Bloomberg News

Illinois Lawmakers Fail to Act on Fixing Pension Deficits

January 09, 2013

Illinois lawmakers missed another chance to restructure the worst-funded state retirement system in the nation, officially ending their 2012 session yesterday without acting on measures to shore up pensions.

In failing to deal with a $97 billion unfunded liability that rises by $17 million each day, Illinois risks more downgrades from bond-rating companies, which have urged the state to stem the ballooning deficits. The inability to broker a solution mirrored a special legislative session that ended almost five months ago with nothing accomplished.

“It’s confounded Illinois legislatures and governors for 70 years -- there have been 12 governors, 13 Speakers of the House and 12 presidents of the Senate that have grappled with this issue,” Democratic Governor Pat Quinn said.

With the streak of frustration preserved, lawmakers begin a new session today with pledges to try again, albeit with a heightened sense of concern about a credit-rating cut.

“I think we may learn from Wall Street very shortly about the importance of doing this quickly,” said state Senator Daniel Biss, a Democrat from Evanston who observed during the August special session that “We all look like idiots.”

Wider Penalty

Investors already are demanding a higher yield penalty on the debt of Illinois and its localities, relative to top-rated securities, than the 18 other states tracked by Bloomberg. The spread widened to 1.40 percentage points yesterday, the data show. On Dec. 24 the difference was 1.32 percentage points, the least since February 2011.

Illinois has the weakest state pension system, with just 39 percent of the assets needed to cover projected obligations for five major groups of public employees, according to the Civic Federation, a Chicago-based nonprofit research group.

The fiscal threat is two-pronged. Pensions are consuming an increasing portion of annual spending while borrowing costs are rising. Illinois devoted $5.7 billion to retirement funding this year and is scheduled to pay $6.7 billion in the next budget year, squeezing services such as education and health care.

“If the political system isn’t prepared to address it now and wants to continue to kick the can down the road, it’s going to cost a hell of a lot more money,” said Richard Ravitch, a former lieutenant governor of New York and co-author of an October study that said the Illinois pension funds “appear destined for insolvency” without changes.

‘Slow Strangulation’

The state’s underfunded pensions lack “the drama that would produce action,” Ravitch said. “This is slow strangulation -- it’s not a bullet through the heart.”

Quinn yesterday offered lawmakers an exit strategy from prolonged gridlock. He pushed for and obtained House committee approval of a plan creating a commission to recommend a pension fix that would take effect later this year, unless majorities of both chambers rejected it. The governor said the plan recognized the legislative process is incapable of dealing with the political and economic complexities of overhauling pensions.

“We need a new mechanism or structure to address this issue,” Quinn told the Personnel and Pensions Committee in the House of Representatives.

Senate President John Cullerton, a Chicago Democrat, rejected the characterization of an inability to act.

“It’s not dysfunctional at all,” Cullerton said during a news briefing in the Capitol. “We have a pension system that is not going bankrupt.”

Teachers Fighting

“It’s a complicated issue,” Cullerton said. “There’s a bunch of unions that represent teachers and state employees who are fighting down here in Springfield against these reforms. We would wish that they would support us.”

Restructuring pensions is challenging because employees don’t want to pay more for benefits, retirees resist having their pensions cut and school districts oppose paying a greater share. Hanging overhead are questions linked to language in the Illinois constitution that protects retirement benefits.

The accumulating cost of inaction makes any solution difficult because, as proposed fixes have shown, each requires someone to pay more or get less -- or both.

“Without reform, huge costs loom for future taxpayers or would-be beneficiaries of state programs that will be crowded out,” according the October report on Illinois finances from Ravitch and former Federal Reserve Chairman Paul Volcker. “But the magnitude of the problem also means any solution will include big benefit reductions or cost shifts, so political interests differ sharply on how to act.”

2 Percent

Lawmakers remained deadlocked as the session ended. The House had before it a measure that would have required employees to pay an extra 2 percent of their salaries into pension funds. It also would’ve delayed annual cost-of-living increases for retirees from starting by six years, or until age 67. A group of unions had pledged a legal challenge, if the changes became law.

The state Senate passed a more limited restructuring last year that didn’t mandate higher worker contributions, yet the differences with the House bill couldn’t be reconciled. Cullerton said it made no sense to force higher payments by employees when the state Supreme Court would reject the step as unconstitutional.

In the meantime, union representatives testified against Quinn’s commission proposal.

“It’s a desperate hail Mary pass,” said Michael Carrigan, president of the Illinois AFL-CIO, which represents almost 900,000 union members in the state, according to its website.

Cinda Klickna, president of the Illinois Education Association, the state’s largest teachers’ union, said both the proposed increases in workers’ pension-fund fees and the Quinn commission were unconstitutional.

Labor’s suggestion: more talk, in the form of a pension summit, to work out a resolution.

Overhaul ‘Essential’

In whatever form or venue, there will be further debate. Cullerton said pension restructuring “is essential” and efforts will begin with today’s start of a new legislative session. Representative Elaine Nekritz, a Northbrook Democrat and co-sponsor of the House bill, said a new measure would be introduced today, intended to attract more support.

Four months ago, Standard & Poor’s cut the state’s credit grade one level to A, sixth highest, citing retiree costs, and gave it a negative outlook, indicating another reduction may be made. Only California, at A-, has a weaker rating among states.

Biss, the Evanston Democrat, said he expects more pressure from Wall Street, in the form of another downgrade.

“I’m afraid that might happen,” he said.

To contact the reporter on this story: Tim Jones in Springfield at tjones58@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.


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