Pension reform: Who you gonna believe Madigan or Moodys?

Endorsed by Jack Roeser, Family Taxpayers Foundation

Illinois is all-abuzz about the most recent “so-called” Pension reform coming from the King of Springfield, Michael Madigan. Basically Madigan is addressing an issue that probably doesn’t exist: a $95 billion unfunded pension liability. That is because Moodys says it is $230 billion and if Moodys is right then Madigan has not only not solved the problem but has actually made it worse.

Highlights of Madigan’s proposal.
There are 14 major points in Madigan’s proposal but only the following five are important to this discussion.

  1. Limits annual COLA’s to a fixed dollar amount of about $900/yr. with no compounding. That is based upon a 3% COLA on the first $30,000 of pension. Although this is an improvement long term because of annual compounding the near term benefit to taxpayers is limited. Currently the cost of COLAs is about $240 billion per year and this new proposal would cut that to about $180 million, a paltry $60 million savings on a pension outflow of about $8 billion/yr. Sounds like more kick-the-can-down-the-road to me.
  2. Provides for pensionable salary cap of $109,000/yr. which means a maximum starting pension of about $82,000/yr. Employee contributions would be limited to that salary amount also.
  3. Increases retirement age by 1 year for those 40-44 years of age, 3 years for those aged 35-39 and five years for those under age 35. Note that even young workers would still retire at least 7 years before those retiring on Social Security normal retirement age of 67.
  4. Provides for a 2% employee contribution increase. This miniscule increase would leave Illinois employees far below those of Ohio teachers who will be contributing 14% starting next fiscal year.
  5. Provides a funding guarantee for state contributions. This provision eliminates the only real bargaining chip taxpayers have to offset the constitutional pension guarantee. This is a BAD BAD BAD BAD idea whose time should never come.

Madigans three big problems.
Madigan’s proposal does very little to address the long term problems of the state pension systems because it ignores three basic realities.

  1. It maintains a DB (Defined Benefit) Plan instead of implementing a new DC (Defined Contribution Plan) such as a 401K.
    Everyone in the world outside of Illinois (and maybe California) knows that DB plans cannot be paid for over the long term. The ROI required to make the math work is most assuredly unattainable. 401K plans limit retirement costs to the current year and forces states and other governmental units to fund current benefits with current costs. What DB plans do is pass the current generations costs onto the next (and the next) generation.
  2. It ignores completely the unlikely possibility that the state pensions will be able to generate investment returns of 8% per year for the next 30 years.
    This is where Moodys and Madigan really disagree. Moodys says you should expect an investment return of 4.3% not 8% and that pension bonds are really just another pension liability.  When Moodys does the math they come up with an unfunded pension liability of about $230 billion not $95 billion.
  3. It guarantees pension funding that is currently not guaranteed by the constitution.
    So Mr. Madigan, how does your reform plan work if you are wrong and Moodys is right? What Madigan does if Moodys is right is raise taxes by $135 billion plus interest via the state funding guarantee. Wonder why he doesn’t talk about that part of his plan? By Moodys reckoning IL 2015 pension payment should be $15 billion, more than 40% of the state’s general fund budget.

Guaranteeing funding would be the worst political decision ever in IL history.
It is hard for me to explain how bad this might be. If the ROI going forward is closer to Moody than Madigan taxes will go up to pay for the pensions and other services of the state would be cut even more than they are now. We are talking potentially $100’s of billions of dollars in new taxes and service cuts. We are talking 30, 40 or even 50% of state general fund budget going to pay people who don’t work anymore. The 95% who are not members of the state pension system are going to have their pockets picked by the 5% who are members.
The exodus from Illinois will accelerate if guaranteed funding becomes the law.
People are already leaving Illinois and Chicago at a record pace. Who in their right mind would move here knowing that the potential taxpayer liabilities for pensions could be $100’s of billions more than what politicians claim? Would you build a new factory here with it’s outrageous property taxes already in place and now potentially billions more going forward if Madigan is wrong and Moodys is right? If you are a Fortune 500 company are you going to believe Moodys or Madigan when making a decision whether to move operations to Illinois?

Chicago taxpayers have it the worst. They have to pay taxes for the Chicago Teachers Pension, the Teachers Retirement System, the Police & Fire pensions, the Municipal Employees Annuity and Benefit Fund, the Laborers Annuity and Benefit Fund, the Forest preserve pension fund and the Cook County pension Fund each and every one of which is underfunded just like the state funds. How much do you think their taxes will go up? Mayor Daley said property taxes would go up 50% if pensions were not controlled and I think he was wrong – Chicago property taxes will go up by at least 100% over the next 10 years just to fund guaranteed pensions.
Politicians want to pass a law, any law, call it “pension  reform” and go home.
The pols are tired, they are worn out, they need relief of some sort and what safer way to see relief than to agree with Mike Madigan. They must know this is probably not going to work and they will be right back at “reform” again in a few years but so what. That won’t happen until after the next election in 2014. Of course reforming the “reform” will be much more difficult next time. But who cares.
As for Mike Madigan, getting “pension reform” passed with the Madigan name on it all but assures the election of his daughter Lisa as Governor in 2014. The dynasty will continue perhaps another 40 years.
But be careful what you wish for as the following cartoon depicts with wicked humor.