As the taxpayers of Illinois turn their attention upon legislative leaders in Springfield on Tuesday (December 3), awaiting word regarding their action on Pension Reform, is there any reasonable grounds for hope that transformative change will come? The “change” about which I am talking is not just modest change… I am asking if there is any hope for major, sustainable change! I am talking about a magnitude of change that could soon move Illinois’ credit rating upward, rather than perpetually downward. Change that can remove the stigma of “deadbeat” from Illinois when it is referenced in national business and finance articles or when late night comedians decide to make Illinois the butt of a joke!
One Illinois citizen, and politician, Chicago Mayor Rahm Emanuel, will have both eyes, both ears, and his whole heart focused on Tuesday’s deliberations in Springfield, for it might be Emanuel, and the future of the city he leads, that has the most to gain (or lose) as a result of whatever decision is made. The reason for this is simple: Chicago faces a monumental crisis in pension funding for teachers, police, firefighters, etc. In fact, a recent report by financial authority, Morningstar, declares Chicago’s pension funds to be the most underfunded among all the major U.S. cities.
Let me hasten to add that Chicago’s finances have not only been compromised by underfunded pension liabilities! As reported recently by the Chicago Tribune (in its “Broken Bonds” series), the city’s leadership has, during at least the past 20 years, regularly financed short-term projects and obligations through long-term bonds. As an example of the magnitude of this problem, during the past 13 years, Chicago has borrowed $9.8 billion in long-term obligations! Wise, fiscally responsible governments utilize long-term bonds to finance long-term projects/assets (such as roads, buildings, etc.). Those governments depend upon shorter-term bonds to fund more current projects/needs. However, of that $9.8 billion long-term debt borrowed by Chicago, not even one-third of it was designated for long-term capital projects. Instead, most of that long-term burden was approved for such things as paying off millions of dollars in one-time legal settlements, refinancing old loans, and buying software that was all too soon obsolete!
Therefore, Chicago long ago placed itself into a financial bind! Adding the over whelming weight of monumentally underfunded city pension obligations to that mix has (essentially) placed Emanuel and his budgetary and financial administrators into a financial straight jacket. He needs relief and he needs it quickly; and such relief needs to begin in Springfield. In fact, it is not an understatement to say that failure by Springfield to act on the pension bill will surely raise the odds that Chicago will (at some point) be doomed to follow in the footsteps of Detroit’s recent bankruptcy. Here is what Emanuel himself said last week about Tuesday’s vote: "It is critical to remember that Illinois' pension crisis will not truly be solved until relief is brought to Chicago and all of the other local governments across our state that now stand on the brink of a fiscal cliff because of our pension liabilities!"
Unfortunately, as we have seen in Parts I, II, and III, Illinois’s state leaders have established a long history of placing political expediency over effective government and fiscal responsibility. Whatever “Pension Crisis” now besets Illinois is almost entirely the creation of Springfield, beginning with the first step toward fiscal fecklessness the legislature took in 1982. I grant that, in the past, Springfield leaders have created and pushed "solutions" through the House and Senate, intended to restore pension funding to sustainable levels. However, as we have shown, they have (always) decided latter to abrogate and/or ignore the plan they themselves had set in place.
Amplifying the undependability of Springfield is the fact that it failed to keep the “promises” made in 2011 when, at the beginning of January, it pushed through a 67% increase in the Illinois personal income tax. No less an authority than Senate President John Cullerton promised to use the additional revenue that would pour into state coffers to (entirely) pay down the state’s shameful backlog of unpaid bills (variously reported as $8-10 billion). Additionally, he promised that the tax would be scaled back by the end of 2014. However, since the start of that tax increase, it has become obvious that the first promise was not kept, and plans are already in place to renege on his second promise, as well! Sure, the state will find a way to make it sound as though it has not lied to its citizens, but the fact will be that they (in spirit) lied indeed!
What hope is there for us when our leaders in Springfield are not only “unwise”, but “untrustworthy” as well? They have known about the pension-funding problem for some 30 years. More specifically, they were confronted by the compelling facts and figures of the problem in early 2007, when the Illinois “Center for Tax and Budget Accountability” published a detailed report: http://www.ctbaonline.org/New_Folder/Home%20Page/CTBA%20Final%20Pension%20Report%2011.13.06.pdf
I encourage you to review the charts and illustrations from that report in the Slide Show to the right. Here are select excerpts from the report narrative, making it crystal clear what the source and cause of our pension problems have been:
“Decades of failing to make the required, employer contribution to the systems is the primary cause of the state’s current unfunded pension liability, rather than either the type of pension plan in place or the level of benefits offered, which hover around the national average.
“The longer the state defers its obligation to pay its pensions, the worse the problem becomes, because the aggregate unpaid liability amount compounds annually, at an investment return rate that currently ranges from 8.0% to 8.5%.
“The current pension system would be affordable, if the state had the fiscal discipline … to have made required yearly payments for benefits earned each year, (the “normal cost”) plus make interest payments on accrued unfunded liability.”
That says almost all that needs to be said. Springfield is the direct cause of the problem. They did not act out of innocent ignorance, but rather out of reckless disregard. They have broken one promise after another in the past. There is no reason to believe they will not break any promises made on Tuesday, or in the future.
Therefore, one could reasonably conclude that the only “hope” for “change” and financial health for Illinois in the years to come will be wholesale change in Springfield – beginning with those at the top!