Insidious Unfunded Mandate in 2010 Pension Law Looms; Drastic Reactions Begin – WP Original
By: Mark Glennon*
Mostly unnoticed in a 2010 pension bill is a state mandate that towns and cities start a payment plan, in whatever-it-takes yearly amounts, to gradually improve their police and fire pensions to 90% of the funding they need.
And it has teeth. Cities and towns must increase property taxes sufficiently to make the payments. If required pension contributions aren’t made, the state will automatically subtract the required contribution from the city or town share of sales and use taxes — a key piece of revenue cities and towns need. (A summary of that bill is linked here.)
That unfunded mandate takes effect in 2016, but the state already started sending out “ultimatums,” as the Tribune called them in an article today. North Riverside is being forced to consider privatizing its fire department, its problems having been solidified by one of those ultimatums. That privatization debate will expand to other municipalities, but expect service cuts, massively higher taxes and more talk of bankruptcy from cities and towns around the state that are in the same fix. That’s because privatization wouldn’t help much. It would have no effect at all on current unfunded pension liabilities, which are based on benefits already earned.
Unbelievably, the pension “reform” plan for Chicago enacted this month follows the same model — an unfunded liability enforced by offsets of money owed to the city by the state. (How Chicago raises the money, however, is left to the city.) In Chicago’s case, the mandate is for $750 million of contributions to two of its pensions over five years, plus whatever it takes thereafter to take the pensions to 90% funding. We explained that in detail here. Massive tax increases will be needed to fund that.
The same model is proposed for “reforming” Cook County pensions. That bill died this Spring but proponents say they will try again. The 2013 pension bill for the state-level pensions also contained a mandate to fund.
Remember the context in which these mandates were passed. The Illinois Constitution prohibits cuts on payments out of the pension to pensioners, but it requires no funding in. The pensions used to be unsecured creditors. But with these mandates and the set-off of state funds, the pensions are elevated to the status of secured creditors. They will take what’s needed to pay pension obligations, in priority over funding for every other service those governments provide. (Only bondholders have a senior priority.) Unions will have no reason to negotiate any other changes to their benefits.
Touché to the public union negotiators and their minions in legislature, like John Cullerton and Kwame Raoul. They’ve pulled off an extraordinary victory — in a diabolical way — at the expense of taxpayers, and younger cops and firefighters, too. Under the label of pension “reform,” they agreed to some reduction in benefits in exchange for nearly bullet-proof assurance to fund the pension obligations. Further reforms are effectively made impossible — both houses of the legislature and the governorship would need to change over.
What that 2010 bill did to is partially reform pensions for new employees joining after that date. In other words, union pensioners in power cut the newcomers but guarantied taxpayer funding for their unreformed pension.
These mandates were referred to in the past as “guaranty” provisions, and we warned from the start that they amount to carving up government body parts for pensions. But “guaranty” has too nice a ring to it, which is perhaps why supporters have gotten away with them. So, we’ve started calling them what they are — “unfunded mandates.”
By the way, want to make a supporter of these “reform” bills squirm? Asked them about the “unfunded mandates” using that term. I’ve been doing that and, yes, they truly squirm.
*Mark Glennon is Managing Director of Ninth Street Advisors and founder of WirePoints.