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Those Aren’t “Wise Men” (or Women) in Springfield (Part III)

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In Parts I and II, we highlighted the reasons why the citizens of Illinois will be looking toward Springfield, Illinois on Tuesday (December 3) with a mixture of naïve hope (taxpayers) and bitter dread (union leaders) as the State House and Senate convene to vote on a “boss blessed[1] state public pension reform bill. In Part II, we shared a summary of the provisions of that bill, which the state’s public unions oppose without reservation. According to House Speaker, Michael Madigan, the reforms are projected to save the state approximately $160 billion over the next thirty years.

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Whatever transpires in Springfield on Tuesday, it is unlikely that we will thereby have “solved” the Illinois pension problem! If the bill fails, we will return to “square one” on this issue. However, even if the bill passes, there are two major obstacles that any reform effort will face:

1) There will inevitably be an appeal to the State Supreme Court, contending that multiple provisions within the proposed bill violate Article XIII, Section 5 of the Illinois Constitution:


Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

2) The legislature (and governor) have a 30-year plus record of undercutting pension funding schedules in order to help them spend more money on projects that better serve their own political interest!

Michael Madigan and his political followers would protest that my characterization above is overstated. To be fair, let’s briefly summarize the checkered history of state pension funding so you can decide if I have made any overstatements. This history can be found at the official site of the Illinois State Controller:

1) Until 1981, the state covered almost all the current costs of pension benefit payouts each year, thereby allowing employee contributions and investment returns to be accumulated as a “pension reserve”. Therefore, pension funding was sound and sustainable;

2) However, when the state experienced fiscal challenges in 1982, legislators took their first step toward fiscal fecklessness by abandoning that “pay as you go” pension policy. Pension payments were sharply reduced in 1982 and 1983, never to recover to anywhere near the level needed!

a. As an illustration of the magnitude of this funding shift, the 1981 state payment into the pension plan was $406 million, while that year's pension cost was just $431 million.

b. In sharp contrast, just fourteen years later, pension plan payouts (expense) totaled $1.9 billion, but Springfield only paid $519 million into the pension funds!! Feckless, indeed!

3) In a momentary act of contrition, the legislature enacted Public Act 88-593 in July of 1995 – creating a 50-year plan to achieve the 90% funding level on pension system liabilities (similar to the goal of the bill to be voted on this coming week!)

a. With the considerable assistance of an intriguing accounting trick that instantly increased the value “on the books” of fund assets, the combined “funded ratio” for Illinois pension funds moved up from 52.4% (1995) to 74.7% (2000).

4) Operating under the illusion that the pension funds were “out of the woods”, Springfield leaders engineered a significant enhancement of pension benefits early on during the past decade, thereby increasing future expenses and fund liabilities.

a. That benefit increase was proposed and passed (primarily) for the political benefit of Springfield leaders and their allies.

b. Combined with the catastrophic consequences of the “Dot.Com Crash” (stocks lost almost 50% in value between a multi-year market peak and its bottom in October of 2002), the not so wise legislators of Illinois managed to jack up the level of pension unfunded liabilities from $15.6 billion (2000) to $43.1 billion (2003) – an incredible 176% increase in just three years!

c. The all-important pension “funded ratio” was, by that point, sitting at a shameless 48.6% level!

5) The piece de resistance of Springfield fiscal fecklessness came in fiscal years 2006 and 2007, when the legislators, casting a blind eye upon fiduciary duty, declared a “Pension Holiday”.

a. The bottom line on that “Holiday” was the following:

i. Pensions were underfunded by $1.18 billion in 2006 (a 55.7% shortfall);

ii. Pensions were underfunded by $1.13 billion in 2007 (a 45.2% shortfall)!

The only reasonable conclusions that one can draw from the above list of facts are the following:

1) Illinois does not suffer from a “Pension Crisis”. Instead, Illinois suffers from the cumulative effects of a fiscally irresponsible state government, whose members regularly chose to use funds the state owed to its pension plans for current projects and expenses that were more helpful to their own future political fortunes, as well as more profitable for their friends and allies. In other words, Illinois suffers from a “Leadership Crisis”, not a “Pension Crisis”.

2) History proves that the Springfield legislative chambers are perfectly capable of passing a bill that appears to ensure the sustainability of state pension benefits for years to come, and then later, when convenient for political or personal reasons, renege upon enough of the provisions intended to fully fund pensions that Illinois pension funding suddenly gets thrown into reverse!

In Part IV, we will wrap up our review and analysis of Illinois pensions and the “Leadership Crisis” that has driven Illinois to the very bottom of the list of U.S. states with regard to financial strength and fiscal responsibility!

[1] House Speaker Michael Madigan (who wields Vladimir Putin-like power across the state), Republican House leader Jim Durkin, and Senate Leaders John Cullerton (Democrat) and Christine Radogno (Republican).



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