grow even more rapidly. Given the $136 billion unfunded pension liability this is a truly irresponsible union handout. Please spare us the falsehood about pensions being unfunded simply because politicians did not fund as they were supposed to. Payments were missed but the bigger problem is that unions pension payouts have escalated exponentially because we have a system in Illinois where local politicians negotiate the contracts with the local unions and then send the bill to the state. It’s called negotiating with other people’s money. Saying yes is really easy when you don’t pay the bill. Plus add in the fact these local politicians/boards are volunteers that likely participate in one contract negotiation in their lifetime and are up against seasoned union negotiators with multiple years of contract negotiations. The outcome in Illinois is not pretty for taxpayers. For example, in my little town the teachers have an incredibly lucrative defined benefit plan plus they have a 403 B that gets a 4% match. If all of this was financially sustainable I would be good with it. My mom was a teacher and my daughter was high school principal. I understand education is the foundation of our democracy.
Why don’t you be constructive and help draft a plan that really can guarantee Illinois government workers some type of pension rather than tossing out canards such as protecting corporate interests and ignoring the financial malfeasance within the current system (Check out the link below. These payouts are unconscionable -maybe even to you) that will ultimately end in ruin for all constituents. The link shows that many employees are collecting more in one year than they contributed in their entire career. This is not sustainable and truly alien to virtually all other workers in the United States.
Let’s pay every teacher at least $100,000 per year and give them a 401 K like the rest of us have. Now maybe that is too draconian and we need to keep a defined benefit plan for government workers but the ones we have here in Illinois will not survive. The current system we he have is imploding and the union members and the truly financially vulnerable (via a lack of needed services) will eventually be the ones that suffer when this house of cards crashes.
Do you want to keep throwing out letter bombs or do you want to roll up your sleeves and help us fix this problem?
“…The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible. Moreover, no possible claim can be made that no less drastic measures were available when balancing pension obligations with other State expenditures became problematic. One alternative, identified at the hearing on Public Act 98-599, would have been to adopt a new schedule for amortizing the unfunded liabilities. The General Assembly could also have sought additional tax revenue. While it did pass a temporary income tax increase, it allowed the increased rate to lapse to a lower rate even as pension funding was being debated and litigated.
“That the State did not select the least drastic means of addressing its financial difficulties is reinforced by the legislative history. As noted earlier in this opinion, the chief sponsor of the legislation stated candidly that other alternatives were available. Public Act 98-599 was in no sense a last resort. Rather, it was an expedient to break a political stalemate…” (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).
How we can fix the problem:
The state’s regressive tax rate is what few legislators want to confront. Politicians, the Civic Committee, Civic Federation, Illinois Policy Institute, the Chicago Sun-Times, the Chicago Tribune, Crain’s Business, and the general news media have capitalized on a mostly vulnerable public by calling for radical pension reform as the solutions for the budget problems in Illinois. They were (and will continue to be) diversionary, scapegoating tactics that have allowed policymakers to escape their legal and ethical responsibilities.
“At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… That is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).
Illinois income tax uses a single-rate structure that results in low-income wage earners paying more taxes than the wealthy. Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent (The Institute on Taxation and Economic Policy).
Pass a graduated rate income tax like the majority of states in this country. The state needs a tax rate that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (Center for Tax and Budget Accountability), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (Center for Tax and Budget Accountability), and one that helps 99 percent of the state’s population.
Focus on why the State of Illinois cannot obtain more revenue. Besides federal sources of income, the state uses only 11 sources of revenue: personal income tax (but note Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (note extortionate tax breaks given to many Illinois corporations!), sales tax (Illinois does not tax services like most other states for another significant source of revenue), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes and other miscellaneous (or rather unsubstantial) tax sources (Commission on Government Forecasting and Accountability).
“A majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively.” Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities).
Expand the state’s tax base. A broader-based taxation system that would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (Center for Tax and Budget Accountability).
Increase taxation on the wealthy: Illinois is in the top 10 of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor [can] rarely save at all – the taxes are inherently regressive” (The Institute on Taxation and Economic Policy).
Eliminate tax loophole for “Tax Increment Financing Districts.” Eliminate “Edge Tax Credits” and other tax loopholes for large corporations in Illinois.
Revamp the flawed Pension Ramp: “Starting in 1995, yet another funding plan was implemented by the General Assembly. This one called for the legislature to contribute sufficient funds each year to ensure that its contributions, along with the contributions by or on behalf of members and other income, would meet the cost of maintaining and administering the respective retirement systems on a 90% funded basis in accordance with actuarial recommendations by the end of the 2045 fiscal year. 40 ILCS 5/2-124, 14-131, 15-155, 16-158, 18-131 (West 2012). That plan, however, contained inherent shortcomings which were aggravated by a phased-in ‘ramp period’ and decisions by the legislature to lower its contributions in 2006 and 2007. As a result, the plan failed to control the State’s growing pension burden. To the contrary, the SEC recently pointed out:
“‘The Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. The resulting underfunding of the pension systems (Structural Underfunding) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.’ SEC order, at 3. That the funding plan would operate in this way did not catch the State off guard. In entering a cease-and-desist order against the State in connection with misrepresentations made by the State with respect to bonds sold to help cover pension expenses, the SEC noted that the State understood the adverse implications of its strategy for the State-funded pension systems and for the financial health of the State. Id. at 10. According to the SEC, the amount of the increase in the State’s unfunded liability over the period between 1996 and 2010 was $57 billion. Id. at 4.5 The SEC order found that ‘[t]he State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.’” (Emphasis added.) Id. at 4 (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).
Also from the Illinois Supreme Court Ruling: “Senator Hutchinson: Would another alternative be the proposal that the Center for Tax and Budget Accountability outlined before the conference committee, which would have re-amortized the current unfunded liabilities to a new gradual [level] dollar payment schedule to achieve well over eighty percent by 2059? Senator Raoul: Yes. So that—that and many other things could have been possible alternatives.”
The current “Pension Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions systems what the state owes. There needs to be a required annual payment from the state to the pension systems. The debt needs to be amortized for a longer frame of time (a flat payment) just like a home loan that is amortized; though the initial payment will be difficult in the beginning, over the long term it will become a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years.
“Decades of mismanagement and failure to match contributions are the predominant reasons that the state’s pension systems are suffering to the degree that they are today. Years of pension holidays, continually borrowing against the systems without a plan for repayment and a severe economic recession, which caused investments to plummet, further exacerbated the problem” (Former Senate President John Cullerton). Thus, there needs to be a required “actuarially-sound” annual payment from the state to the pension systems! Indeed, the State of Illinois has a revenue problem and its policymakers have stolen money for decades from public employees’ pensions to hide this fact.
Finally, fix Tier II Benefits: Tier II pension benefits are lower than Tier I pension benefits because of its pensionable salary cap that violates the “Safe Harbor” standard of the Social Security Administration. The “Safe Harbor” provision states that those who do not receive Social Security payments must receive a pension benefit equal to that of Social Security benefits.
Thanks for responding to my “How can we fix this” request. Everyone of your responses focused solely on the revenue side of the problem and that alone will not come close to fixing the mess we have today. Totally ignoring the cost side of the problem will ultimately result in future pain that is disproportionately higher for union members than if they would provide some accommodation now. Let’s go to the revenue side. I do agree that right now Illinois does need a graduated income tax and I will support the upcoming referendum. However, the three other states with unfunded pension liabilities similar to Illinois also have graduated rates with up to tax rates of CA 13%, CT 6.99% and NJ 8.88% so I am less than optimistic about economic salvation with this but philosophically supportive of the concept . Pritzker says the new tax will bring in $3.5 billion which is a pittance compared to the $136 billion pension hole we have today and when you add in the unfunded police and fire pensions now coming to the state a reasonable person will see we have an impossible gap to fill via only looking at revenue solutions. Off course, I understand this is an Illinois Constitution speed bump and Pritzker and future politicians will raise our up to rates significantly. On a side note I am not sure the police and firefighters agreeing to transfer this payment responsibility from local municipalities to our broke state is a real sound strategy. My guess is their attorney’s are telling them the inability of the state to declare bankruptcy is a better bank than a poor local municipality that can. Plus when the local police are fired because we have to pay the pensions of the retired police the locals will be a bit ballistic. This sleight of hand transfer to the state takes that wake up call off the table which is bad because it keeps the citizenry in the dark until it is too late. It also has the local pols now negotiating with other peoples money and that surely will not result in an a happy ending not unlike we have with TRS and the other state funded pensions.
Those who refuse to also look at pension expenditures notwithstanding the rampant fraud and completely non-sustainable payouts in our current government programs are doing a great disservice to those they are trying to protect. Right now we have many people in this state retiring at $150,000 plus per year and through spiking shenanigans and COLA bumps their pensions will exceed their salaries very shortly after retirement. These people likely will have contributed less to the pension plan in their entire careers than they will receive in their first year of retirement. That is not sustainable in the real world. Probably less than 15% of private employees have defined benefit plans and those plans are designed to pay about 50% of income (and yes social security is part of the thought process) with no inflation protection. I do not fault the unions and their members for seeking these benefits. I do fault our government officials for agreeing to completely unrealistic payouts and when it comes to money, in the long term, realism is unavoidable in spite of the fact these promises were made. Bad promises are made and broken every day. These promises will be broken too because as currently constructed they are an injustice to taxpayers that have no golden parachute even remotely close to what the Illinois government offers its employees today. You can continue your approach and just say give us more revenue and inevitably when we run out of money a huge haircut will leave pensioners with a very small percentage of their incomes. You also had a laundry lost of other taxes you wanted to enact as well. Given the truly outrageous property taxes we have here in many Illinois communities your additional tax suggestions would hurt our economy and increase the already expanding number of people leaving the state. I’m sure you see compromise as something only for the weak but this hardball tactic will not end well for any constituents. How about a more realistic and balanced approach to a truly epic problem that left unfixed will really hurt a lot of people. Most people in the government pension plans are not receiving those mind boggling every increasing $250,000 and above payouts and we need to protect those people. A combined look at tax revenue increases and pension expense reduction is the only viable solution.
You think anybody reads our commentary besides you and me?
I am not surprised you went silent. My commentary geared towards looking at more revenue and fewer expenses is the only workable solution. We both know focusing solely on more revenue will not scratch the surface of the ever increasing $136 billion pension debt. If more people understood state employees are retiring with payouts of 100% of their salaries with a guaranteed minimum 3% COLA in perpetuity that IL Constitution would be changed and real reform could begin. When the first 18 months of a retire’s pension payout exceeds the amount contributed by a 35 year state employee we have a promise that is not sustainable regardless of the IL Constitution or Pritzker saying he is reforming the system. His reintroduction of the 24% spiking and transferring local pensions that are sometimes funded at less than 15% of what is needed to the state is simply pandering to people who don’t understand he has actually made the situation worse. This type of deceit will eventually hurt a lot of people who devoted their careers to helping others. It’s time to get real and begin focusing on meaningful solutions. Protecting those $250,000 plus per year pensions is rather unbecoming. We can do better. Oh yeah why did Pritzker add the lump sum payment option? He disingenuously positions it as a cost savings reform. Maybe he believes it. It takes a lot less brainpower to inherit money than it does to earn it.
Those $250,000+ pensions are not teachers’, policemen, firemen or other state workers’ pensions. They are superintendents’, principals’ and other administrative person’s pensions. Yes, “they are unbecoming.”
“IL Constitution [should] be changed and real reform could begin”:
To anyone who wants to amend the Pension Protection Clause: read Article XIII, Section 5: “Pension and Retirement Rights” of the Illinois Constitution. Read Article 1, Section 16: “Ex Post Facto Laws and Impairing Contracts” of the Illinois Constitution. Read Article I, Section 15: “Right of Eminent Domain” (the Takings Clause) of the Illinois Constitution. Read Article I, Section 2: “Due Process and Equal Protection” of the Illinois Constitution.
Read Article 1, Section 10 of the United States Constitution: “No State shall… pass any… Ex Post Facto Law, or Law impairing the Obligation of Contracts…” Read Amendment V, Section 1 of the United States Constitution: “No person shall be… deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use, without just compensation.” Read Amendment XIV, Section 1 of the United States Constitution: “Due Process and Equal Protection.” To ignore the Fifth and Fourteenth Amendments of the U.S. Constitution and change laws that protect one group of people is to ignore due process and equal protection of the laws that guarantee contractual agreements as well. Finally, read the Illinois Supreme Court ruling: docket number 118585, filed on May 8, 2015.
Here is another problem to consider: Tier II members are subsidizing both Tier I and Tier II benefits. In the future, when Tier II members are the significant majority in Teachers’ Retirement System (TRS), the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost and school districts will be responsible for making up the difference. Furthermore, these teachers will receive a TRS pension that will be less than Social Security; thus, it will be in violation of the Safe Harbor provision of the Social Security Administration, which states that anyone who does not receive Social Security must receive a benefit equal to a Social Security benefit. Remember, teachers do not receive Social Security; the State of Illinois saves billions of dollars by not having to pay into Social Security.
David, the pension debt problem is not because of the COLA. The pension debt problem is because Illinois legislators have never fully funded the pension systems throughout the decades, the so-called “Pension Ramp” of 1995, and the antiquated revenue system in Illinois. Note: eighty percent of the Illinois pension payment today is for the service debt.
Hi, David and Glen. I’m learning more about the pension crisis and am reading your commentary. Thank you.
Enjoyed reading your comments.
Until the elected officials focus primarily on the decades in the making out of control cost side, all the new taxes & continued borrowing will only push more people out of the state. You can only go si long living above your means.
Why haven’t Illinois politicians gone to jail for breach of honest services?