To wrap your brain around Illinois’ complicated, worst-in-the-nation public pension conundrum, it helps to consider the parable of the leaky roof.
At first, it may cost a little to fix. But ignoring the problem by simply shuffling around pots and pans to catch the drips only invites an expensive gusher of a home repair down the road.
That is where state government, Chicago’s City Hall and some suburbs find themselves today, reeling from the very real consequences of decades of deferred financial maintenance on their retirement systems.
Displaying a chronic lack of leadership that spans both Democratic and Republican control, elected officials committed to a costly array of retirement promises for government workers but failed to set aside anything close to adequate money to pay for them.
The how-we-got-here part of the story has resulted in furious finger-pointing among politicians and employee unions as the issue has come to dominate public policy debate in Illinois. Rhetoric aside, there’s a reason average folks should care: Not only are taxpayers on the hook for the tens of billions of dollars, but the enormous pressure to put more toward retirement costs is leaving less money to spend on stuff voters tend to favor, including education.
Furthermore, credit-rating agencies are portraying Illinois as a financial basket case, which threatens to send borrowing costs through that leaky roof, and governments are feverishly struggling to play catch-up on pension funding.
Lawmakers return to Springfield this week, and Democratic Gov. Pat Quinn wants them to spring into emergency mode on pension reform, though there’s no clear consensus on how to accomplish that, what sacrifices will be demanded and from whom. The House and Senate couldn’t even agree on when to meet with just days left until new lawmakers are sworn in and the reset button is hit at the Capitol.
What’s more, sweeping pension protections built into the 1970 Illinois Constitution all but guarantee that the fate of any hard-won agreement — if indeed any is won at all — will be thrown into question by legal challenges.
“You have to win twice,” said Eric Madiar, chief legal counsel to Illinois Senate President John Cullerton. “First in the Legislature, and then in court.”
All of which leads pension expert Ralph Martire to warn that acting in haste to address a crisis fraught with mind-bending fiscal, legal and political complexity only risks making things worse.
“The problem with the pension reform legislation is it’s a lot of ‘ready, fire, aim,'” warned Martire, executive director of the Chicago-based Center for Tax and Budget Accountability. “It’s a long-term problem that’s not going to be solved overnight.”
Crying wolf?
Illinois has skated on the edge of pension crisis for a century, and the loud chorus of anxiety now being sung across the state suggests the mother of all such crises may be nigh.
Consider this: In 1902, the Chicago teachers pension fund was close to bankrupt and shorting promised payouts to retirees by more than half. In 1919, a state commission pronounced most public employee pension funds insolvent or nearly so. In 1949, tens of thousands of public workers in Chicago and Cook County were told the funds that financed their pensions were in danger of running dry.
The difference today is that the debt is larger than it’s ever been. Since 1970, the last time the state’s pension system was this underfunded, percentagewise, there’s been a fivefold increase in unfunded liabilities, adjusted for inflation.
The sense of urgency is that pension fund demands now are threatening to crowd out money available for children, public safety and an array of other public services.
Money for pre-kindergarten programs has been cut, eliminating early-learning slots for 22,000 children. A like number of college-age students have lost state tuition grants. Funding to bolster low-performing schools has been cut by two-thirds, and after-school programs for teens have lost more than half their state funding.
For the state alone, the pension bill that now stands at more than $5 billion in the current budget will jump about $1 billion next year and in a few more years is projected to command nearly 1 of every 5 dollars in the main checking account of Illinois government.
Soon, the state’s annual pension bill is expected to exceed the amount it spends on schools.
In sum, the red ink at state-run pension systems for teachers, university workers, rank-and-file employees and elected officials stands at $96.8 billion and counting — nearly three times what Illinois sets aside each year for the day-to-day costs of government.
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“This is coming to a very, very serious moment,” Republican state Treasurer Dan Rutherford said.
And that tab doesn’t include billions more in deficits amassed by separate pension systems covering public workers in Chicago (about $27 billion for City Hall and public schools), Cook County ($5.8 billion) and the police and fire pension funds in some suburban and Downstate communities ($7.5 billion).
How we got here
There are so many layers to the problem that it defies easy explanation or solution. Some of it is demographic in nature and parallels the vexing controversy at the federal level over Social Security. Baby boomers are retiring in ever-larger numbers, and there are simply not enough younger workers paying into that retirement system to make up the slack.
Just as with Social Security beneficiaries, Illinois pensioners are living longer and therefore collecting checks longer, even as government pares the number of workers now on the payroll. The power of compounded cost-of-living adjustments increases the size of those checks. All of which is good for retirees and their loved ones but tough on the bottom line of retirement funds.
Pension systems in Illinois also still are reeling from the Great Recession, which to varying degrees wiped out a big slice of their assets.
But at its core, today’s pension crisis is a testament to the pitfalls of yesterday’s political expediency. It was long standard operating procedure for mayors and governors to divert money that would have underpinned the long-term financial viability of pension funds to other, more immediate and voter-friendly needs.
In addition, some union leaders went along with pension sweeteners that politicians doled out despite questions about whether there would ever be enough money to pay for them.
“If you’re a politician and you want to get re-elected, making sure that the public pension plan is funded on a sound actuarial basis is pretty low on the list,” explained Amy Monahan, an expert on state pension laws at the University of Minnesota. “It doesn’t pay dividends until decades in the future.”
For years, during the Richard M. Daley administration, Chicago Public Schools paid little or nothing into the pension account for city teachers, letting a once-financially healthy fund descend into unsoundness.
Republicans in Springfield played their part as well. Before he was elected governor in 1990, Jim Edgar served as Gov. James Thompson’s legislative lobbyist. Edgar recalls that the Thompson administration rationed spending on pensions so that scarce state resources could be put toward more pressing and voter-pleasing needs.
“The state was trying to pay for all these services people wanted on the cheap,” Edgar said. “Where they skimped was putting money into the retirement system.”
When Edgar succeeded Thompson, he set in motion a long-term strategy to pay down the pension debt by requiring the state to ramp up ever-larger annual financial commitments over a 50-year period. Critics noted the plan put off the pain of much higher payments until later years.
The boom of the late ’90s stock market helped reduce the pension shortfall. But an economic downturn and management missteps by Edgar’s successors, in particular the now-imprisoned Rod Blagojevich, made the payment ramp all the steeper. State pension funds actually are in worse financial shape today than they were when Edgar set out to fix them.
Today’s landscape
The pension debate is coming to a head as public workers and unions increasingly find themselves on the defensive, battling attempts from the political right and even some prominent Democrats to portray them as pampered at the taxpayer’s expense.
But Edgar, a Republican, has emerged from the sidelines as a prominent voice warning against attempts to scapegoat government workers, who he points out have paid their share of pension obligations through payroll deductions even as elected officials have not set aside government’s share.
What’s more, he said, the vast majority of such retirees live on modest pension incomes, despite occasional disclosures about a handful who have gamed the system. And most public pensioners, including teachers, don’t qualify for Social Security, leaving the pension as their sole source of retirement income.
“I just wish some of the zealots would not try to make out state workers as the bad guys in all this, because they’re not,” Edgar said. “They did their job and paid their money. It was the elected officials for a long, long period of time, who didn’t.”
Illinois, a firmly Democratic state, is traditionally union-friendly territory. Yet Democratic leaders like Quinn and Mayor Rahm Emanuel have been leading the charge for union concessions, in particular focusing on the yardstick that most pension systems use to insulate retiree benefits from the effects of inflation.
Union leaders recently indicated a willingness to have members chip in more each paycheck to help safeguard the viability of their pensions. But unions say that has to be part of a broader package of reforms that also demands sacrifice from the business community through the closing of tax loopholes and includes a guarantee that government will step up and pay what’s needed to keep systems adequately funded.
Anders Lindall, spokesman for one of the state’s largest government workers unions, made it clear that organized labor considers any attempt to roll back benefits without receiving “valuable consideration” in return would be viewed as an unfair nonstarter sure to trigger a legal challenge.
“We are prepared to go to court if there’s something that we believe is clearly unconstitutional,” said Lindall, of the American Federation of State, County and Municipal Employees Council 31. “And we also think that, again, the principles of contract law mean that employees and retirees and their unions as their legal representatives, their legally recognized collective bargaining representatives, have to agree to any modifications in that contract.”
That is hardly a threat to be taken lightly. Few states have enshrined pension protections in their constitutions quite as emphatically as Illinois.
The charter’s so-called pension clause — which states that pensions cannot “be diminished or impaired” — was written at a time when the financial condition of many retirement systems in Illinois was nearly as bad as now. The difference back then was that courts in Illinois considered pensions a “gratuity” that could be reduced in a financial pinch, and actually had been in other states with similar legal standards.
The pension language was added to the constitution to address state workers’ fears about benefit cuts, records of the 1970 Constitutional Convention show. The clause was copied almost verbatim from the state constitution of New York.
That, however, is where the similarity ends. Officials in that state backed up their pension promises over the years with adequate funding, and public retirement systems in New York generally are in healthy shape.
As lawmakers here struggle to agree on how to shore up the state’s pension systems, many experts think that the Illinois Constitution gives a strong legal hand to those who oppose benefit rollbacks. Courts have interpreted the pension clause as protecting benefits but not the funding needed to pay for those benefits, explained Monahan, the University of Minnesota expert.
“Illinois rulings are pretty favorable to employees,” she said. “There are strong protections for retirement benefits. There’s just not a lot of wiggle room in Illinois.”
That’s why Cook County Commissioner Bridget Gainer suggests that elected officials are better off reaching consensus with union leaders before a plan is approved.
“The more there’s give-and-take, the better off you are, because I guarantee you this is going to come before a judge,” said Gainer, who heads a county pension committee.
“Any single person can sue” if they don’t like changes to the pension systems, she added. “It doesn’t matter if 99.9 percent of them agree. … You can’t agree yourself out of a lawsuit.”
Tribune reporter Jason Grotto contributed.
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