Pension Reform Will Not Address the Unfunded Liability. So what should be done?

“Since there is an impasse, the House and Senate voted to form a Conference Committee that will be comprised of Senate and House appointees. [From the Senate: Kwame Raoul, Linda Holmes, Daniel Biss, William Brady, and Matt Murphy; from the House: Elaine Nekritz, Michael Zalewski, Arthur Turner, Darlene Senger, and Jil Tracy]*... The Conference Committee will meet over time until a resolution is obtained.  If an agreement is reached, a Conference Committee Report (CCR) will be filed, but only if 6 of the 10 members of the Committee have signed the Report.  The Conference Committee Report must then be filed in both chambers and passed on a roll-call vote by the House and Senate. If the Conference Committee cannot reach an agreement or the CCR does not pass the roll call vote in both chambers, a second Conference Committee can be created.  If the second CCR fails, the bill is declared lost” (Senator Sue Rezin).

*Brady, Biss and Murphy voted “Yes” on SB 1; Nekritz, Senger, Zalewski, and Tracy voted “Yes” on HB 1154, 1165, 1166; Turner voted “Yes” on HB 1154 and 1166.

“There can be no doubt that behind all the [attempts at pension reform in the Illinois legislature]…, there is [some sort of ineffectual] organization at work. An organization which not only [perpetuates] corrupt [dealings by politicians]…, of whom the best that can be said is that they recognize their own limitations, but also has at [its] disposal [bureaucratic alternatives in addition to suborning corporatists and lobbyists and officious reporters]... And the significance of this… organization…? It consists in this, that innocent persons [can also be victimized by] senseless [rulings that] are put in motion against them… How is it possible… to prevent gross corruption…? It is impossible [in Illinois]…” (With apologies to Franz Kafka, The Trial).

No pension reform will address the current unfunded liability. Say it again out loud this time: No pension reform will address the current unfunded liability. Solving the shortfall between available assets and accrued liabilities is foolish. Pension systems carry liabilities into perpetuity because they are “perpetual government agencies.” There is never a need to match assets and liabilities ever!

“Pensions will not run out of money… [That] assumes that at a future date, state pensions will just cease and all outstanding financial obligations will come due… Unlike a corporation, a state government cannot go out of business… [Accordingly,] state law empowers TRS (40 ILCS 5/16-158c)… Payment of the required state contributions and of all pensions, retirement annuities, death benefits…, all other benefits…, and all expenses are obligations of the state… The state has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code.  Federal law would protect all claims… Pensions [are not] the problem [or] why Illinois has been unable to pay its bills.  The reason is the dramatic fall-off in state revenues over the years, costing the state billions” (Dave Urbanek, TRS, 2011).

Most state legislators lack the political backbone to address the real causes of the state’s budget problems but prefer scapegoating the public employees and their pension systems instead. These politicians are abetted by the Civic Committee of the Commercial Club of Chicago, the Civic Federation, Illinois Policy Institute and the Chicago Tribune. These politicians do not want to pay for public pension systems even though past legislators (that include Madigan, Cullerton, Currie, and Cross...) contributed to the public pension systems’ lack of funding (Under whose watch did the Illinois pension debt grow before the year 2000?).

What should be done?
The current “Pension Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions systems what the state owes. There needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time (a flat payment) just like a home loan that is amortized; though the initial payment will be difficult in the beginning, over the long term it will become a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years.  

What else should be done?
Legislators should focus upon structural reform for increasing revenue, but they haven’t the political will to do it. What is needed to solve the budget problems in Illinois is a better revenue base to pay the state’s debts. What is easier to do is to evade serious problem solving of the budget issue and to incriminate the state’s public employees.  

What else should be done?
The state’s regressive tax rate that few legislators want to confront... Politicians, the Civic Committee, Civic Federation, Illinois Policy Institute and the Chicago Tribune have capitalized on a mostly gullible public by calling for radical pension reform as the solutions for the budget problems in Illinois. They are diversionary, scapegoating tactics that will bring intentional, financial harm to public employees and allow policymakers to escape their legal and ethical responsibility.

“At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy)… 

Illinois is one of seven states with a regressive flat-rate tax. The state needs a tax rate that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (Center for Tax and Budget Accountability CTBA), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (CTBA), and one that helps 99 percent of the state’s population.  

What else should be done?
Focus on why the State of Illinois cannot obtain more revenue. Besides federal sources of income, the state uses only 11 sources of revenue: personal income tax (but note Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (note extortionate tax breaks given to some Illinois corporations), sales tax (Illinois does not tax services like most other states for another significant source of revenue), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes and other miscellaneous (or rather unsubstantial) tax sources (Commission on Government Forecasting and Accountability).  

What else should be done?
Focus on sales taxes, “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively” (the Center on Budget and Policy Priorities).  

What else should be done?
Consider a broader-based taxation system that would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (CTBA).  

As long as Illinois politicians like Madigan (SB 1), Cullerton (SB 2404), Ives and Morrison (HB 3303), and others play their political ping pong game with one another and prioritize their own political opportunism, it will be impossible to obtain any just resolutions for the state’s budget problems. Politicians who favor pension reform prefer the easy way out of a difficult and challenging situation. The State of Illinois will not have a fair and sound tax system until it addresses the most important cause of the state’s budget deficits through significant state tax reform, and that will occur only when particular elected officials uphold the State and U.S. Constitutions instead of preserving their own self-regard and the wealthy corporatists that bankroll them. 

How about 12 pragmatic reasons to reject Illinois pension reform?