The Purpose of Government is not Government Employees

As politicians of both parties struggle with the seemingly unending negotiations on pensions they are ignoring the biggest overwhelming problem with government in Illinois i.e. the ever increasing cost of public employee compensation.

In other words it not just pensions. It’s salaries and insurance cost (health care, life, vision, dental), vacations, holidays, retirement age, sick leave and on and on. The concentration of effort on public employees’ compensation elements is perhaps best illustrated by the more than 700 pension modifications introduced to the legislature in the last 8 years. That’ more than one pension mod for every day the legislators were in session over that period. In other words it’s all about public employeesall the time.

And all the while this inordinate attention goes to the public employees the people who really need the help of the state continue to have their programs cut back. The elderly, the handicapped, the poor and the hungry are squeezed while the $33,000/mo. pension checks go out and the state employees continue to pay zero for one of the best health care programs in the country. More evidence of government for government workers: State retirees pay less income tax on their $400,000 pension (zero, zip, nada) than the part-time private sector employee does on $10,000/yr. in wages ($350).

Projecting current trends shows state employee costs growing from 27% of budget in 2008 to 66% in 2045.

In order to visualize what will happen if nothing is changed I have created a chart projecting the state costs out to 2045. I chose 2045 because that is the final year of the 50 year pension funding law passed in 1995. At that point all five state pension systems supposedly will be at the 90% funding level.

The assumptions used in this chart are as follows:

  1. State revenue increases by an average of 3% per year.
    Personally I don’t see how Illinois can achieve that rate considering the competition from adjoining states with lower tax rates, bond indebtedness, unfunded pensions and regulatory burdens. In other words who in their right mind would move their business to IL or start a new one if they had a choice to do it in WI, IN or KY? And if no one expands or moves here how do we grow by 3%?
  2. Pension costs increase out to 2045 according to 2011 Actuarial Reports.
    And remember these pension cost projections are “best case” since they assume an average 8% return on investments. My guess is they will be much higher than what is projected here.
  3. State health care costs grow by 7.5% per year.
    The consulting firm Price, Waterhouse just completed a cost analysis for 2013 and came up with 7.5% and that was before ObamaCare passed muster with the Supreme Court. If you include all of the new costs in OC then this rate is probably at the low end.
  4. Salaries from Actuarial Report projections out to 2045.
    These may actually be high in outer years if you assume head-count reductions and salary restraint due to cost restraints. However this is all we have to go on at this point.

NOTE: Numbers for 2008 -2011 are actual costs.

Notice how fast costs ramp up: from 27% of budget in 2008 to 40% in 2014. Even the 40% rate is unsustainable long term.

A government of the public employees, by the public employees and for the public employees is neither feasible nor desirable.

This chart shows what happens when public employee contributions drive public policy by funding politicians’ campaigns. See political contributions by teachers union here. Public sector unions give politicians $10’s of millions in political contributions and politicians give public employees $10’s of billions in pensions and other benefits in return.

While taxes continue to increase public services continue to be cut back meaning taxpayers are receiving back as public services a smaller and smaller share of the taxes paid while public employees are receiving a larger and larger share via various forms of compensation.

Should we have to pay $11 Billion/yr. for people who don’t work anymore?

This chart shows the cost of pensions and retiree health care from 2009 to 2015. It is made up of scheduled pension payments, Pension Obligation Bond payments and the health care subsidies for retirees only. The red squares in 2014 and 2015 show the increase in payments required under the new GASB rules just released in June.

Notice the costs more than double in just 5 years. This chart shows conclusively that we cannot pay these bills and “D” day is coming in just a couple of years.

We need more reform than the politicians in Springfield are proposing.

As Springfield dithers the problem of retiree costs threatens to overwhelm the state’s budget and the state’s economy. We need all employees on 401K’s and we need all health care recipients to pick up a big proportion of their health care cost.

If it takes a law suit to settle the legality of 401K’s for current employees then let’s get it started so we can put the issue to rest before IL’seconomic death spiral drives 1,000’s of taxpayers to other states.Illinois looks a lot like Detroit did 10 years ago with public unions in control, taxes going up and middle class people leaving in droves.

Big changes need to be made now because in 10 years it will be too late. No one will be left to pick up the tab.