Repeating past mistakes: Pritzker proposes borrowing, stretching out payment ramp as pension solution

Repeating past mistakes: Pritzker proposes borrowing, stretching out payment ramp as pension solution

Trying to fix a massive pension deficit with more tax increases, deferring payments and gambling with taxpayer money is a recipe for failure.

Illinois Gov. J.B. Pritzker’s administration plans to address Illinois’ pension hole by dedicating funds from a progressive income tax hike, selling $2 billion in bond debt, selling state assets, offering pension buyouts and extending the deadline to get the state’s pension funds solvent by seven years.

Several of these proposed fixes are similar to concepts that have been tried in Illinois in the past and not only failed to solve the pension crisis, but made it worse.

Former Illinois Govs. Rod Blagojevich and Pat Quinn issued pension obligation bonds in 2003, 2010 and 2011. The total of $17.2 billion in borrowing is expected to cost $30.8 billion to repay, according to the most recent projections.

Stretching out payments has a particularly sordid history in Illinois. Former Gov. Jim Edgar implemented a system known as the Edgar ramp, which artificially reduced payments to the pension funds during his term of office and increased them for his successors. This is a direct cause of Illinois’ ballooning pension debt and rapidly growing contributions. From fiscal year 2000 to 2019, pension spending has grown more than 677 percent, in large part thanks to the Edgar ramp.

Deputy Gov. Dan Hynes presented Pritzker’s plan in a Feb. 14 speech to the City Club of Chicago. Hynes is in charge of budget and economic issues for Pritzker and is the former state comptroller.

He outlined five changes the administration supports:

1) Passing a progressive income tax hike and dedicating $200 million a year of it for pensions, in addition to the state’s required payments.

2) Selling state assets and transferring proceeds to the pension funds, potentially including the Illinois Lottery and the Illinois Tollway. Hynes said the number of state employees has declined from about 80,000 to 60,000 without an accompanying drop in facilities housing state employees. Excess office space could be another potential asset to sell.

3) Issuing a $2 billion pension bond. Hynes said the borrowed money would not be used for operating costs.

4) Offering additional pension buyouts to public employees. The state offered two forms of limited, optional pension buyouts as part of the fiscal year 2018 budget.

5) Extending by seven years the target date to reach 90 percent funding of the pension plans, to 2052 from 2045.

Problems with the Pritzker plan

Despite claims from Hynes, several of the Pritzker administration’s proposed pension fixes are financially unsound and likely to draw rebuke from major credit rating agencies.

Illinois’ pension debt stood at $133.7 billion at the start of this fiscal year by the state’s accounting, but Moody’s Investors Service previously calculated the deficit at $250 billion. Illinois already has the worst credit rating in the nation, just one notch above non-investment grade “junk” status. And Illinois’ current funding target of 90 percent by 2045 is already a violation of actuarial best practices.

Issuing pension obligation bonds and extending the payment ramp fly in the face of these realities.

Fitch Ratings previously issued a warning against a pension plan that included stretching out payments and issuing pension obligation bonds. Citing a history of failure, credit rating agency S&P Global Ratings considers the use of pension obligation bonds to be a credit negative, according to an article published by OFI Global.

Pension obligation bonds are only useful if the interest paid on the bonds is lower than the return on investment in the pension funds, a concept called arbitrage. Given Illinois’ currently poor credit rating, which directly affects the interest a state has to offer to bond buyers, more pension obligation bonds would be a gamble with taxpayer money that is unlikely to pay off.

Beyond pension obligation bonds and extending the payment ramp, Pritzker’s proposed progressive income tax plan has major problems of its own. States with progressive income taxes see lower jobs growth, wage growth and GDP growth – along with a history of failure to solve fiscal problems and higher tax rates creeping down to the middle class. Illinois is already home to the second-worst income growth in the nation as well as one of the worst rates of private-sector jobs growth. Illinois families looking for opportunity simply cannot afford a progressive income tax hike.

Trying to fix a massive pension deficit with more tax increases, deferring payments and gambling with taxpayer money is a recipe for failure. The only responsible alternative is to structurally reform spending to address the cost drivers of Illinois’ fiscal problems.

A sustainable pension solution

The Illinois Policy Institute recently outlined a plan that would enable the state to balance the budget, pay off its debt and cut taxes in five years. This can be accomplished while protecting core government services and preserving earned pension benefits for government workers. It is the only plan that responsibly reduces the state’s current pension contribution while getting the state’s pension systems fully funded faster.

The most critical component of any sound plan for Illinois’ fiscal future is real, lasting pension reform. Pritzker can save taxpayers $12.2 billion and shore up the pension funds faster than planned under current law by:

1) Supporting an amendment to the Illinois Constitution so that it still protects earned benefits, but allows changes in future benefit accruals. Then, lawmakers can reintroduce reforms similar to those passed in 2013 by the Democratic supermajority-controlled General Assembly and signed by a Democratic governor.

2) Aligning responsibility for setting benefits with accountability for paying benefits at schools and universities.

Rather than repeating past mistakes – mistakes that caused the problem to begin with – Pritzker should get serious about addressing the root causes of Illinois’ worst-in-the-nation fiscal health. Outgoing Chicago Mayor Rahm Emanuel has endorsed real pension reform. The Civic Federation has also called for placing a constitutional pension amendment on the ballot.

Continuing to pursue unsound accounting gimmicks and tax hikes is irresponsible. It is past time that Pritzker joined a growing chorus in endorsing real reform.

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