State pension crisis is about debt, not benefits

0514CurtisPensions

Pension puzzle/Shutterstock image

So according to the Illinois Supreme Court, when the state constitution says pension benefits shall not be diminished, it means pension benefits shall not be diminished.

And somehow this bit of elementary logic comes as a huge shock to the state’s political leadership.

It would seem they’re still in denial, judging from the schemes now emerging to find new ways to enact benefit cuts. Gov. Bruce Rauner wants a constitutional amendment (which would be challenged as an ex post facto law) or bankruptcy; Senate President John J. Cullerton wants to let workers choose benefit cuts if they want to keep health care; for the city, Mayor Rahm Emanuel wants everyone just to agree to cut benefits, which is essentially a “close your eyes and make a wish” strategy.

There’s a more sensible way, according to Ralph Martire of the CenRalph_Martire-021115-02ter for Tax and Budget Accountability, but it involves two things. One is acknowledging that the problem is not benefit levels but decades of borrowing from pension funds to pay for essential state and city services. The other is finding a way to pay for those services besides borrowing from pensions.

If you attack the state’s pension crisis not as a benefit problem but a debt problem, he says, you can re-amortize the debt over several decades. But instead of heavily backloading the payments to the point where they’re unaffordable, as our politicians have done, you pay a level dollar amount, the same way homeowners pay off their mortgages.

That will cover current and future obligations and get the pension system close to 80 percent funded in 30 years — the funding level that’s considered healthy — and fully funded in another dozen years, he says.

It would cost a little more than the state is currently paying for pensions, but that would be covered by more than $2 billion in annual pension obligation bond payments that will expire in the next couple years.

“It’s constitutional, it’s affordable and it’s the only viable path available,” Martire says.  “And interestingly enough, it deals with the actual cause of the problem, which is borrowing and debt, not benefits.”

What’s stopping us?  On the one hand are the big-money interests that want to use the pension crisis to bash unions, and who hold “a very ideological worldview” that “government is not the solution, it’s the problem, and that all spending is bad and all taxes are bad,” Martire says.

Then there are the politicians who want to shift responsibility for the crisis to someone else — public employees are quite handy — and who are too timid to fix the state’s broken, regressive revenue system.  It’s a system in which lower-income residents pay a much higher proportion of their income for state and local taxes than the wealthy do.  That’s inefficient, because for several decades, wealth has been flowing upward.  It’s a revenue system that contributes to that upward flow of wealth — and fails to raise enough to cover basic services.

“People ask whether the Supreme Court decision means the state needs to raise taxes, and my answer is no,” Martire says.  “The state does need to raise taxes, [but] it needed to raise taxes regardless of what the Supreme Court did.  In fact, the unfunded liability in the pension system is a symptom of the state’s need to raise taxes.  So yeah, we’ve got to raise taxes, but that’s just to have a sustainable funding base for current services.”

There’s a conservative myth that Illinois is a high-spending and high-tax state.  In fact, Illinois has cut billions in spending on health care and social services in recent years.  In 2012, according to CTBA, the state ranked 28th in the nation in spending on services as a share of population and 36th in spending as a share of GDP.  Looking at the total state and local tax burden, Illinois is among the lowest in the nation — and lower than Iowa, Michigan, Wisconsin, Indiana or Ohio.

We need progressive revenue solutions.  We could start by expanding the sales tax to high-end services and closing billions of dollars of corporate tax loopholes.

Instead we get Springfield politicians — products of a political system completely dominated by money and clout — who seem entirely focused on ideological posturing,  jockeying for power and shifting blame for their irresponsibility.

Photo: Pension puzzle/Shutterstock image

  • Bill James

    What is it to Emanuel what the state is doing ,just run your Chicago you where not elected to run the whole state