November 29, 2013 By: Mark Glennon
Today, key Illinois legislators released the list of “details” of their long awaited pension deal. The release is linked here. It’s just one page. A draft of the actual bill is still kept secret. Most legislators haven’t seen that yet, and may not until hours before the vote. Here are a few highlights and comments:
It won’t save nearly enough to solve the problem, and it certainly isn’t “comprehensive” — as even some Republicans are claiming. We know from similar proposals earlier and statements by deal sponsors that no more than about $20 billion of the unfunded liability would be cut. The total official unfunded liability is $100 billion and the real number is probably closer to $200 billion, so this proposal doesn’t come close to ending the crisis.
Deal sponsors are bragging that it will save taxpayers $160 billion and the press is lapping that up. In fact, that’s a red herring. One noted actuary called that “propaganda” that’s “funny without comment.” Any reduction in pension benefits results in infinite savings if you measure the impact over a long enough period. Here, they’ve chosen thirty years to allow them to claim that big number. But the total funded and unfunded liability over that period is well over $600 billion so, again, the plan does not come close to fixing the problem.
The can will be kicked down the road for the rest of the unfunded liability. The deal would establish “an actuarially sound funding schedule to achieve 100% funding no later than the end of 2044.” Has a nice ring to it, huh? But deal sponsors have been admitting the schedule is back-loaded into years 25-30. Not wanting to be too obvious about that, predictably, they did not provide the funding schedule. So, a fair way to summarize this is “let the legislature deal with this in 25 years.” That’s why this is not a “plan” to fix the pensions in any sense of the word, and why Governor Quinn’s claim that this “eliminates” the unfunded liability can only be called a lie.
The savings are accomplished mostly by changes in COLA calculations, a cap on pensionable salary and — this is new — some gradually higher retirement ages. That cap on pensionable salaries excludes salaries that currently exceed the cap or that will exceed the cap based on raises in a collective bargaining agreement. Today’s fat cats, in other words, stay fat, as does anybody else the unions muscle in. So much for the means testing we hoped to see.
Employee contributions to the pensions are reduced by one percent.
Finally, and most importantly, the deal includes that dangerous “funding guaranty” now finally getting some attention (as discussed in current articles on this site), but details are too sketch for us to make a final judgment on it. This provision is key because, if it’s written as strongly as in some previous drafts, the state would be all but irrevocably committed to paying untold billions into to pensions in priority over all other state payments except bonds, and it would preclude chances for further reforms later. Do mandatory contributions change as the actuarial numbers change and as assumptions are adjusted? They can have a huge impact, and we’ve repeatedly seen the pension deficit ratchet up as reality invalidates the phony assumptions used by state actuaries. Could the state afford the required contributions as that continues to happen? We don’t know any of this.
Much of the deal is constitutionally suspect, so it’s even possible the cost-saving provisions could be voided but the guaranty left in place, which would be a real calamity. If the guaranty can be gutted or eliminated, this pension deal might be defensible as a small step in the right direction. If it’s written as strongly as the unions and their friends in the legislature want, the deal should be trashed entirely.
In conclusion, pension deal sponsors are doing what they can to hide key facts from taxpayers as well as rank-and-file legislators. We know enough, however, to conclude that the deal won’t nearly end the crisis and that it includes a funding guaranty that will be catastrophic unless it’s gutted.
Meanwhile, public sector unions are putting everything they’ve got into killing the deal for the opposite reasons — to keep pensions untouched. Have at it, unions. All the sooner it will be that Illinois finally understands how drastic the solution inevitably must be.