In Part I, we reported the newly re-calculated level of Illinois' unfunded public pension liability – now closing in on $100 billion. We also offered a brief outline of the size of Illinois’ operating fund deficit (and accumulated debt). Two years ago, these mounting debt levels led the state legislature to push through an unprecedented 67% income tax hike — an increase that was accompanied by several promises. We have already watched two of those promises be violated, and we will very likely witness the violation of the third promise at some point in the next two years.
In November, Tyrone Fahner, President of Civic Committee of the Commerce Club of Chicago, published a letter to Governor Quinn in which he called the state pension crisis so big that it is "unfixable". In that letter, Fahner listed four steps that can be used to address the cavernous funding gap: 1) end cost of living indexing of benefits; 2) place a cap on the amount of salary on which an employee’s pension benefit can be calculated; 3) raise the retirement age to 67; 4) gradually shift the cost of teacher pension payments to local school districts over a twelve-year period. Legislative leaders in Springfield and union leaders around the state did not (to put it mildly) warmly receive Fahner’s report!
However, there is no question that something must be done, and done soon. The hard decisions that lie ahead could have been made much easier (and more effective) if state leaders had been more disciplined and courageous during the past two decades (during which the growing pension and budget problems were evident, but ignored).
An October report from the U.S. State Budget Crisis Task Force (co-chaired by former Fed Reserve Chair Paul Volcker) shared its determination that Illinois' budget was no longer sustainable because of the state's $10 billion operating debt and massive under-funding of state pension programs. Illinois’ fiscal mess has not escaped the notice of credit agencies. One year ago, Moody’s Investors Service dropped the credit rating for Illinois down to A2, the very lowest rating among the states it rates. The primary consequence of lower credit ratings is an increase in borrowing costs, and Illinois has been no exception to that rule. In fact, the “spread” (or difference) between the interest rate paid by the most creditworthy (triple A) rated states on its bonds and what Illinois must pay is huge. Among U.S.-related borrowers, only Puerto Rico has a larger spread.
Recently, Governor Quinn has reported that the state’s plan to make key infrastructure improvements has been impeded because of the state’s financial crunch and extremely low credit rating: “You can’t do that building and issue those bonds if you have this severe situation overlooking you.” http://www.msnbc.msn.com/id/50151795/ns/us_news/t/illinois-governor-says-pension-woes-hurting-infrastructure-program/
Naturally, the state’s pension funding mess places extraordinary pressure on the state’s operating budget. Quinn has reported that the annual state pension fund contribution required for this fiscal year is $5 billion, compared with just $1.4 billion a few years ago. In fact, the pension liability grows by $17 million each day! Unless these funding shortfalls are addressed quickly, the state’s pension funding obligations are projected to consume an accelerating portion of the state budget – choking out education and other essential programs.
It is for this reason that Quinn has set a “deadline” of January 9 for state lawmakers to pass pension reform legislation: “We don’t want to end up like the Titanic. We don’t want to sink. We’ve got to act.” Unfortunately, given the past record of Springfield leaders, I’ll bet that they (un)successfully manage to “kick the can” down the road once again (much like the U.S. Congress did on January 1). The price for their past folly and current indecision will be paid by both pension beneficiaries and state taxpayers.
As we suggested at the start of Part I, British poet Edward Young was on target when he wrote: “Procrastination is the thief of time.”