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By: Mark Glennon*

Now widely reported, initially by the Chicago Tribune, Illinois Gov. Bruce Rauner made some public comments last month that he talked to members of the United States Congress about federal legislation to allow Illinois to reduce some pension benefits, overriding the state constitutional ban thereon.

But what Rauner is saying and doing is only part of the story. There are two broad ideas afoot in Washington. Other states also have pension crises so this is about more than Illinois.

One major, national, blue chip law firm is actively talking up the idea Rauner spoke about and another major, national blue chip law firm is actively promoting a broader concept.

Here are the specifics:

Rauner said, “We’ve got a bill now. We’re working with Congress to pass a law. We’re lobbying right now that would allow states to reorganize and restructure their pensions.” He added, “If we can get this bill passed in Congress, and I’m hoping to get it done with this tax overhaul that we’re doing, if we can get this bill passed, [it will be] transformative to Illinois taxpayers.”

He’s referring to a pension-only concept along the lines of what the Manhattan Institute has been promoting for about a year. See their article on it linked here. Let’s call it “Bankruptcy Lite.” It would give states the option to file for a limited form of bankruptcy under which just pensions could be reformed. It’s premised, however, on the federal bankruptcy power which is express in the Constitution.

The other concept is a fuller bankruptcy proceeding like the current Chapter 9 for municipalities or PROMESA, the bankruptcy-like statute passed for Puerto Rico. Specific modifications would be included for states themselves to file bankruptcy, but the basic elements of a full bankruptcy would be maintained, which include the power to adjust all debts (not just pensions), power to cancel contracts and a stay on litigation. For more background on the this concept, see our earlier articles linked here and here.

The municipal bond community would be delighted with Bankruptcy Lite. It would relieve states of some of their pension debt, leaving other debt untouched and freeing up more money for bond payments. Pensioners obviously would prefer the broader bankruptcy option because the losses would be spread among other creditors besides themselves.

Both concepts may seem extreme to most folks, which is to say they prefer a third option of doing nothing.

For now, that is.

But they’ll eventually see that doing nothing will devolve into the disorganized chaos of mass creditor litigation with arbitrary winners. More importantly, they’ll understand that bankruptcy-for-states is anything but a “bailout,” as some critics have said.

To the contrary, denying states the option to adjust their debts is the bailout. Broke states like Illinois are a drag on the national economy. Their contribution to to the federal taxes is reduced and they suck up more Medicaid, food stamps and the like than they would if they were in recovery. When they try to tax their way out of their problems, as Illinois is doing, those taxes are deductible at the federal level so the rest of the nation is shouldering part of those tax increases.

None of this is to say that either option being discussed is a good one. This is about what’s unavoidable and inevitable. The facts dictate the options, and they are very, very narrow.

It will take time to sink in.

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

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NB-Chicago

dumb question, but aren’t Illinois state and local pension guaranteed by pbgc? (or not?) and if proposed bankruptcy lite is past then the feds/pbgc would be on the hook for some portion of all the $billions of bankrupt pension $.

Rex the Wonder Dog!

PBGC only applies to PRIVATE sector pensions, not public. Public pensions are not covered by the PBGC.

T B

Move everyone to Social Security

Here’s my solution:

https://drive.google.com/file/d/0B90sU3A85q46OE9BZHJFSWEzbGM/view?usp=drivesdk

Thoughts?

Stephen Douglas
Bankruptcy lite is a non starter. Each state has a slightly different story, but for several, Meep pegged it… “DON’T PAY THE BILLS, THE DEBT GETS LARGER”. Rauner said, “We’ve got a bill now. We’re working with Congress to pass a law. We’re lobbying right now that would allow states to reorganize and restructure their pensions.”  “Reorganize and restructure”, being a euphemism for “reduce”, which, if done properly is not inherently bad, but it puts the entire onus unfairly on public workers, and if the actual “reorganize and restructure” is ill conceived, it will just set up the system for future failure. Of course the municipal bond community would be delighted. But before we… Read more »
Tough Love
Stephen Douglas, If by saying ….. “But at least all the camels will be created equal.”………… you really meant that Public and Private Sector Total Compensation (wages + pensions + benefits) in ALL (yes, both lowest through the highest) jobs should be very near EQUAL, then we’re on the same page. But I’m certain that you are NOT advocating for giving up the HUGE current Total Compensation “advantage” that the Public Sector workers (AND retirees such as yourself) now enjoy. And THAT is evident in your quote from Meep above ……………..”“DON’T PAY THE BILLS, THE DEBT GETS LARGER” ……… because you very clearly know (from many discussions… Read more »
Stephen Douglas
Not even in the same book. “DON’T PAY THE BILLS,.. etc.” actually acknowledges that most, if not all state and local systems in the US use higher discount rates than are prudent. DPTB states (Illinois, New Jersey, Kentucky, Connecticut, et al., doubled down by not contributing even that low-balled amount. “But ultimately the reason the pensions are so little funded is because the state didn’t put in enough funds. And they knew it. They knew it for years.” (Meep) :::::::::::::::::::::::::::::::::::::::::::::::::::::::: “with both of us also knowing that there is zero justification for granting Public Sector pensions that are routinely 3, 4, 5, even 6 times greater in… Read more »
Tough Love
Quoting Stephen Douglas ………. ““Impose a ceiling on pension benefits to retirees, based on the principle that pensions are supposed to ensure retirement security, not lavish affluence. Similarly, establish a floor for pension benefits to retirees, based on the principle that employees at the low end of the pay scale are nonetheless entitled to retire with an income sufficient to live with dignity” I see than your Public Sector entitlement mentality hasn’t waned one bit. First, lets address this ……”Impose a ceiling on pension benefits to retirees, based on the principle that pensions are supposed to ensure retirement security, not lavish affluence.” Caps expressed as $ upper… Read more »
Stephen Douglas

The ceiling and the floor were Ed Ring’s terms. I qualified that somewhat by confining it to only full career employees to eliminate the $50,000 pension with only fifteen years service.

Tough Love says… “There is no justification to promise (or guarantee) lower-paid Public Sector workers more than the compensation that the job would earn in the Private Sector.”

That’s your opinion. It is, in fact, income redistribution, and there several good reasons for it. They won’t show up in your spreadsheet.

Tough Love

Stephen Douglas,

Your oversized “entitlement mentality” is showing again.

Rex the Wonder Dog!

Stephen probably has the words “entitlement mentality” tattooed somewhere on his body by now 🙂

Stephen Douglas

Leviticus 19:28
You shall not make any cuts on your body for the dead or tattoo yourselves: I am the LORD.

J.A.Herzrent
Let’s assume there’s not enough money to pay all public “servants” what they’ve been told they would receive. Bankruptcy or debt repudiation will get us to that point in the next few years (after the lawyers are no longer getting paid to delay the inevitable). Should those already retired be able to get everything that’s been set aside so that there is nothing left for those who are still working? Or should we just stop the music and distribute what has been accumulated fairly? Everyone joins in for the chorus of “Solidarity Forever” but the longer this farce continues, the more the retirees will deplete the fund… Read more »
Tough Love

Quoting J.A.Herzrent…….

“Everyone joins in for the chorus of “Solidarity Forever” but the longer this farce continues, the more the retirees will deplete the fund and leave little or nothing for those who haven’t retired yet.”

Indeed !. nd not surprisingly, commentator Stephen Douglas IS a RETIRED CA Public Sector worker.

Stephen Douglas

J.A.Herzrent

There Will Be Blood

And yes, those already retired will bleed, too. It’s happening now in the MPRA (union pension) reductions. Some exclusions are made for the very old, or very low pensions. There is no logical, legal, or moral reason to exclude most retirees from the cuts.

J.A.Herzrent
I have seen the movie with that title (10 years old by now). I am puzzled by your last sentence, but perhaps we agree that retirees should experience haircuts also. Those with pensions over $3000 per month, perhaps. Name your figure but you’d have to go pretty low to spread the available money equitably over all who feast now at the banquet table and those who hope to feast in years to come. Is there an implied threat of violence by the privileged classes because they’ll have to reduce their standards of living like the rest of us taxpayers have had to do? To the barricades and… Read more »
Tough Love

Stephen Duglas,

MORE of your BS and attempt to mislead.

Reductions in PRIVATE Sector MPRA Plans have absolutely NOTHING to do with the ludicrously excessive PUBLIC Sector State & Local pension Plans.

Stephen Douglas
Quoting Tough Love… “Reductions in PRIVATE Sector MPRA Plans have absolutely NOTHING to do with the ludicrously excessive PUBLIC Sector State & Local pension Plans.” And did we not discover that, at least in some cases, multi-employer plans actually have MORE generous pensions than equivalent public sector worker? I can look it up if you like. Sample: Hagerstown, Maryland (Teamsters Local #992) $3,000 for 25-at-57. $3,600 for 30-and-out. $4,200 for 35-and-out. (30-and-out and 35-and-out are “any age” _________________________________________ New Jersey State Truck Driver. Tandem axle. 2016 Salary range 12 …( $34,628.13 – $48,398.13) Pension = years of service (35) divided by 55 times FAS ($48,398.13) = $30,798.81,… Read more »
Tough Love

Stephen Douglas,

Please link to a source of Final Salaries (after 30 or 35 years) for that category of NJ Public Sector truck drivers. I suspect that their final pensionable salaries are considerably greater.

Stephen Douglas

Salary for “TRUCK DRIVER TANDEM AXLE” is listed as range 12 in…

http://info.csc.state.nj.us/TItleList/StateList.aspx
………………………
Page A1 gives the salary range and increments for range 12

http://www.state.nj.us/csc/about/publications/pdf/Compendium.pdf
……………………….
How much do you think a truck driver makes? A California state Heavy Truck Driver makes $4,051 per month.
SMH

Tough Love

Ranges are nonsense, proof is names and final salary on the date of retirement. Somehow I’d bet that upon retirement with the State of NJ almost all been recently promoted to higher level (manager ?) positions of some sort with the 3 years or so in that position to goose their pensions.

PROOF is names and dates for retirees with the 30 or 35 years you’re talking about not published wage ranges.

Stephen Douglas

Yeah, that’s how it works in California too. If I’ve seen it once, I’ve seen it a million times…

“Boss, I been drivin’ truck near 35 year. I’ll take that management job now, and in three years, I’ll be outta your hair.

“I’d bet” they “almost all” do it.

Bad enough we’ve been off topic for 10 hours, now you’ve gone off into another dimension.

Comptez pas sur moi

Stephen Douglas
Quoting Tough Love… “Reductions in PRIVATE Sector MPRA Plans have absolutely NOTHING to do with the ludicrously excessive PUBLIC Sector State & Local pension Plans.” ………………………………………………………….. Mr. Herzrent referred to cuts for existing retirees. Many feel that pensions for current retirees are virtually sacrosanct. Even in Kentucky, with possibly the most dire pension crisis, the proposed plan excludes retirees…”The plan spares the state’s more than 166,000 current retirees from any reductions in their pension checks. ” Even Arnold Governor Schwarzenegger, among others, said pension changes should not affect current retirees, (or those close to retirement). Stephen Douglas (AKA the “RETIRED CA Public Sector worker”) says “There is… Read more »
Stephen Douglas

Well, I guess we’l just have to agree to disagree.

Rex the Wonder Dog!
To the contrary, denying states the option to adjust their debts is the bailout. Broke states like Illinois are a drag on the national economy Hi John, I have told you this MANY times in the past, and know you are aware of it because you’re a lawyer. States do NOT need ANY LAW from the Congress. States are sovereign entities and cannot be sued. They can, and many have in the past, REPUDIATE THEIR DEBTS with 100% immunity from suit. So IL can CANCEL any debt they owe to ANYONE, including their own public employees, and cannot be held liable because they are immune from lawsuit,… Read more »
Doug

Rex, curious, what would happen if someone sold all real estate and Illinois assets and then left Illinois while never paying latest tax bills?

Doug

Illinois tax bills

Rex the Wonder Dog!

Sorry Mark- I called you JOHN by accident, an old friend of mine was John Glennon!

Great reporting.

Thanks for the explanation – the stuff I had originally read made no sense to me.

Joe Mathewwson

Right on, Mark! This could be Rauner’s first real accomplishment to deal with the overwhelming debt he and all Illinois taxpayers are burdened with after decades of official misfeasance.