Sunday, February 23, 2020

The Bottom Line: Illinois’ Public Pension Debt Is a Moral Issue by Elizabeth Bower (Forbes February 23, 2020)

Earlier this week, President Donald Trump granted clemency to former Illinois Gov. Rod Blagojevich, who was eight years into a 14-year federal sentence for corruption charges. As Wikipedia notes, “he was the fourth Illinois governor to serve time in federal prison, after Otto Kerner Jr.Dan Walker, and George Ryan.” Of note, although Illinoisans appear now to be either mystified or outraged at this turn of events, he won re-election in 2006 even though he and his associates were already under investigation at the time of the election. Earlier in February, a report by the University of Illinois at Chicago ranked Chicago as the most corrupt U.S. city.

That same report ranked Illinois as the third-most-corrupt state. And the math behind those rankings pulls from such examples as Ald. Edward Burke, who was re-elected to his 13th term back a year ago after having been charged of attempted extortion. The charge was plastered all over the newspapers, but voters still returned him to office — and not even because he had opponents who split the opposition between them, as the Chicago elections function on a run-off basis, and Burke won an absolute majority.

Corruption costs the city, and it costs the state, and it’s not merely a matter of a few bad apples, but of a political system that is still too close to the machine politics of the past, in which what matters to voters is whether they and their interest groups get what they want.
And it is no mere coincidence that a state with such a legacy of corruption is so severely in debt. Remember, Illinois is ranked second-worst according to Truth in Accounting, with a pension debt of $139 billion (by its reckoning) and a further $56 billion in unfunded retiree healthcare promises. Only New Jersey is worse, because of the state’s smaller size. And Chicago is second-worst of the 75 largest cities; New York City is worse only because its finances include the liabilities for its school system, which is a separate entity financially in Chicago.

Here, again, is a brief rehash of the numbers: The state is spending 25% — soon to be 27% — of its revenues on pension contributions. As a result, the state falls woefully short in meeting the basic human needs of its people — the disabled, the poor and unemployed, the young and the old — while instead promising that tax increases will fix everything, or increased gambling or pot legalization or some other magical new revenue source, or that there’ll be some clever work-around if only the clever people think enough clever thoughts. (Buyouts? the savings are too small to matter. Consolidation? That’s no help for the $137 billion in state debt. Asset transfers? I’ll believe it when I see it.)
The state’s target of 90% funding in 2045 is so dependent on the reduced benefits for Tier 2 employees staying in place (which is itself unlikely) and on the optimistic assumptions for asset returns, that a boost in those Tier 2 benefits (widely expected to occur) or a drop in the valuation interest rate/long-term asset return, will cause the state to fall far short, or contribute far more, than scheduled.

And while the state of Illinois has a long history of underfunding its pension plans (in 1969, its funded status was more or less the same as now — 42% vs. 40%), the debt in 1970, when the new constitution was put into place, was $1.5 billion. The projected 2020 debt? $139 billion.
That doesn’t include debt due to retiree healthcare promises, or state and local debt, or pension obligation bonds needing repayment…
It should be plain to see that debt has skyrocketed, and far beyond what can be adjusted away by looking at inflation or other factors during this time frame — and blame can hardly be placed on the “Edgar ramp” of 1996 when there have been ample years since then in which the problem has only gotten dramatically worse. That dip in 2004? That’s the result of Blagojevich’s Pension Obligation Bonds shifting liabilities out of the pension funds themselves to elsewhere on the state’s balance sheet.

Corrupt state and local government officials who rationalize skimming a little for themselves, and voters who overlook this if they think their interest group (neighborhood, union, ethnic group, etc.) benefits from the state or city’s spending — it’s an attitude that led columnist Mike Royko to pen his proposed new motto for the city, back in 1967: rather than Urbs in Horto (city in a garden), it should be Ubi Est Mea, “Where’s mine?”

And this is the very same mindset that accepts unfunded/underfunded pensions, in which the costs are not placed on other taxpayers in the here-and-now, but rather the people on whom the burden is being placed is the next generation.

How can we tell our children that they should build their future in this state when we leave them this debt, not scheduled to be paid down for another 25 years, and even then only incompletely and with a high degree of risk that the scheduled payments are insufficient if returns are too low, or when restoring Tier 2 benefits finally become unavoidable due to lawsuits or union pressure?
And, yes, this is personal. I have three sons, one of whom has already left Illinois to attend college elsewhere. I have three sons, one of whom, as an infant, received therapy through the Early Intervention program, the providers of which are impacted by the state’s unpaid bill backlog. And I am not a native Illinoisan — however much those who are, may simply be accustomed to the misgovernment and corruption in Illinois and Chicago, I can’t accept this. Calling for pension reform is not about trying to hurt state workers; it’s about having a state government that’s competently and responsibly managed now and in the future.
And in the same way in which it is not good enough for politicians merely to promise that they themselves will not be corrupt, it is also not enough for them to promise that they themselves will not sink the state/city further into debt by no longer promising benefit hikes, bigger COLAs, larger multipliers.
In order to leave behind the legacy of corruption, the politicians of Chicago and Illinois and the city and state as collective entities, and the people of Illinois, must commit to saying, “the time of passing costs on to our children and grandchildren is over.” That involves doing what’s politically unpopular, rather than hiding behind claims that it’s a “fantasy” or that other, no-cost actions will solve the problem. In the same way as a twelve-step program requires an addict to make amends, and a Catholic penitent is given penance, so, too, Illinois cannot become the honest, fair-dealing state it claims to be without the pension reform which is a necessary part-and-parcel of “walking the walk.”

All of which means that pension reform is not merely about a few numbers on a balance sheet; it is a moral issue. And, yes, the same holds for every other state and city with similarly poorly funded pensions.  For the article, click here. 

Elizabeth Bauer has also written about amending the Illinois Pension Protection Clause. 
Indeed, “Illinois public pension debt is a moral issue”; however, this is the significant moral and justice issue columnists ignore:
To possess a right to a promised deferred compensation, such as a pension, is to assert a legitimate claim with all Illinois legislators to protect that right. There are no rights without obligations. They are mutually dependent. Fulfilling a contract is a legal and moral obligation justified by trust among elected officials and their constituents.
According to philosopher David Hume, the idea of keeping a promise depends upon creating rules of justice; that rules of contracts, for instance, have to be considered morally desirable as well. In other words, a “contract” or promise between the State of Illinois and its public employees must be viewed as a moral commitment and requirement of justice. Justice demands we keep our “covenants” with one another. In regard to public pensions, keeping an agreement means a concern to promote the well-being of public employees and the need to secure their rights.
All citizens have rights that must be protected. When legislators swear an oath to uphold the state and federal constitutions (Article XIII, Section 3 of the Constitution of the State of Illinois), then citizens of Illinois and the United States have also acquired the right to expect that they will uphold that pledge. This is also a matter of important moral concern for all citizens of a state, for all legal claims will be validated by a moral framework since the concept of justice is grounded in ethics. If citizens’ legal rights are abused, then their dignity and humanity will also be violated. As stated by Alicia H. Munnell, Director of the Center for Retirement Research at Boston College, Illinois is one of seven states where accruals are protected, and the legal basis for protection of public pension rights is under state law (State and Local Pensions). This was also validated on the May 8, 2015 by the Illinois Supreme Court.
Without a doubt, the significant issue of past and now future pension reform by today's pundits has been its attack on public employees’ rights to constitutionally-guaranteed, earned compensation and the legislators’ obligation to safeguard those promises. An unconscionable constitutional challenge of those rights and earned benefits generates a serious threat to their secure sense of worth as citizens and creates the unfair possibility for an economic disadvantage for a particular group of people and their families. This can never be legally or morally justified.
What has continuously been at stake is not an adjudication of claims that public employees will have against policymakers who want changes to public employees’ benefits and rights or an amendment to the Pension Protection Clause, but to respect the public employees’ contractual and constitutional promises because they are legitimate rights and moral concerns not only for public employees, but for every citizen in Illinois: for any unwarranted act of stealing a person’s guaranteed rights and compensation will violate interests in morality and ethics and the basic principles of both the State and United States Constitutions that protect every one of us.
For these reasons, it is imperative that policymakers, stakeholders and columnists examine their own ethical and moral principles in view of the fact that they will have to justify their decisions to the citizens of Illinois. Certainly, moral responsibility and legal obligation to fully fund the public pension systems should not be ignored "so the time of passing costs on to our children and grandchildren is over." 
It is a moral concern and legal duty to reform the state’s sources of revenue and to address the incurred pension debt through restructuring so the state can provide services for its citizens and fund the public pension systems instead of incessantly incriminating public employees and retirees, and thereby forcing them to defend the State and United States Constitutions nearly every day of their lives. 
-Glen Brown


  1. Elizabeth Bauer overlooks critical context and ignores the role public pensions play in state and local economies and revenue generation.

    It is true that pension liabilities have been growing in absolute terms—but so has the economy. When we examine the ratio of pension debt and GDP growth in Illinois, the ratio has been pretty stable at around 2% of GDP.

    A recent study by researchers from the Federal Reserve, the Bank of England, and the Brookings Institution shows that pension debt is or can be mostly stabilized by modest adjustments even at relatively low rates of returns. Major reforms are not urgent.

    The author also overlooks the important role that public pensions play in generating revenues at the state and local level. In Illinois, for example, in 2018 investment of public pension assets and spending of retiree checks poured $78.3 billion into state and local economies. This, in turn, generated about $14.4 billion in state and local revenues. In the same year, taxpayer contributions to public pensions totaled $12.5 billion. In other words, public pensions generated $1.9 billion more than taxpayers contributed to them. If there were no public pensions, taxpayers in Illinois would have to pay $1.9 billion more in taxes to receive the current level of services.

    We must think twice before undermining public pensions.

    Hank H. Kim
    Executive Director and Counsel
    National Conference on Public Employee Retirement Systems
    Washington, D.C.

    1. Indeed, Bauer and others do not care whether teachers and other public employees have contributed responsibly to their pension funds or that teachers will receive little to no Social Security when they retire. They do not care whether retired teachers’ and other public employees’ defined-benefit pension plans are a fundamental source of economic stimulus to communities in Illinois and the only retirement income for hundreds of thousands of people.

  2. The propaganda machines with their illogical logic and framed arguments are heating up again.
    If Bauer had worked and been denied the money she had been promised, she would not question moral, ethical, philosophical, or theoretical issues. She would expect the money she earned, the income she needs to have.
    Regarding our deferred earned income (pensions) we ain’t dead yet, and we have bills to pay.