Mix pension financing, constitutional law, and politics, and you’ll have either a recipe to cure insomnia, or the most important but under-discussed issue facing Illinois today.
Illinois lawmakers are on the brink of making a mistake that could lock taxpayers in for hundreds of billions of dollars in new costs.
The mistake in question is called a “pension guarantee.”
Government worker unions are lobbying hard to make it so the state can be sued to pay more into the state’s five pension systems each year. In exchange for a small bump in employee retirement contributions, unions want taxpayers to hand them a blank check to fund an inherently flawed pension system.
And that blank check equates to higher taxes.
Unless you’ve been dining on paint chips, it’s pretty obvious this is a bad proposal.
After all, you, the taxpayer, are being asked to guarantee pension investment returns – while having no say on how that money is invested. More important, Illinois politicians have a long history of succumbing to union pressure and making pension benefits increasingly generous. And this proposed pension guarantee would make the taxpayers responsible for whatever future benefits are promised.
Don’t think government pensions are generous? Think of five able-bodied people you know who retired in their mid-50s.
Were most of them government workers? I thought so.
This pension guarantee is being proposed under the guise of stopping politicians from shortchanging the systems in the future.
Core government functions – such as educating children, incarcerating criminals, and caring for the disadvantaged – would take the backseat to ponying up for pensions.
Having sat through plenty of legislative hearings on pensions, I can tell you there is considerable disagreement about a provision in the Illinois Constitution regarding pensions.
Here’s what it says:
“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.”
Some folks, like me, believe that means government workers are guaranteed by the pension fund not to lose what they have already earned.
But government worker unions contend once people enter government employment, they have boarded a rocket ship that guarantees ever-increasing pensions – even as those benefits soar past the financial stratosphere.
Benefit reform has been the subject of much verbal jousting in recent years.
More often overlooked is another critical question: What happens when that pension rocket runs out of fuel?
After all, the pension systems are independent of state government.
In fact, the state pension code is quite clear on that matter: “Any pension payable under any law hereinbefore referred to shall not be construed to be a legal obligation or debt of the State, … but shall be held to be solely an obligation of such pension fund, unless otherwise specifically provided in the law creating such fund.”
Now an assortment of schemers want state taxpayers to guarantee those funds don’t go broke.
And instead of talking about fundamentally reforming pensions into 401(k)-style plans – like 85 percent of the private sector – pension guarantee advocates want the Illinois taxpayers to dole out more and more cash to keep the faltering system alive.
Advocates of the guarantee want to change the law so that pension funds can demand money from the state – based on their investment and actuarial projections.
And, by the way, some of those current projections are more than a bit rosy. Moody’s Investors Services says pensions should use more realistic return assumptions: rates that currently are just more than 4.3 percent. But Illinois’ pension systems currently use a projected rate of return of about 8 percent.
If the Illinois General Assembly creates a taxpayer guarantee, there is nothing to keep the pension boards from simply lowering their projected rate of return and demanding more from taxpayers.
Note to readers – Scott Reeder’s column is underwritten by the Illinois Policy Institute.