Forget Greece – Is Illinois in our future?

A world of hurt for Illinois and lessons for Missouri

Illinois’ state pension system is broken so badly that, as reported November 15 by the AP, a recent memo of the Civic Committee of the Commercial Club of Chicago termed it unfixable. According to the former Attorney General, Tyrone Fahner, the Civic Committee president:

“The pension crisis has grown so severe that it is now unfixable. We do not make that statement lightly. It is an honest statement that no one – not our legislators, nor our governor, nor labor leaders – is willing to say publicly.”

In a detail reported by Reuters but not by the AP, the Committee expressed disappointment that the election resulted in a veto-proof Democrat majority in the state legislature, which will make any reform very difficult.

The current debt or unfunded liability of the five pension plans  is $83, $86, or $96 billion,  depending on the source. To pay current obligations and start to pay down the mountain of debt used for previous obligations, Illinois would have to devote 20% of its general revenue for 2013 and more than 40% for 2020. The state has long raided its required pension contributions for more politically palatable purposes and has granted overly generous “benefit enhancements,” such as very early retirements and double-dipping. In plainer English the pension plans have been mismanaged since the early 1980s by Democrat politicians and a few Me-Too Republicans in bed with the teacher and other public-sector unions. The pension plans of the city of Chicago are in a similarly parlous state.

State mismanagement has created other unfixable fiscal problems. The State Budget Task Force  flatly states that “Illinois’ budget is not fiscally sustainable.” Illinois has “the worst unfunded pension liability of any state.” Medicaid obligations have doubled from 2000 to 2011. With dwindling Federal dollars and an unreformed and stagnant tax revenue base, Illinois has gone over the fiscal cliff and is approaching free fall.

Let’s look at the pension system for school teachers. Teachers contribute 9.4% of their gross pay towards their pensions. Their school districts contribute another 0.58%. The state is obligated to make up any shortfall for current retirees and to make contributions towards fully funding the plan. But TRS pensions were only 46% funded for 2011. The Democrat Governor’s leadership consists of a website using a cartoon character, Squeezy the Pension Python, to outline the predicament. In contrast the TRS Board of Trustees  “no longer has confidence that the State will be able to meet its existing funding obligations” and insists that

“The impact of any proposal…must be determined using generally accepted actuarial principles and not the funding scheme and pension bonds limits currently in Illinois law.”

It is clear that Illinois retirees and taxpayers will inevitably suffer, no matter what reforms are adopted. Recently bankrupt California cities have already cut back on pension benefits. Unfortunately Illinois retirees have not paid into the Federal Social Security program and will not be able to receive any benefits.

There is an alternative to this disaster. In 1981 and 1982 employees of the Texas counties of Galveston, Matagorda, and Brazoria were permitted to opt out of Social Security in favor of a market-based solution called the Alternate Plan . Under this pension plan, assuming 40 years of work:

  • A worker earning $26,00 at retirement would receive $1,826/month instead of Social Security’s $1,007.
  • Another earning $51,200 at retirement would receive $3,600/month versus $1,540.
  • And a high-income worker maxing out Social Security benefits at $2,500/month would instead collect $5,000 to $6,000.

Employees pay 6.2% of their gross with a matching amount from the county. There can be no unfunded liabilities since the county obligation ends with the matching contribution. The worker owns his own account. There are death, survivors, and disability benefits comparable to or better than Social Security’s. Employee contributions are pooled and bid out annually. One of the conditions is that there should be a guaranteed base rate of return, usually 3.75%. The Alternate Plan is an option for all state and local government retirement plans currently outside of Social Security. Illinois and Chicago could switch tomorrow. But then the politicians would have fewer revenues to play with and the unions could not justify their high dues. But current teachers, given that their current cushy benefits are about to shrink,  might prefer, if given the choice:

  • 6.2% out of my salary instead of 9.4%
  • No union dues
  • Retirement benefits 1.8 to 2.5 times higher than Social Security
  • No risk of reduced benefits or political interference
  • No possibility of unfunded liabilities

Illinois taxpayers, also on the hook, might also prefer this system.

The bottom line: real people in Illinois are being hurt by government malfeasance. (Of course these real people also elected the irresponsible politicians promising current benefits, but not mentioning future woe.)

What are the implications for Missouri? Many Illinois businesses will be moving to other states with a friendlier business climate, including Missouri. But Missouri is a forced-union state with a union-friendly Democrat Governor and a cumbersome tax system. Many western Missouri businesses have already moved to the friendlier climes of Kansas and Oklahoma for similar reasons. It is essential that the Missouri Legislature should take advantage of its current veto-proof majority and make Missouri a Right to Work state as its first order of business. Requiring generally accepted actuarial principles for future obligations and gimmick-proof budgeting procedures should quickly follow. A third item for immediate attention is reform of the tax system to produce a steadier and business-friendlier revenue stream in good times and bad. Illinois has provided many good lessons for those who have eyes to see.

Troglo                                                                                                                    

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