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Can Gov. Rauner Put Illinois Pension Funds in the Black?
If any one state stands out in the race to the bottom of public employee pension insolvency, Illinois would be it. And the new GOP governor, Bruce Rauner, is determined not to allow collapse to happen. Rauner, a former private equity fund manager, was elected last November over Democratic incumbent Pat Quinn. He faces an estimated $111 billion in unfunded pension liabilities, almost $10,000 for every resident. The years of greed, ineptitude, corruption and bad luck, having taken their toll, the governor and his top fiscal policy adviser, Donna Arduin, have proposed tough measures to reverse course.
So far, they haven’t won too many friends among the state’s powerful public-sector unions. And they have an uphill battle convincing the Illinois Supreme Court, which this May 8 sided with the unions in invalidating Quinn-backed reforms enacted in late 2013.
Many recent studies have shown that state-sponsored pension systems are facing a solvency crisis, even given the recovery of the stock market since the 2008 crash. Among the most telling is one published last June by Standard & Poor’s. Based on their assumptions, the authors estimated that state mean and median asset-to-liability ratios overall in 2012, respectively, were 71 percent and 66 percent. This is underfunding close to a crisis situation. And the trend during 2009-12 was one of steady decline. Granted, some states are well-prepared. The five highest-ranking states – Wisconsin, North Carolina, Washington (State), South Dakota and Oregon – each had funding ratios above 90 percent. But the five lowest-ranking states — Illinois, Connecticut, Kentucky, Alaska and Louisiana – were funded at well below 60 percent in 2012. Illinois had the distinction of having the worst-funded state system in the country at 40.4 percent. Illinoisans at least can take heart: Puerto Rico’s asset-to-liability ratio was 8.4 percent – beyond the pale of hope, especially given its $70 billion or more in outstanding high-risk public debt.
During 2009-12, noted the Standard & Poor’s report, government contributions, employee contributions and (especially) earnings on investments each increased. By definition, then, the increase in underfunding was the result of liabilities accumulating at an even faster rate. And public-sector unions are the driving force behind these obligations. State governments, fearful of strikes and the political consequences of being blamed for them, all too often have accommodated union demands, as they have in the areas of wages and salaries, health care plans and other expenditures. At the same time, there are countervailing forces that limit union bargaining power. State constitutions in varying ways limit spending and borrowing capacity. The 2008 crash and resulting recession have made investors wary of tying pensions too closely to the stock market, especially in industries subject to high price volatility. Moreover, the ratio of current contributors to beneficiaries in state pension plans is falling, a consequence of growing life expectancy and a tendency toward early retirement. In 2012, according to the U.S. Census Bureau, the contributor-to-beneficiary ratio was only 1.7 to 1, down from 3 to 1 in 1992. State budgets have become hostage to unsustainable, and legally enforceable, pension agreements extending decades into the future.
Elected officials and pension fund managers, even those sympathetic to public-sector unions, know this. That’s why pension reform is now a “hot” issue across the country. The Standard & Poor’s report noted:
According to the National Conference of State Legislatures (NCSL), between 2009 and 2014, all 50 states and Puerto Rico enacted some type of pension reform. According to NCSL’s pension legislation database, 45 states, Washington, D.C. and Puerto Rico introduced pension legislation and approximately 1,223 bills so far in 2014; this compares with approximately 1,433 bills for the 50 states, D.C., and Puerto Rico in 2013. Of the retirement system bills introduced this year [2014], 40 states, D.C. and Puerto Rico have enacted more than 239 bills with some state legislatures still evaluating some of the proposed bills. Although the actual number of bills introduced is not as important as the measures included in the enacted bills, the number of bills introduced reflects legislators’ willingness to address pension issues.
The reform measures include any number of strategies. Among the most prominent are: restriction of benefit levels for future employees; increased age and service requirements; restriction of cost-of-living adjustments; increased employee and/or employer contributions; and switching from traditional defined-benefit plans to hybrid defined-benefit/defined-contribution plans. Even one of these initiatives can invite intense union opposition.
National Legal and Policy Center in December 2013 covered this issue as it applied to Rhode Island. The legislature, at the recommendation of then-Governor Lincoln Chafee and especially Treasurer Gina Raimondo, back in 2011 overwhelmingly had passed legislation to raise the minimum retirement age for state employees, suspend annual cost-of-living increases, and replace the defined-benefit system with a defined-benefit/defined-contribution hybrid that would require employers and employees sharing the load of contributions. The projected cost-savings: $4 billion over 20 years. The unions responded by hiring a private investigator to discredit the law. The eventual report accused Raimondo, a former venture capital manager, of benefiting from conflicts of interest. What the report did not do, as could have been predicted, is address the central role of unions in driving state and local governments down the road to fiscal disaster. Raimondo, who declared herself Democratic candidate for governor that December, was elected the following November in a close three-way race.
Public-employee unions, meanwhile, are suing their respective states to block reform. In Rhode Island, nine public-sector unions went to state court to overturn the 2011 pension reform law on constitutional grounds. This past April 2, six of the unions, representing virtually all of the nearly 60,000 affected active and retired employees, and the state announced a settlement. The agreement would provide flexibility to the minimum retirement age, more possibilities for cost-of-living increases, and an increase in the range of defined-benefit pensions available to longtime public employees. Governor Raimondo insists “the state had a very strong case,” but concedes that “to take the litigation risk off of the table is the right thing to do.” As of this writing, the settlement awaits approval by the Rhode Island General Assembly.
Other states, torn between prior pension commitments and current operating budget shortfalls, also have been embroiled in court battles. In New Jersey, the State Supreme Court this April agreed to hear case brought by several unions challenging the Christie administration’s decision to scale back payments, as negotiated back in 2011. A Superior Court Judge ruled in February that the state had to make the payments, however difficult coming up with the money might be. Republican Gov. Chris Christie and the nonpartisan Office of Legislative Services argue that coming up with the restored funding is next to impossible. The governor’s fiscal year 2016 budget calls for $1.3 billion in pension payments, less than half of the roughly $3 billion required by the 2011 agreement. In Florida, meanwhile, the State Supreme Court, by a 4-3 margin, in January 2013 upheld a 2011 law allowing the government to retain a 3 percent levy on worker salaries to offset state contributions to the retirement system. A ruling in favor of the union plaintiff, the Florida Education Association, would have created a budget hole as much as $2 billion. The decision overturned a lower court ruling holding the law to be an unconstitutional violation of employee contractual rights.
Then there is Illinois. There are some good reasons why its pension system is only 40 percent funded, the least solvent among all 50 states. This represents a current estimated long-term deficit of $111 billion, up from $20 billion in 1994. For one thing, union negotiations have produced lavish compensation packages. More than 11,000 retired employees in the state now collect more than $100,000 annually. State officials would like to close the pension gap by cutting benefits, but the state constitution is very specific that this can’t be done for active plan participants. Second, and not unrelated, the pension system has known its share of corruption. About a decade ago, a board member of the Illinois Teachers Retirement System, Stuart Levine, was indicted on various corruption charges, having allegedly conspired with several persons including real estate developer Tony Rezko, a top fundraiser for Governor Rod Blagojevich (and Barack Obama, when the latter was laying the groundwork for his successful 2008 presidential campaign), to obtain control over lucrative union-sponsored contracts. Levine pleaded guilty in October 2006 to mail fraud and money-laundering. Later, in 2013, the Securities and Exchange Commission issued a cease-and-desist order to the State of Illinois for failing to disclose the effect of its unfunded pension systems on its ability to manage other spending obligations. The State settled with the SEC in March of that year.
The Chicago city pension system also has been corrupt. In 2011, a top official of International Brotherhood of Electrical Workers Local 134, Tim Foley, stepped down from his post following revelations that he and many other local members had been “double-dipping,” simultaneously collecting a union and City pension in violation of state law.
Source: http://nlpc.org/stories/2015/06/01/can-gov-rauner-put-illinois-pension-funds-black
