UPDATE- John Bury, a widely read actuary focused on pensions and quoted in this post, emailed me with his comments on this post, which I have copied below and they should be read.
The Nekritz-Biss pension reform proposal being debated now in Springfield includes the “ironclad guaranty” below sought by unions to assure the state makes pension contributions. This provision would effectively outsource budgeting for pensions to state courts. Never mind for now the other problems with the proposal.
Beginning July 1, 2013, the State shall be contractually obligated to contribute to the System under Section 2-124 in each State fiscal year an amount not less than the sum of (i) the State’s normal cost for that year and (ii) the portion of the unfunded accrued liability assigned to that year by law in accordance with a schedule that distributes payments equitably over a reasonable period of time and in accordance with accepted actuarial practices. [Emphasis added]
…Notwithstanding any other provision of law, if the State fails to pay in a State fiscal year the amount guaranteed under this subsection, the System may bring a mandamus action in the Circuit Court of Sangamon County to compel the State to make that payment, irrespective of other remedies that may be available to the System. In ordering the State to make the required payment, the court may order a reasonable payment schedule to enable the State to make the required payment without significantly imperiling the public health, safety, or welfare.
Note the underlined language. It would be certain to tie up the state in endless lawsuits to seize its cash. “A schedule that distributes payments equitably over a reasonable period of time”? Opinions on that will vary dramatically, in part because positions about the size of the problem differ dramatically. As we’ve reported here, most outside experts say the unfunded pension liability is twice as large as the state says. Unions will surely think a reasonable period is much shorter than does the state.
“In accordance with reasonably accepted actuarial practices”? Please. New standards from the rating agencies and the Governmental Accounting Standards board effectively say the state’s actuaries are full of it. Actuaries hired by the state come to the conclusions the state wants. Union actuaries will give different answers that are just as biased. John Bury, a prominent actuary who regularly comments on these topics, calls them “whores.” Who would sort this out? State court judges who are also covered by state pensions. And they could, under the second paragraph, adjust the required contribution to balance it against other state needs! That would basically outsource the legislative spending power to the courts. We could only hope that even a judge who is a political hack would have the courage to throw the whole thing out under the void-for-vagueness doctrine.
Most importantly, the credit rating for the state’s bonds is premised in party on a payment priority. General obligation bonds are supposed to get paid first. Most other bonds are secured by particular streams of tax receipts. This provision says nothing about what trumps what.
This kind of “ironclad guaranty” is foolish from the start because it amounts to chopping up the state’s body parts for distribution to pensions — the state’s dwindling free cash flow could be seized by the courts and redirected to pensions.
Both political parties appear inclined to accept an “ironclad guaranty” like this. The insanity is breathtaking.
Comment emailed from John Bury:
I read the piece and it pretty well sums it up. It reminds me of NJ in 1997 when Whitman wanted to stop contributing so they placated the unions by saying benefits would be really, really, really protected. Or NJ in 2010 where they arbitrarily slashed the ARC to 1/7th of the amount with 1/7th increments over the next few years but promised they were really, really, really going to pay it.
What the unions seem to be missing is that if it’s the government that gets to write the laws then they can simply rewrite the laws whenever it suits them. When it comes time to make those higher payments what’s to stop a government from deferring again or even making the contributions by selling POBs?
As for referencing actuarial standards, it’s a quaint concept. Oddly enough they could easily define the correct method of valuing liabilities to be what is used in the private sector where we are essentially told what mortality table and interest rates to use. However, that would engender massive increases in the liabilities so the politicians prefer getting somebody who’s due are current with ASPPA who thinks there’s nothing wrong with an 8% funding interest rate these days.