Plenty of examples for Illinois to follow in pension reform
BY DAVID ROEDER Staff Reporter firstname.lastname@example.org June 3, 2013 7:02PM
FILE - In this April 17, 2013 file photo, Illinois Gov. Pat Quinn speaks to reporters in his office at the Illinois State Capitol in Springfield. Quinn promised a quick signature on legislation to regulate hydraulic fracturing, or fracking, after it passed the state House and Senate, saying the industry will create thousands of badly needed jobs in southern Illinois where oil companies already have leased hundreds of thousands of acres. (AP Photo/Seth Perlman, File)
- Pension impasse leads to another downgrade to state's credit
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Updated: July 5, 2013 2:42PM
When it comes to liabilities for state pensions, the Illinois General Assembly can be embarrassed for two reasons.
One is that by not acting on the pension issue last week, lawmakers left alone a festering pile of debt. It stands at $96 billion or so, growing by an estimated $17 million a day. The 45 percent funding level for those pensions is the lowest figure for any state.
The other issue is that by doing nothing, Illinois is falling behind its peers. A wave of pension changes has swept across state capitols nationwide, making reform the norm the last few years.
Experts in municipal finance said a few states might inspire lawmakers here if they bothered to consider approaches elsewhere. Among them are Rhode Island, like Illinois in that the Democrats run it with strong influence from government employee unions, or Florida, which withstood a court fight to force state workers to make their first contributions toward their pensions. Unions argued it was an illegal cut in pay.
Marcia Van Wagner, senior analyst at Moody’s Investors Service, also cited Maryland, which has begun transferring costs for teacher pensions from the state to local districts. Illinois bears the cost of suburban and Downstate teacher pensions, part of its larger pension problem.
“You don’t need to solve your pension problem overnight, but it is very important to at least get some progress today. And that’s what Illinois hasn’t done,” said Chris Mier, chief strategist at Chicago investment bank Loop Capital.
He praised Rhode Island for a transparent process bringing interest groups together on pension reform. “Our Legislature has tried to handle this behind closed doors, and it hasn’t worked,” Mier said.
A spokeswoman for Gov. Pat Quinn, an advocate of pension changes, said a special session to tackle the subject is under consideration. The Legislature adjourned last week. She said Quinn plans to meet with legislative leaders Tuesday.
The National Conference of State Legislatures counted 32 states as making major changes to its pensions in 2011 and another 10 in 2012. Among the 2012 crop were Kansas, Louisiana and Virginia, which replaced old-fashioned guaranteed benefit pensions with something less generous, such as “cash balance” plans with benefit levels that can fluctuate.
Even California, mentioned with Illinois as poster children for bad pension practices, enacted changes that affect benefits for new employees. Critics said the California reform helps but won’t have a budgetary impact for years.
“Those [states] that have had the greatest impact on unfunded liabilities have been those that addressed the benefits of current workers,” Van Wagner said.
Illinois’ pension inaction brought the state another in a series of recent downgrades to its credit rating Monday. Fitch Ratings cut the state’s rating one notch to “A-minus,” still investment grade. The action applies to $27.5 billion in outstanding bonds but could lead to the state paying higher interest rates on future debt.
Fitch called Illinois’ growing annual pension payments “unsustainable.” Its report said, “Fitch believes enactment of reform is critical to the long-term stability of the state’s fiscal position, although legal protection of pension benefits is particularly strong in Illinois and Fitch expects any changes to be litigated.”
Illinois has a constitutional clause that says pension benefits “shall not be diminished or impaired.” The requirement means Illinois can’t draw many lessons from other states, said Ralph Martire, executive director of the Center for Tax and Budget Accountability.
Martire said the situation here is unique. The pension shortfall comes not from excessive benefits, from an unrealistic debt schedule created by former Gov. Jim Edgar that’s burdening the state with high payments, Martire said.
Refinance and extend the debt and the problem is solved, he said.
“A lot of time is being spent in Springfield arguing about the wrong solutions,” Martire said. “You’ve got a lot of affluent CEOs calling for the most aggressive benefit cuts for people earning $40,000 a year.”
Mier said Martire’s answer defers the problem without solving it. “You need to attack it on several fronts, and with both current and future workers,” he said.
Ultimately, lawmakers here might do nothing until higher borrowing costs force their hand, Mier said.
Contributing: Natasha Korecki, Dave McKinney