If Illinoisans want a glimpse of the state’s upcoming fiscal cliff, they should look no further than the failed negotiations between the maker of Twinkies and the unions that took them on.
Hostess Brand’s bankruptcy is much more than the demise of famous brands like Twinkies, Ho Hos and Wonder Bread. It’s also the tragedy of what happens when unions demand more than a company’s owners can afford. The result is bankruptcy, massive layoffs and a lot of finger pointing about what went wrong.
The Hostess closing and Illinois’ current fiscal crisis follow a similar plot line:
- Bad governance. While we may mourn the downfall of this iconic company, Hostess’ bankruptcy should come as no surprise. Hostess first went into bankruptcy in 2004. Since then the company failed to increase sales, innovate or lower labor costs. Instead, Hostess failed due to more debt, losses and a tanking share price. Now, more than 18,500 people will be looking for new jobs.
Just like Hostess’ results signaled its decline, Illinois’ skyrocketing debt, out of control government employee labor costs and bad governance are pushing the state into near bankruptcy. Nevertheless, politicians have failed to act on state pension reform. Funding is likely to dry up, leaving thousands of workers without retirement income.
- Inflexible unions. The nail in Hostess’ coffin came when management asked unions to accept cuts in order to keep the company afloat. The Teamsters accepted the proposal, but the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union (BCTGM) said no. The union decided to strike, leaving the company with no alternative but to close its doors.
Similarly, Illinois government employee unions continue to strongly oppose pension reforms, even for benefits that have yet to be earned. Rather than ensure safe and secure retirements for their members by embracing reforms, the unions continue to fight for a system that is likely to go bankrupt. Nowhere was this intractable behavior more evident than in the recent Chicago Teachers Union strike, which left the Chicago Public Schools with an unmanageable budget hole and even higher pension costs.
- Bad judgment. BCTGM could have averted the Hostess closure by accepting the terms offered by the company’s owners. But the union didn’t believe the situation was sufficiently dire. They went on strike – the rest is history.
Much like BCTGM, Illinois politicians and union leaders are treating the state crisis like a bluff. It’s not. It’s real. They refuse to heed the crystal-clear signals that are leading Illinois into a fiscal death spiral.
The Hostess bankruptcy will put about 18,500 employees out of work – including nearly 1,400 Illinoisans. But that tragedy is miniscule compared to what will happen to Illinois if state politicians and unions are allowed to drive this state into the ground. Here are the signals they are choosing to ignore:
- Debt related to government employee benefits has skyrocketed to nearly $300 billion. Each Illinois household is now on the hook for more than $51,000 in state debt.
- Illinois’ pensions are the worst funded in the nation. The state’s pension systems are little more than 20 percent funded under new accounting and transparency rules.
- Moody’s Investors Service, citing the lack of pension reforms, gave Illinois the worst credit rating in the nation; worse, even, than California and New Jersey.
- The head of the Teachers’ Retirement System says that without reforms, the teachers pension fund could face insolvency by 2029.
- Illinois will spend more state dollars on teacher retirement costs than in the classroom by 2016.
- Benefits for government employees are bloated. The average career teacher retiring today with 30 or more years in the classroom will receive more than $2.4 million in lifetime pension benefits.
- The state can’t pay its bills. State government has racked up more than $9 billion in unpaid bills.
- Illinois is 48th in the nation in economic outlook.
- Illinois loses a net of one person to other states every ten minutes.
Absent substantial reforms to retirement benefits, Illinois is likely to suffer a similar plight to that of Hostess Brands. But the state’s problems can’t be sold off like Twinkies and Ding Dongs brands. Instead, taxpayers will face dramatic cuts in core services like education, health care and public safety.
The writing is on the wall – it’s time for lawmakers and unions leaders to come to grips with Illinois’ fiscal reality.