The problem with Madigan’s pension plan
EDEN MARTIN firstname.lastname@example.org May 2, 2013 4:28PM
Illinois Speaker of the House Michael Madigan, D-Chicago, speaks to news reporters after testifying during a House Committee hearing regarding state pension legislation at the Illinois State Capitol May 1. (AP Photo/Seth Perlman)
Updated: May 3, 2013 2:22AM
The pension reform bill pushed through the Illinois House Thursday by Speaker Mike Madigan has some very good things about it, but also one bad thing.
On the positive side, we are told that unfunded liabilities would be reduced from about $98 billion to perhaps $70 billion. The reforms would apply to current employees — not just those hired in the future. The bill limits cost-of-living pension increases, which are costly to the state. It creates incentives for employees to retire later, which is consistent with trends in the private sector and helps control costs. It would raise the level of employee contributions.
Also, the bill provides for annual state funding based on actuarial principles (albeit with some back-end loading of costs). Putting funding on a sound basis is a good thing — if done by statute. Unlike contracts, statutes can be changed when circumstances change.
The bad feature here is that Illinois would in effect become the contract guarantor of the several pension fund liabilities. The state would irrevocably commit now to annual funding of the liabilities — however large they may become, at whatever annual level the actuaries determine, and regardless of the state’s circumstances at the time.
Also, the guarantee provides that if the state fails some year to fund at the level determined by the actuaries, the pension funds “shall” go to court and obtain a judicial order compelling the state to pay up.
This open-ended guarantee is extraordinarily dangerous. After the impact of the proposed reforms, the remaining stated unfunded liability of about $70 billion would increase at a rate of about 8 percent each year — perhaps more. No one knows how large the liabilities may become.
What happens if Illinois is hammered by another recession, causing the state’s revenues to drop or the values of assets in the funds to plummet? What if local school boards, knowing the state has become the contract guarantor for the funds, approve changes that drive up the pension obligations? What if actuarial assumptions turn out to be wrong?
At least when issuing a bond we know the amount of principal and interest the state will have to pay. Here, the state would undertake to guarantee blank checks that may turn out to be monumental.
State government is supposed to embody the principles of democracy. One legislature may not bind the hands of future legislatures. Power delegated to an elected legislature may not be further delegated. Taxing and spending decisions are supposed to reflect the will of the people at the time, rather than the will of past legislatures, or local school districts, or the judgments of actuaries and judges.
In Illinois we permit contract claims against the state only in the Court of Claims, and only up to $5,000. The Madigan bill approved by the House Thursday would explicitly trump these limits and direct pension boards to bring judicial actions to compel billions in annual funding — regardless of how many billions, or the state’s circumstances at the time, or the impact on education, health care, law enforcement or other essential functions of state government.
The guarantee would allow future legislatures to duck responsibility for the most crucial policy decisions — including taxation. (“The court made me do it.”)
It would be good for the pension system. And it might give legislators some protection from angry taxpayers. But it’s dangerous, unnecessary and not democracy.