Illinois’ New Class-Based Pension Math

This article, authored by CPEG’s Ron Baiman, originally appeared on the Dollars and Sense; Real World Economics blog in December 2013.

Having boxed themselves into a political dead-end by adopting the austerity agenda of the business community as represented by the Illinois “Civic Federation,” Democratic House Speaker Michael Madigan and Illinois and Democratic Governor Pat Quinn on Tuesday, Dec. 3, rammed through a state Pension cutting bill that would reportedly reduce the state’s $ 100 B unfunded pension liability by $160 B. The Democratic President of the Senate, John Cullerton (a supporter of a Senate bill negotiated with the unions that would have cut less and given workers a choice of options), voted for the House bill, but warned it had “serious constitutional problems” and was reportedly silent during the debate, not present when the final deal was announced and a no-show at an earlier meeting attended by the three other legislative leaders. As is documented below, Cullerton’s concerns are well-founded as this bill presumes that $160 B of pension liability reductions are somehow equivalent to a roughly $26 B cut in the value of pension contributions from state workers.

CPEG and others have repeatedly pointed out that Illinois has a revenue, not a pension problem (the average Illinois state pension in 2011 was $ 27,000 comparable for a wealthy state to the $23,000 average among the states). We have offered numerous equitable and politically popular proposals to raise additional revenue including a Financial Speculation Tax and closing egregious business tax breaks. It is laughable to hear Speaker Madigan (a man of untold wealth who exemplifies Illinois’ utterly corrupted “pay for play” political “democracy,” talk of the Illinois pension system being “too rich”.

Because “pensions” have been defined as the state’s premier political problem, with Democratic election prospects riding on achieving some kind of pre-election “solution,” the Legislature passed this farcical bill. Illinois’ pension legislation is sadly based on a legal fiction that allows wiggle room for “consideration” under which the state will unilaterally renege on $ 160 B that it owes despite the clarity of the state’s constitution that declares Illinois’ pension system is “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired” (the $ 160 B is an actuarial estimate of the present value of the pension liability savings summed over the next 33 years – see CPEG power point link op. cit.). The legislation reduces the required employee pension contribution to the pension systems by roughly $24 B and in return reduces state pension system liabilities by $160 B (a similar estimate of the present value of a 1% reduction in pension contribution out of state payroll over the next 33 years, based on Illinois Commission on Government Forecasting and Accountability (CGFA) future state payroll estimates and a 5% real return on investment had these funds been invested in the pensions systems over the next 33 years – i.e. an “apples to apples” comparison roughly using the assumptions behind the $ 160 B pension cuts estimate above – for CGFA data see Appendix G of this document.

Some legal theory! I’ll give you $24 B and in return you give me $ 184 B (the difference being the estimated $ 160 B in reduced state pension liability) and we’ll call this unilateral $ 160 B theft from state workers a “consideration” that somehow satisfies the original contract. I’d like to see this kind of legal “argument” prevail when it comes to state borrowing from bond holders! We the state of Illinois will give you the bond holders $24 B, in return you the bond holders give us $ 184 B, and we’ll call it a deal! You don’t agree? Too bad. This is a new kind of “consideration contract” to which only one party has to agree. To our class-based “political debate” and class-based “justice”, we can now add class-based “math”!

Image: FreeDigitalPhotos.net

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