Updated: January 2, 2014 6:28AM
Now that the details have been disclosed, it’s pretty clear that a proposed deal announced Wednesday by Illinois’ legislative leaders would not fix the state’s pensions or solve its fiscal problems.
First, the state’s current pension plans are far too generous and too costly — wholly unrelated to competitive market standards. The private sector, where most taxpayers work, has largely shifted away from pension plans to defined contribution plans, which reduce risk to the employer. Illinois should make the same shift. Instead, the pension deal creates defined contribution plans but makes them optional — and limits participation to no more than 5 percent of employees. (That’s because the state wants those future contributions in order to fund pensions for those already retired.)
Where private-sector employers have kept their pension plans, few permit employees to retire with full pensions as early as 55. The proposed deal retains this feature for older employees, while adding incrementally to the retirement age for younger employees.
Similarly, private-sector plans rarely grant anything like compounding 3 percent cost-of-living adjustments, regardless of inflation. Yet the pension deal would preserve these COLAs for major chunks of the pensions of retirees.
And why, when the funds are so badly underfunded already, reduce employee contributions going forward?
Tinkering with the retirement age, fine-tuning the COLA mechanism, and reducing employee contributions — these appear to be an attempt to dress up the deal to make it look like a “compromise” with labor: bundles of offsetting give-ups and gains. Yet the unions have flatly rejected any such compromise and are preparing to go to court. So what’s the point of weakening the reforms — or taking on a new state funding commitment?
Second, the amount of “savings” attributed to the reforms is exaggerated. The current unfunded liability is about $100 billion. The proposed deal would reportedly reduce that by about $14 billion, which is less than had been projected under House Speaker Michael Madigan’s earlier reform proposal.
Advocates say that in future decades the “savings” will amount to perhaps $160 billion. But those “savings” are speculative and over-stated. What would $1 billion of savings — realized in, for example, 2040 — be worth today? Only about $125 million — roughly 1/8th — using the state’s pension discount rate.
Third, what would be the likely impact of the deal on the state’s budget? Will the state’s required annual pension contributions compel cancellation of the scheduled roll-back in the state’s income tax? Or perhaps even require an increase? How much, and when? The number-crunchers surely know the answer, but they’re not talking. Why sign on to a huge deal like this without knowing the likely consequences?
Fourth, what does the deal mean for Chicago? The state will assume funding responsibility for K-12 teachers’ pensions throughout the state — except Chicago’s — though Chicago taxpayers will bear their share of that state-wide burden. If the state were to assume similar funding responsibility for Chicago’s school pensions, that would free up local property taxes to be used to deal with the city’s looming budget shortfalls. Why wait?
The main problem is this: The pension deal takes tiny steps in the right direction when what we need are giant steps. Tiny steps alone will not solve the state’s enormous fiscal problems.
Pass it or don’t pass it. Illinois’ pension crisis isn’t going away.