As the pension crisis threatens to engulf Illinois, legislators continue to fiddle.
It’s no secret that Illinois has the worst-funded state pension systems in the nation. That’s an accepted fact by those on both sides of the aisle. Unfortunately, that fact hasn’t motivated any action from the state’s politicians.
Now recent news point to even deeper troubles for the state. Moody’s Investor Services has threatened to punish Illinois again with another credit downgrade by revising the state’s outlook to “negative” from “stable”. The agency already gave Illinois the nation’s worst credit rating, an A2, in January 2012 – and things look to get worse.
Moody’s rationale for another potential downgrade mimics what it announced in January:
- Illinois faces a severe pension-funding shortfall, and the state remains an outlier among states based on the size of its pension liabilities. Illinois’ ability to manage its growing pension-funding requirements remains unclear.
- The state maintains a large amount of unpaid bills – currently at $9 billion.
- The state’s long-term weak management practices are reflected in its pension underfunding and chronic bill payment delays.
What’s ironic is that as the situation worsened during the past year, Springfield’s lack of action became increasingly more obvious. Moody’s called out this fact, saying: “The state repeatedly failed to act on pension reform – during the regular session that ended May 31, during a one-day special session convened by the governor on Aug. 17, and again during the state’s ‘veto sessions’ in November and December.”
A growing problem
A recent release by the Illinois Policy Institute shows the true extent of the crisis in Illinois. Politicians often talk about Illinois’ official funding shortfall, now equal to $96 billion. But when the state’s liabilities are measured under new accounting and transparency rules proposed by Moody’s, Illinois’ pension shortfall exceeds $209 billion.
The state also has $54 billion in unfunded liabilities for retiree health insurance and $15 billion in pension bonds that Gov. Pat Quinn and his immediate predecessor, former Gov. Rod Blagojevich, issued to avoid pension reform.
That debt now totals more than $275 billion — or $58,000 in debt for each and every household in Illinois.
Only 24% Funded
It’s becoming clear that the state’s pension systems are running out of time. Under new rules proposed by both Moody’s and the Governmental Accounting Standards Board, the five state pension systems have reached dangerously low levels of funding. Under Moody’s rules, the state’s overall funding levels are now just 24 percent. The Teachers’ Retirement System, or TRS, for downstate and suburban teachers is only 24-percent funded and among the worst-funded systems in the nation. One major stock market correction and that fund will be effectively insolvent.
Those findings only confirm what Dick Ingram, head of the TRS, said in February: Without reforms, TRS may be insolvent by 2029.
Unfortunately, all this pressure hasn’t been enough to motivate Illinois legislators to protect state retirees, taxpayers, and the state’s fragile finances.
No new taxes
Moody’s sees a substantial “risk of outcomes other than successful pension reform.” The urgency for reform grows as Illinois’ 2011 temporary tax increase is set to partially unwind in January of 2015, meaning the state will have less revenues going forward.
But that shouldn’t be read as a need for making the 2011 tax hike permanent. More money in the state’s coffers will only delay pension reform and allow politicians to spend more taxpayer money. Themassive failure of the 2011 tax hike should provide sufficient proof.
That tax hike failed to put Illinois on sound fiscal footing. It stalled all reforms and failed to restore confidence in government’s ability to meet serious challenges head on. It failed to strengthen the state’s economy. And the state failed to pay down its massive backlog of unpaid bills.
The only true solution for Illinois is serious pension reform.
The latest reform proposal
A new pension reform proposal by state Rep. Elaine Nekritz, D-Northbrook, and Daniel Biss, D-Evanston, falls far short of giving Illinois’ public sector employees and taxpayers what they deserve – financial security and a prosperous state. And it ignores just how serious the pension crisis has become.
Their proposal maintains the same defined-benefit system that the Legislature has controlled and abused for decades. It throws more money into a failed system. And it fails to fully take on the reforms needed to dramatically reduce the unfunded liability. Their proposal will just perpetuate the crisis.
Instead, Illinois needs reforms based on a defined-contribution system that puts individual workers in charge of their retirements. A defined-contribution system will finally plug the hole and get the politicians out of the pension business.
Illinois has the worst pension system in the nation. That means it needs the boldest reforms in the nation. It’s time to stop fiddling.