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REPEATING
PAST MISTAKES: PRITZKER PROPOSES BORROWING, STRETCHING OUT PAYMENT RAMP
AS PENSION SOLUTION
Illinois Policy Institute/
Adam Schuster
Trying to fix a massive pension deficit
with more tax increases, deferring payments and gambling with taxpayer
money is a recipe for failure.
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 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.
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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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