Reeder: A guarantee that Illinois should not provide
By Scott Reeder email@example.com April 29, 2013 10:52PM
Updated: June 1, 2013 6:26AM
Mix pension financing, constitutional law and politics and you’ll either have a recipe to cure insomnia — or the most important but under-discussed issue facing Illinois today.
Illinois lawmakers are on the brink of making a mistake that could lock taxpayers in for hundreds of billions of dollars in new costs. It’s called a “pension guarantee.” Public-employee unions are lobbying hard for it so the state can be forced, by a lawsuit if necessary, to pay its full share of funding its five pension plans each year.
In exchange for a small rise in employees’ retirement contributions, the unions want taxpayers to hand them a blank check to finance an inherently flawed pension system. And that blank check equates to higher taxes.
Unless you’ve been dining on paint chips, it’s pretty obvious this is a bad proposal. Taxpayers are being asked to guarantee pension investment returns while having no say in how that money is invested.
More important, Illinois politicians have a long history of succumbing to union pressure and making pension benefits increasingly generous. And this proposed pension guarantee would make taxpayers responsible for whatever future benefits are promised.
Don’t think government pensions are generous? Think of five able-bodied people you know who retired in their mid-50s. Were most of them government workers? I thought so.
This pension guarantee is being proposed under the guise of stopping politicians from shortchanging the pension plans in the future. Core government functions — such as educating children, preserving public safety, incarcerating criminals and caring for the poor and elderly — would take the backseat to financing pensions.
Having sat through plenty of legislative hearings on pensions, I can tell you there is considerable disagreement about a provision in the Illinois Constitution regarding pensions.
Here’s what it says: “Membership in any pension or retirement system of the state, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Some folks, like me, believe that means a government worker is guaranteed by their pension fund not to lose what they have already earned. But the public-employee unions contend that once a person enters government employment, they have boarded a rocket ship that guarantees ever-increasing pension benefits — even as those benefits soar past the financial stratosphere.
Pension reform has been the subject of much verbal jousting in Illinois in recent years. Often overlooked is another critical question — what happens when that pension rocket runs out of fuel?
After all, the pension systems are independent of state government. The state public pension law is clear on that: “Any pension payable under any law hereinbefore referred to shall not be construed to be a legal obligation or debt of the state, ... but shall be held to be solely an obligation of such pension fund, unless otherwise specifically provided in the law creating such fund.”
Now some schemers want Illinois taxpayers to guarantee that those pension funds don’t go broke. It’s sort of like if the ne’er-do-well down the street were to knock on your door and ask you to co-sign his mortgage. No way, right? Well, that’s the predicament the state would find itself in under the pension guarantee proposal.
And instead of talking about fundamentally reforming state pensions into 401(k)-style plans (similar to 85 percent of the private sector), pension guarantee advocates want Illinois taxpayers to dole out more money to keep the faltering systems alive.
Those pushing for the proposal want to change the law so that the five pension funds can demand money from the state, based on their investment and actuarial projections — and those projections are now more than a bit rosy.
Moody’s Investors Services says pension plans should use more realistic return assumptions, or rates that are now about 4.3 percent. But Illinois’ public plans use a projected rate of return of about 8 percent.
If the General Assembly creates a taxpayer guarantee for financing public pensions, there is nothing to keep the pension boards from lowering their projected rate of return and demanding more from taxpayers.
And if the state doesn’t pay up, the pension system can sue and our tax bills will soar.
Scott Reeder is a veteran statehouse reporter and the journalist-in-residence at the Illinois Policy Institute, a nonprofit research group that supports the free market and limited government.