Thursday, January 28, 2016

BANKRUPTCY IS NOT A OPTION for dealing with Illinois public pensions

Bob Reed, from the Better Government Association, seems to believe “bankruptcy” is an option for dealing with Illinois public pensions, even though the pension debt is one percent of Illinois' total economy (Ralph Martire, WTTW, Chicago Tonight, January 27).

Should the State of Illinois declare bankruptcy so it can renege on its public pension obligations? Though the State’s liabilities continue to increase, and the State of Illinois has a cash-flow problem because of antiquated revenue structure, bankruptcy is not an option.  

Why?  Most importantly, the U.S. Constitution prohibits any state from declaring bankruptcy or “impairing the obligation of contracts” (Article 1, Section 10). Bankruptcy would also destroy the State of Illinois’ credit rating completely and its ability to borrow at affordable interest rates; the State’s budgets would be slashed; bond sales would plunge, and the bond market would destabilize… If that is not enough, the Center on Budget and Policy Priorities affirmed that “it would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute.  States have adequate tools and means to meet their obligations...  Confusion between short-term cyclical deficits and debt, pensions and retiree insurance – and the overstatement of the magnitude of the latter set of problems – draw attention away from the need to modernize state and local budget and revenue systems and address structural problems that have built up over time in these systems.  

“States suffer from ‘structural deficits’ or the failure of revenues to grow as quickly as the cost of services… Structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy in areas such as health care.  Fixing these structural problems would help states and localities balance their operating budgets without resorting to [desperate measures]… It is far more constructive to focus on fixing these basics of state and local finance than to proclaim a crisis based on exaggerations of imminent threats.”  
…[Furthermore], in Illinois, the State Constitution (Article XIII, Section 5) is quite explicit about public employees’ guaranteed pensions (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants). On May 8, 2015, Justice Karmeier delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion.  

Indeed, “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, Public Information Officer at TRS, 2011)…

For examining why the Federal Government would not be interested in a bail out, please read my post from July 19, 2013: click here.

For the original article, "Why Bankruptcy Should Never Become an Option for Illinois," posted on August 2, 2011: click here.


  1. Revamp the flawed Pension Ramp: “Starting in 1995, yet another funding plan was implemented by the General Assembly. This one called for the legislature to contribute sufficient funds each year to ensure that its contributions, along with the contributions by or on behalf of members and other income, would meet the cost of maintaining and administering the respective retirement systems on a 90% funded basis in accordance with actuarial recommendations by the end of the 2045 fiscal year. 40 ILCS 5/2-124, 14-131, 15-155, 16-158, 18-131 (West 2012). That plan, however, contained inherent shortcomings which were aggravated by a phased-in 'ramp period' and decisions by the legislature to lower its contributions in 2006 and 2007. As a result, the plan failed to control the State’s growing pension burden. To the contrary, the SEC recently pointed out:

    “‘The Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. The resulting underfunding of the pension systems (Structural Underfunding) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.’ SEC order, at 3. That the funding plan would operate in this way did not catch the State off guard. In entering a cease-and-desist order against the State in connection with misrepresentations made by the State with respect to bonds sold to help cover pension expenses, the SEC noted that the State understood the adverse implications of its strategy for the State-funded pension systems and for the financial health of the State. Id. at 10. According to the SEC, the amount of the increase in the State’s unfunded liability over the period between 1996 and 2010 was $57 billion. Id. at 4.5 The SEC order found that ‘[t]he State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.’” (Emphasis added.) Id. at 4 (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).

  2. “[From the recent Illinois Supreme Court Ruling]: Senator Hutchinson: Would another alternative be the proposal that the Center for Tax and Budget Accountability outlined before the conference committee, which would have re-amortized the current unfunded liabilities to a new gradual [level] dollar payment schedule to achieve well over eighty percent by 2059? Senator Raoul: Yes. So that—that and many other things could have been possible alternatives.”

    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.

    “Decades of mismanagement and failure to match contributions are the predominant reasons that the state’s pension systems are suffering to the degree that they are today. Years of pension holidays, continually borrowing against the systems without a plan for repayment and a severe economic recession, which caused investments to plummet, further exacerbated the problem” (Senate President John Cullerton). Thus, there needs to be a required “actuarially-sound” annual payment from the state to the pension systems! Indeed, the State of Illinois has a revenue problem and its policymakers have stolen money for decades from public employees' pensions to hide this fact.

  3. Let us not forget who is also behind this perpetuation of attacks on public employees’ and retirees’ pensions: the plutocratic members of the Illinois Policy Institute, the Civic Committee of the Commercial Club of Chicago, the Civic Federation, the Better Government Association, the yellow journalists of the Chicago Tribune and their affiliates, the Chicago Sun-Times and their affiliates…

    Heartland Institute, Manhattan Institute, Knowledge and Progress Fund, Lucy Burns Institute, Independence Institute, Cascade Policy Institute, Searle Freedom Trust, Mackinac Center, South Carolina Policy Council, Oklahoma Council of Public Affairs, JM Kaplan Fund, Philanthropy Roundtable…

    Charles G. Koch Foundation, John Arnold Foundation/Pew Charitable Trusts, Empower Texans Foundation, Richard and Helen DeVos Foundation, Farmer Family Foundation, Donald and Paula Smith Foundation, Lynde and Harry Bradley Foundation, John M. Olin Foundation, Randolph Foundation, The GFC Foundation, Jaquelin Hume Foundation, William E. Simon Foundation, Ruth and Lovett Peters Foundation, William Donner Foundation, Castle Rock / Adolph Coors Foundation, Rose Marie and Jack R. Anderson Foundation, Earhart Foundation, Joe and Mary Moeller Foundation, John William Pope Foundation, Anschutz Foundation, Paul Singer Family Foundation…

  4. "We should file for bankruptcy! I got public services at the expense of public worker pensions back then and I don't want to pay now either!"

    Supporters of bankruptcy might want to rethink what they are asking for. The costs of bankruptcy can far outweigh any savings that might accrue from stiffing public employees.

    What has actually happened where bankruptcy has been used by government? What happened to workers ? What happened to bondholders? Were the problems really solved?

    Workers have experienced at most only modest reductions. Their good will is needed if the municipality is to survive. Treat them badly and you no longer have employees. Many employees will simply refuse to work for an employer who has cut their wages and taken away their retirement. No employees, no services.

    Bondholders have taken a much steeper haircut than public employees have in the few municipal bankruptcy cases that have been heard. Now that bondholders know that they are the ones "in the barrel", they are VERY opposed to the idea.

    Once a government entity goes down this path, their future municipal bond offerings become very difficult to sell. Few will subscribe (at any premium) to purchase a bond that may well default. They buy bonds from from more dependable borrowers. The bankrupt town finds it difficult to raise money at all.
    Before advocating bankruptcy:

    Do you really want to live in a town that can't borrow money or find employees to provide services?

    Maybe it is time to pay what is owed, instead of looking for ways to skip out on what is owed to these workers.