By: Mark Glennon*
A core goal of progressivism is fundamentally right and noble — helping those most in need. But what actually works is where their views split with the rest of us, and that’s certainly true on pension reform. Illinois progressives appear universally opposed to repeal of the pension protection clause in the Illinois Constitution. That shouldn’t be so. All sides should agree: Repeal is essential to reforming many Illinois pensions in a way that protects rank-and-file workers with reasonable pensions.
It’s at the local level where the pension crisis is most acute and where the flexibility afforded by full repeal is most needed. First, it’s important to understand how terrifying the local situation should be for many workers with modest pensions. While most of the debate centers on the five state-level pensions, many of the 650 other pensions maintained by cities, towns and other units of Illinois government are beyond hopeless. Skim through the list of those pensions and their unfunded liabilities to see the parade of zombie funds for yourself (2015 report by Commission on Governmental Forecasting and Accountability, pp 99-128).
Dozens and dozens of them are in towns and cities with budgets already crushed by even the inadequate pension funding they have provided. A few examples: Aurora police fund – just 51% funded; Carbondale police – 47%; Kankakee firefighers – 19%; Cairo police – 27%; Alsip police – 36%; Danville police – 36%; Springfield police -56%; Galesburg police – 54%; Joliet firefighters – 54%; Waukegen police – 45%. Rockford, whose mayor has already talked about bankruptcy, has more retired pensioners than active workers and its pensions are just 60% funded. In aggregate, these local pensions were 56% funded in 2012.
Then there are Chicago area pensions, which are huge and equally frightening, having $35 billion in total unfunded liability. The Chicago police and firefighters pensions have more retirees than working members, and they have just 30% and 24% of what they need to pay retirees, respectively.
And the real, current numbers for all of them are much worse because independent financial experts universally say the accounting is phony. Further, unfunded liabilities grow every day, despite five good years of asset returns, because contributions are far too small. S&P recently said that Chicago, already cash-strapped, has been contributing only about one-fourth of what it should be to properly fund its pensions.
The plain reality isn’t just that some benefits will be cut. It’s that, in many cases, the needed cuts will be so large that that subsistence of many pensioners will be threatened, unless cuts are concentrated instead on those who can bear them. Some prosperous suburbs may be able to make up their pension deficits in full. Others may need to make only small cuts that all pensioners can bear. A few are fully funded already. But can anybody doubt that, for example, Chicago firefighters and Danville police aren’t in danger of facing cuts so severe that their subsistence at retirement will be at risk?
For many of those cities and towns, pension reform should include some form of means testing on benefit cuts — progressivism — disproportionate protection for smaller pensions going to those who most need them. Not all pensioners are double dippers, spikers or gluttons, though many, many are. Many other public retirees are living on pensions of thirty or forty-some thousand dollars a year, with no Social Security. Some of the oldest retirees are most at risk because they lived through the hyper-inflation 1980s where their three percent automatic COLA didn’t nearly keep their pensions up with inflation.
Only repeal of the pension protection clause would give the state broad enough flexibility to deal with all the variation in local circumstances. Without repeal, the only hope for pension reform of any kind is the “police power” defense now being decided by the Illinois Supreme Court for the state-level pension reform bill, SB-1. That’s the argument that the state is too broke to honor its pension obligations. It’s entirely impractical to imagine that defense being used for means tested reform at the local level. Separate trials on the economic circumstances for each municipality would be required, with endless appeals. Whether means testing could even be allowed under that defense, and to what extent, is completely unknown.
How many pensions really are small, honestly earned and truly needed? Nobody knows because nobody cares enough about those small guys ever to have done any such analysis. Unions tout bogus numbers about “average” pensions that include workers who have worked only part of their career in the system and have other pensions or retirement sources. Even if “averages” are calculated fairly, they don’t tell us what we need because it’s the variance below the averages that matters.
For that reason, the formula that might be used for means testing is a separate discussion for a later day. It might be as simple as full protection for all pensions below a certain amount and pro rata cuts for the excess. More complicated formulas might look at other sources of income and wealth. But you would need to have those numbers on how many pensions are really essential, and what they total. With full repeal of the pension protection clause, the state could even single out the spikers and double dippers for cuts, electing instead to protect the true victims of this mess.
Pension reform so far has done the opposite — disproportionately protecting fat cats at the expense of the little guys. It started in 2010 with the Tier 2 reforms that we criticized here, which put those hired after that year into a second class with far lower benefits than older ones. Worse, Tier 2 workers are required not only to fund their own benefits but to pay additionally each month to subsidize the unfunded liability for older workers. Those yet-to-be workers weren’t represented at the bargaining table when Tier 2 was passed.
And there’s a special “grandfather” provision for fat cats in SB1. That bill includes a cap of about $110,000 on the salary on which pensions are based. But the “grandfather” provision excludes those with salaries already exceeding the cap or that will exceed the cap based on raises in a collective bargaining agreement (that is, a deal made through their unions).
Senator Elaine Nekritz (D-Northbrook) did raise the issue of means testing as SB-1 was drafted, and the bill does exclude pensioners getting less than $25,000 from COLA cuts, but, other than that, concern for the little guys has been absent.
The probability that some municipalities will end up in a Chapter 9 bankruptcy proceeding doesn’t help, unless the pension clause is repealed first. Chapter 9 does not provide for any distinction in priority of claims based on size or need. In other words, if pensions get cut in bankruptcy because they are underfunded, the cuts would be pro rata. There is a requirement that the reorganization plan be “in the best interest of creditors,” which a bankruptcy judge might stretch to help smaller pensioners, and voluntary variations can always be negotiable, but the Bankruptcy Code has nothing express about means testing among creditors that get cut. Pensions can be cut in bankruptcy despite the pension protection clause, so if smaller pensioners are to be specially protected in a municipal bankruptcy, the state would first have to repeal the pension protection clause then pass the legislation that prioritizes the smaller pensioners.
For the five state-level pensions in Illinois, Governor Rauner remains committed to avoiding any cuts for benefits already earned. If he succeeds, God bless him, and that’s sufficient protection for smaller pensioners. If he doesn’t succeed and earned benefits must be cut, need should be a primary consideration.
But it’s on those local pensions that the facts are most clear and a progressive solution is most imperative: Some retirees in the worst-off pensions will be looking poverty in the face unless a solution flexible enough to protect them is found. Repeal of the pension protection clause will be needed to do that.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.