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.

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Paul

The politicians don’t pay any attention to the State Constitution when i comes to a balanced budget. Why pay attention tot the must not cut pensions?

Won’t be long an all the public servants will be gone and the taxes just pay for the retired ones.

Mike

Actually not sure how much of a ramp in the 30 year Quinn pension funding plans.
PA 98-0599 & P 96-1495.
At the very least 30 years is an awful long time to play catch up, and even then the funds are only 90% funded.

Mike
Public Act 96-1495 (SB 3538) contains amongst other things a 30 year pension funding ramp for 4 of the 19 pension funds in the Illinois Pension Code with a goal of having the funds 90% funding by 2045. This is the Quinn Ramp for Police and Fire Pensions. 1. Chicago Firemen’s Annuity and Benefit Fund. 2. Chicago Policemen’s Annuity and Benefit Fund. 3. Police Pension Fund (Outside Chicago) 4. Fire Pension Fund (Outside Chicago) PA 96-1495 also created Tier II reduced benefits for new employees only for those funds plus the IMRF Sheriff’s Law Enforcement Personnel (SLEP). Some of the other pension funds have Tier II benefits… Read more »
Jim Palermo

More than half of active downstate police officers and fire fighters work in municipalities where their pensions are so poorly funded that there is insufficient money to fund the benefits of those no longer working, meaning the active employees have NO money in the plans for their own retirements. This is the case in large communities and small, wealthy and working-class, throughout the state. I expect many more municipalities to receive these letters.

anonymous

That’s another reason why younger workers are getting totally fucked by these reforms. We still have to pay into these pensions with benefits like they were for older workers, but nothing is going to be there for us.

Jim Palermo

Younger workers should be demanding a defined contribution system. Yes, a DC (401-k type plan) exposes workers to market risks and is likely less generous than a DB plan, but DC plans offers portability and wouldn’t be subject to benefit cuts like today’s underfunded DB plans.

Understanding woefully underfunded downstate DB benefit plans, ask yourself what constituency might object to younger workers going on a DC plan?

Mark Glennon

Exactly. Why younger workers have accepted these phony reforms at their expense is a total mystery to me. As is why they elect nutjob leadership like Henry Bayer, and lying extremists like Cinda Klickna.

JenniferBW

Just greed, pure disgraceful greed. How did this not get reported when it was made a law?

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