Illinois has a $100bn pensions black hole, and it's getting worse every day. The state’s leaders must seriously address the issue and should reconsider planned tax cuts
The latest in the ongoing pension mess in Illinois reminds me of President Clinton's famous response to a grand jury in 1998: ‘It depends on what the definition of the word “is” is.’ In Illinois' case, it depends on what constitutes diminishing or impairing public employees' pensions – and on how you define the word ‘crisis’.
In a radio interview, Illinois Senate President John Cullerton said he didn’t think the word ‘crisis' could be used to describe the state's pension woes, claiming that it was an issue being flogged by business interests looking for a tax cut at the expense of government retirees.
But the numbers tell the story: Illinois currently has a $100bn unfunded pension liability and is falling $5m deeper in the hole every day it doesn't reform its pension system. Because of its failure to deal with the massive pension debt, the state's bond rating has been downgraded, which increases its borrowing costs.
Cullerton says Illinois' annual pension expenditures amount to about one-fifth of the state's general revenues and are on track to stay at that level through 2044. But the Civic Federation, a Chicago-based government watchdog group, disagrees. It estimates that the state's pension costs will rise to about 35% of annual tax and fee revenues by 2033.
Sure sounds like a crisis to me.
Perhaps ironically, it is the existence of the very crisis that Cullerton, a Chicago Democrat, denies that makes him right to oppose planned state tax cuts that would drain revenue that is needed to address the pension crisis. In 2015, Illinois' personal income tax rate is scheduled to drop from 5% to 3.75%, and the corporate rate is supposed to fall from 7% to 5.25%.
Efforts to get Illinois' pension system under control have been going on for many years. The work of a bipartisan House/Senate panel that has been meeting since June is focused on a blueprint that would eliminate an automatic annual 3% compounded cost-of-living adjustment (Cola) for state retirees. Under the plan, annual Colas would be pegged to half the inflation rate and be subject to a freeze, with the permissible length of the freeze dependent on the recipient's age.
The panel also is looking to limit what counts as salary for purposes of pension calculations.
It's estimated that this approach would reduce by $138bn the $381bn Illinois taxpayers would otherwise have to pay to fund the state pension system through 2045. But lost revenue from the scheduled tax cuts would be about four times the savings from the bipartisan commission's emerging pension-reform plan.
The big question is whether that plan would diminish or impair government retirees' pensions, which is prohibited by the state constitution. It's likely that the courts will ultimately decide that question.
However the courts rule on that issue, there's no question that Illinois' leaders are going to have to begin grappling seriously with the state's pension woes, which became apparent soon after World War II. Decades of denying the problem precipitated the current crisis. That denial has to stop.
Charles Chieppo is a research fellow at the Ash Center of the Harvard Kennedy School. This post first appeared on Governing.com’s Better, Faster, Cheaper Blog
