Tuesday, December 4, 2018

Lately the Chicago Tribune and its ilk have been lambasting public pensions again

What the Tribune and other yellow journalism should be writing about today is how the unfunded liability in Illinois was created. The state's unfunded liability has increased to $130+ billion. Nearly half of that figure was machinated by Illinois legislators. Today's fiscal predicament is not the result of a financial problem that was unforeseen at the time of the 1970 Illinois Constitutional Convention. The unfunded liability is a consequence of continual legislative negligence, dishonesty and ineptitude.

For several decades, Illinois policymakers have consistently failed to make the annual required contributions to the state's pension systems, primarily because they could pay for services and their "pet projects" without raising taxes; in 1995, for instance, policymakers created a flawed re-funding schedule* (unfortunately with the approval of the Illinois Education Association under Bob Haisman) and policymakers have refused to correctly amortize the pension systems' unfunded liabilities since then. Instead policymakers have favored corporate interests rather than the interests of their citizenry and; thus, they have seriously sabotaged the public employees' retirement plans and the State of Illinois' future economic solvency through mismanagement and fiscal irresponsibility. Past state policymakers have left us with this fiscal disaster.

Instead of protecting public pension rights and benefits, which have a legal basis under Illinois State Law (Consider the May 8, 2015 Illinois Supreme Court ruling); instead of restructuring the state's revenue base to pay for the state's growth in expenditures and its recklessly-accumulated debts and obligations, current yellow journalists and some current legislators have continuously chosen to ignore public employees' constitutional rights and their benefits, even though revenue restructuring and pension debt re-amortization are the best legal and moral solutions.

Let us not forget what was stated in 2011 “The Pension Code sufficiently manifests intent to make pension payments the obligations of the State when due… [T]he Illinois Pension Code Article of each of the five state-funded pension systems contains a provision with sufficient language binding the State to pay pensions even if a system defaults. Each provision states in pertinent part that ‘[t]he payment of the required department contributions, all allowances, annuities, benefits granted under this Article, and all expenses of administration of the system are obligations of the State of Illinois to the extent specified in this Article…’

“[Furthermore,] the inclusion of the phrase ‘benefits of which shall not be diminished or impaired’ manifests… clear evidence of the framers’ intent to limit the General Assembly’s power to modify pension benefit rights even in the face of a fiscal crisis. This conclusion is supported by the common dictionary definitions of the terms ‘benefits,’ ‘diminish,’ and ‘impair.’ After all, the Clause’s prohibitory language contains no exceptions and is fashioned in absolute terms…” (Madiar (2011), Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution).

The promise to honor commitments and pay for the public employees’ pension is of “sufficient importance” to all citizens of Illinois. To pass any so-called pension reform (or, for that matter, attempt to amend Article XIII, Section 5 of the Illinois Constitution) is “an unequivocal manifestation of intention not to perform… legal duties…under a contract… When there is a duty of immediate performance of a promise, failure to perform in full is a breach…” (Professor of Law, Emeritus, Claude D. Rohwer and Professor of Law, Emeritus, Anthony M. Skrocki, Contracts in a Nutshell).

The Illinois Supreme Court explicitly stated in 2015: “The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible.  Moreover, no possible claim can be made that no less drastic measures were available when balancing pension obligations with other State expenditures became problematic. One alternative, identified at the hearing on Public Act 98-599, would have been to adopt a new schedule for amortizing the unfunded liabilities. The General Assembly could also have sought additional tax revenue. While it did pass a temporary income tax increase, it allowed the increased rate to lapse to a lower rate even as pension funding was being debated and litigated. That the State did not select the least drastic means of addressing its financial difficulties is reinforced by the legislative history…” (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015).

Indeed, to address the pension debt problem caused by policymakers' theft and irresponsibility, 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.

According to the National Association of State Retirement Administrators, policymakers must “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.”  Therefore, the focus should be on structural tax reform and not so-called “pension reform,” where public employees are victimized again and the state’s debt is not resolved.

There needs to be a modernization of state and local budgets and their revenue systems. “The structural problems that have built up over time in these systems need to be addressed” (The Center on Budget and Policy Priorities).

“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 or flat 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).

“Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor [can] rarely save at all – the taxes are inherently regressive” (The Institute on Taxation and Economic Policy, ITEP). Illinois income tax uses a single-rate structure that results in low-income wage earners paying more taxes than the wealthy. Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent (ITEP).

To address the revenue problem that policymakers choose to ignore: with a constitutional amendment, “given an appropriately designed graduated-rate structure, Illinois could cut the overall state income tax burden for 94 percent of all taxpayers—on average providing a tax cut to every taxpayer with less than $150,000 in base income annually, raise at least $2.4 billion more in revenue, and keep the effective individual income tax rate for millionaires well below five percent…  Illinois taxpayers with the bottom 94 percent of base income collectively would receive an annual tax cut of $1.06 billion… [T]he combined effect of this policy would be a stimulus to the economy from tax cuts and additional state spending (assuming that the additional revenue is used to fund current public services that would otherwise not be funded) that would create at least 36,000 private sector jobs in communities across Illinois…” (Center for Tax and Budget Accountability).

*Pension Ramp Footnote:

“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).

1 comment:

  1. "...TRS benefits are not responsible for the majority of the unfunded liability at TRS. TRS actuarial reports show that 66 percent of the unfunded liability over the last 15 years was caused by contributions from state government that failed to meet the ‘full funding’ levels set by actuaries. For instance, between FY 2014 and FY 2017, the state’s total contributions were $7.2 billion short of the actuarial requirement.

    “In addition, the chronic lack of proper funding from state government means TRS does not have that money to invest, and those ‘unrealized’ investment returns over time account for 27 percent of the TRS unfunded liability, along with the cost of issuing pension bonds and other miscellaneous factors. Of the $578 million increase in the state’s annual contribution to TRS for fiscal year 2018, only 4.7 percent is attributable to benefit increases… ‘Over the last 15 years, 50 percent of the TRS unfunded liability is the result of underfunding by state government, 25 percent from pension bond costs and miscellaneous items, 21 percent from unrealized investment profits and only 4 percent from benefit increases.’

    “As long as the Tribune and the IPI deny the already huge deficit created by the shorting of pension payments from the state of Illinois over decades in order to divert… payments and others to avoid the real costs of running a government, nothing will ever be corrected, not really. Instead of facing the actual issues and finding a means to correct them, they scapegoat those who have already fully paid into their retirements.

    “It’s not just the bizarre and hyperbolic examples that the Tribune and the IPI want to paint broadly across the minds of those willing to be beguiled. It’s all of us, even those of us who forsook social security and earnings to work for the benefit of students, those in need of services, or in maintaining our state’s infrastructure. Feel guilty? That’s what the Tribune wants. Feel like someone is scapegoating you? They are”—John Dillon