From the more than 1,000 politicians (including three former governors) convicted of corruption, to the virtually-insolvent defined-benefit teachers pension that is likely underfunded to the tune of $76 billion, Illinois is in deep trouble. So fiscally feckless is the Land of Lincoln is that it makes California seem financially responsible in comparison.
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Prairie State politicians are actually attempting to make some fiscally-sensible decisions to whittle down its pension and retired civil servant healthcare liabilities. Those efforts are being successfully opposed in the courts by public-sector unions such as the American Federation of State County and Municipal Employees and affiliates of the nation’s Big Two teachers’ unions.
The most-likely solution for Illinois to finally address its long-term burdens – and force public-sector unions to agree to them – is to follow the example set by woe-begotten Detroit last year and file for bankruptcy protection.
This month a coalition led by AFSCME, the NEA’s Illinois Education Association, and the Illinois Federation of Teachers unit of the AFT, filed a motion in state court seeking a court ruling invalidating Senate Bill 1, a modest pension reform plan that Gov. Pat Quinn got through the legislature last year. The group succeeded last May in obtaining an injunction halting its implementation. From where the unions sit, the law violates the state constitution’s pension clause restricting state officials from reducing so-called vested rights given to civil servants.
The public-sector union lawsuit comes a month after the state Supreme Court ruled in Kanerva v. Weems that the state could not reduce $56 billion in unfunded retired public employee healthcare. In that ruling, the high court determined that healthcare benefits were covered under the same pension clause, and therefore, could not be cut regardless of the state’s precarious fiscal condition.
AFSCME, NEA, and AFT are betting that the state high court will also apply this thinking to SB 1. This is because the plan ends the gravy train of pension payouts – including three percent cost-of-living annuity raises that are compounded annually. Retired public employees collecting more than $25,000 a year in annuity payments, for example, would not receive COLA raises.
For Quinn and his fellow Democrats in control of the state legislature, a court ruling against the plan would force them to consider even starker measures. This includes tax increases, which would not go down well with Illini, who already bear the nation’s 13th-highest tax burden, according to the Tax Foundation. Given that the state has still not recovered from the economic malaise of the past seven years, no one in Springfield wants to go down that road.
But the consequences of a court ruling favoring public-sector unions isn’t faced by Illinois alone. Chicago Mayor Rahm Emanuel has based much of his own efforts to address the Second City’s massive pension deficits on the state’s own efforts. Emanuel has already convinced legislators to enact modest changes to pensions for the city’s firefighters and police officers – and is looking to take on the teachers pension, which is likely underfunded to the tune of $12.5 billion, according to Dropout Nation. But a ruling against Illinois’s pension reforms would hurt Emanuel’s efforts as well.
It’s hard to feel sorry for Illinois politicians on this one. For decades, they have been far too willing to do the bidding of public-sector unions at the expense of taxpayers and fiscal sanity. An Illinois teacher, for example, can collect a pension equal to 75 percent of final year’s salary, a payout unavailable to anyone working in the private sector.
This taxpayer-financed generosity has become an even bigger problem because Baby Boomers are now heading into retirement. The state teachers’ pension alone will likely see 6,404 teachers retire every year for the next decade, increasing annuity payouts by at least $293 million per annum.
Numerous Illinois governors have botched opportunities to address the pension insolvencies in a sensible manner. A decade ago, the infamous (and now imprisoned) Rod Blagojevich, for example, floated $10 billion in pension obligation bonds in a bet on that era’s bull market. But the state pensions have not seen enough investment growth to cover those liabilities. Even worse, taxpayers will have paid $21.3 billion in principle and interest by the time the bonds are paid off in 2033.
Yet Quinn, has shown an unusual (for Illinois) commitment to bringing fiscal sanity to state finances. Of course, the fact that he faces the likelihood of losing his bid for another term in office to private equity millionaire Bruce Rauner helps focus the mind. But over the past two years, Quinn has sparred with public-sector unions and even his own fellow Democrats to make pension reform a top priority. A court ruling against SB-1 would prove damaging to Quinn or Rauner.
But Illinois does have a way out. That starts with federal bankruptcy court. If either Quinn or Rauner filed for Chapter 9, the state could take advantage of a federal ruling handed down last December in Detroit’s bankruptcy case that determined that defined-benefit pensions are merely contracts subjected to the U.S. Constitution’s Supremacy Clause. Bankrupt governments can ignore lower annuity payments for retirees, restructure defined-benefit pensions, and even replace traditional pensions with defined-contribution plans so long as it is approved by its creditors.
The ruling helped Detroit force public-sector unions agree to effectively end its defined-benefit pensions and move both existing and new employees to a hybrid retirement plan that features a defined-contribution component similar to those for private-sector workers. Under such a scenario, Illinois could easily force AFSCME, NEA, AFT, and other unions into a similar bargaining position.
For Illinois taxpayers, such a move would be especially sensible because it would allow the state to address the biggest problem with pension reforms so far: The fact that they don’t cover the growing unfunded liabilities from benefits offered to Baby Boomers and other current workers. Quinn or Rauner could cut pension and healthcare benefits much more than they could under state law.
What are the chances of Illinois taking such a step? Unlikely for now. But with the way things are going now, the Land of Lincoln may not have much of a choice. And the same is also true for other states in similar straits.