Hopeless state pension plan coming down the pike
By EDEN MARTIN October 17, 2013 12:38AM
After months of quiet negotiations and arm-wrestling, the Illinois legislative pension reform committee may be about to produce a proposal, one light on reform but heavy in financial burden to Illinois.
Its main elements appear to be these:
◆ Change the cost-of-living adjustment (COLA) from 3 percent compounded to ½ the CPI, but with a ceiling of 4 percent and a floor of 1 percent. As state Senate President John Cullerton recently explained, this means if there is inflation, retirees could “get more than they’re getting now.”
◆ Reduce employee contributions by 1 percentage point.
◆ Guarantee funding by the state of the pension system’s obligations. That guarantee would be constitutionally binding, giving pension funding a greater priority than anything other than state bonds.
Cullerton says such a “reform” would “save” $138 billion over 30 years. Compared to what? The real projected savings would be far less in present-value terms. And if we have inflation, the savings would shrink even more — maybe even disappear.
No one is talking about how much — if at all — the $100 billion of existing unfunded liability would be reduced.
If Cullerton’s proposal were accepted, organized labor would publicly complain about how unfair and hurtful it is. But privately they would be celebrating. They could attack it in court. If they lost, their members still could retire at age 55 — far earlier than in the private sector or under Social Security. If there were serious inflation, which is a virtual certainty over the next three decades, they would get more than under present law. And their contributions would be reduced. Win — Win — Win!
Most important, they would get that state funding guarantee. The cloud hanging over the pension funds would be lifted.
What would the state get in return? It would be on the hook. The unfunded liabilities would continue to rise, as would annual pension costs. Pension funding would receive a contractual priority over education, health care, social services and all operating expenses.
The state Legislature would be tying not only its own hands but those of future legislatures, not to mention future governors.
The political significance could be enormous. Suppose some reformer type on the Republican side — a reformer with a meat ax — were elected governor. Someone who believes Illinois should shift, prospectively, to a defined contribution pension plan, which would be fairer to taxpayers and less burdensome to the state. The new pension reform, with the funding guarantee, would handcuff any such reforming governor.
The Legislature would be faced with a stark choice: either severely cut basic government operations, including education, or raise taxes to fund the pensions (perhaps with higher COLAs and certainly with reduced employee contributions).
Forget about the presently scheduled income tax reduction beginning in early 2015. How much would taxes have to be raised? And if the proposed graduated income tax were approved, how much would taxes be raised on middle and higher income taxpayers?
How many individuals and businesses would leave Illinois? How many more would leave Chicago when similar “reforms” were enacted for the Chicago pension funds?
If the proposal being floated by President Cullerton is ever enacted, Illinois’ fiscal problems will only be beginning.