Wednesday, November 20, 2013

A Response to Today's Chicago Tribune Editorial about So-called Pension Reform

"Illinois' four legislative leaders have been meeting privately in an effort to carve out a pension reform deal. Only top staffers have been allowed in the room with them. No news conferences. No comment. Members of the General Assembly have been told to clear their calendars for Dec. 3 and 4. That's the firmest signal yet that the four leaders — Senate President John Cullerton, House Speaker Michael Madigan, Senate Minority Leader Christine Radogno and House Minority Leader Jim Durkin — are getting close to a deal. The four are scheduled to meet again this week and the day before Thanksgiving, location top-secret.

"Given all the failures in the past, is there any reason to think this time will be different? Probably not, but here's a likely reason for the timing: By 5 p.m. Dec. 2, the members of the House and Senate will know if they face primary opponents in the 2014 election or if they have clear sailing. That's the deadline for candidates to file petitions to get on the ballot…

"The leaders are talking about freezing COLA increases in certain years, increasing retirement ages and capping pensionable income. Also on the table is a voluntary 401(k)-style plan. Public pension plans should make the switch to fixed-contribution retirement plans, as many companies have done. A voluntary plan at least would give public workers an opportunity to direct their own retirement accounts…

"The problem cannot be solved with a modest fix. Consider: the largest of the state pension funds, the Teachers' Retirement System, posted impressive investment returns of 12.8 percent for the fiscal year that ended June 30. Even so, the unfunded liability of that system rose during the same period by $3.6 billion. We cannot invest our way out of this debt.

"The legislature during its fall veto session passed pension changes for the Chicago Park District. That plan would require workers to pay more toward their retirements and retire at a later age. It would limit COLA increases, even freeze them for three years. And even at that, the Park District would have to borrow big money — potentially up to $50 million — to stabilize that pension system. We cannot borrow our way out of this debt.

"The state's pension system faces that unfunded liability nearing $100 billion. That has prompted 13 credit downgrades just since 2009. That liability grows by $5 million every day. We cannot tax our way out of this debt…" (Editorial: A December vote on pension reform?).  

Commentary: Solutions for Pension Ramp and State Revenue

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 more 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. So-called Pension Reform will not solve the problem.

According to the Center for Tax and Budget Accountability: “Since it passed, Illinois funded the ‘Pension Ramp’ as required every year, except FY2006 through 2007. However, the annual increases in the required contribution under the intended ‘Pension Ramp’ vastly outpace natural growth in the state's tax revenue. This reality, coupled with the constitutional requirement that Illinois balance the budget, meant the state would have to cut spending significantly on services to fund the ‘Pension Ramp,’ particularly in out years. The net result, Illinois' fiscal system simply could not accommodate the significant contribution increases contemplated under the ‘Pension Ramp.’ The first major threat to the ‘Pension Ramp’ was averted with the sale of $10 billion of pension obligation bonds. Then, reverting to past poor fiscal practices, the state significantly underfunded pensions in FY2006 and FY2007, to maintain, and in some cases expand, services.

“There were years like 2006 and 2007 in which lawmakers passed legislation that lowered the contributions for those years to an amount that was below the pension ramp (those amounts were already less than the employer’s ARC).  In addition to a revenue problem, the pension ramp was designed in such a way that it’s unfeasible. Even if Illinois’ revenue issue was addressed, the pension ramp would still likely be an issue” (The Unfunded Pension Liability (and the “Pension Ramp”) from Center for Tax and Budget Accountability).

Furthermore, what is needed to solve the budget problems in Illinois is a better revenue base to pay the state’s self-induced debts. What is easier to do is to evade serious problem solving of the budget issue and to incriminate the state’s public employees.

The issue at hand is the state’s regressive tax rate that no one wants to confront. The public lacks awareness and understanding about the main causes of the state’s budget deficits. Legislators, the Civic Committee, Chicago Tribune, et al. have capitalized on the public's ignorance of the essential causes of the state's financial debacle by calling for budget cuts and radical pension reform as the solutions. They are diversionary, scapegoating tactics that will bring intentional, financial harm to public employees and allow legislators to escape 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).

Instead of reforming the state's tax system, legislators (and their wealthy subsidizers like the Civic Committee ) have focused on radical pension reform and severe budget cuts to services that the rest of us need. What do the wealthy and their puppet legislators propose? They propose sweeping, radical pension reform that will destroy the public employees’ defined-benefit pension plans, even though they know current unfunded liabilities will not be resolved by pension reform.

Why can’t the State of Illinois provide a fair and sound tax system (Illinois is one of seven states with a regressive flat-rate tax), one that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (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?

The answer is most legislators in the State of Illinois prefer the easy way out of a difficult and challenging situation that they have created. Illinois legislators will not address the most important causes of the state's budget deficits: the state's pension debt and flat-rate taxation because of their own self-interests and the wealthy one percent that bankrolls them (from IEA Wants You to Sign a Petition for a Graduated Income Tax).

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