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Where’s the money to solve IL’s budget crisis?

Wed, Apr 10, 2013

Illinois legislators “are no longer sticking their toe in the water at the shallow end of the pool but have jumped in headfirst” on pension reform with a three-point bill that encompasses the biggest cost driver of them all, compounded cost of living adjustments (COLAs), says Assistant House Majority Leader Sara Feigenholtz (D-Chicago).

The bill approved March 22 and sent to the Illinois Senate reduces $20 million of nearly $100 billion in unfunded pension liability. Yearly payments on this liability have begun to dominate the Illinois budget at the expense of all other line items.

Does the bill go far enough to reduce the state’s worst-in-the-nation unfunded pension liability? And will the pension fund holders themselves allow it to pass both houses of the General Assembly?

Dan Montgomery, president of the Illinois Federation of Teachers (IFT) told the Chicago Tribune the COLA action meant that teachers would have less purchasing power. He called the bill unconstitutional and predicted it would be thrown out in court.

Article 13, Section 5 of the Illinois Constitution says that “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.”

“I think the courts will look at what is going on in the State of Illinois more holistically,” Feigenholtz said when asked about the IFT statement. “If we can’t get support from the courts, I am not sure where we go except for bankruptcy court. People need to understand we do this because we have no other choice. Every day we don’t fix the pension problem we rack up another $17 million in debt.”

Illinois’s pension fund has just 39 percent of the money needed to pay retirement benefits promised to state employees, teachers, state university personnel and lawmakers, the Associated Press noted in January. Years of payment holidays by the General Assembly are to blame.

Not surprisingly, Illinois also has the worst credit rating in the nation, which makes it more expensive to sell bonds to fund transportation, housing or other infrastructure, said Mary Sue Barrett, president of the Metropolitian Planning Council. The MPC was one of four civic organizations that sought legislation earlier this year to reduce the unfunded pension liability by roughly $28 billion; correspondingly, the annual pension contribution for the next fiscal year would also drop by about $1.8 billion, or nearly one-third.

“Nothing tops pension reform because we can’t have good government if pension costs keep gobbling up more and more state budget dollars that now pay for education, health care, social services, public safety and economic development,” said Andy Shaw, president and CEO of the Better Government Association, another of the civic organizations calling for reform. Others include the Civic Federation and the Chicago Urban League.

“Reducing cost of living adjustments [COLAs] is the single largest driver to bringing down the pension debt the state has,” said Ted Dabrowski, vice president of policy at the Illinois Policy Institute.

But Dabrowski adds that “the bill that was passed in the House the other day does nothing to reform the pension system, because it continues to maintain defined benefits as the core of its pension system.”

“Defined benefits” promise retirees fixed payments for the rest of their lives, he said.
“Defined contributions,” on the other hand, are more like a private-sector 401K, where the employee puts money into an account every pay period.

“The pension systems make promises for the retiree’s life but we’re finding those promises are almost impossible to keep,” Dabrowski said. “With defined benefits you’re relying on the politicians and the market in the hope that you get your retirement money. In a 401K style system, you are still relying on the market, but you – not the government – are in control of the investment saving.”

Without reform, he said, pension systems are likely to go broke. Furthermore, “if we don’t convert to a defined contribution system, state workers will continue to be relying on the same politicians that have driven this system into the ground.”

Spending on the existing pension system also “crowds out” core services for the poor and disadvantaged, as well as health care (Medicaid), education and public safety, Dabrowski said.

Housing Action Illinois has no specific issue on pension reform, “although we do feel the Illinois tax system is outdated and regressive,” said Policy Director Bob Palmer. “In addition to looking at the spending side of the budget,…we need to look for ways to change the tax system to be more fair and to generate more revenues.”

Palmer said both the sales tax and the flat income tax are regressive, i.e., they take a larger percentage from low-income people than from high-income people. There is a campaign underway, he said, to amend the Illinois constitution to allow for a fair tax system that asks the rich to pay a little bit more in order to protect priorities like education, public safety, health care, and housing.

In addition, Illinois has long taxed products but not services, Palmer said. “That’s where the real growth in the economy is. A lot of states that do tax services have not had the dire fiscal problems Illinois has.”

By Suzanne Hanney,
StreetWise Editor-In-Chief

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