Anyone following the pension reform debate knows that Illinois has long diverted the moneys needed to properly fund its pension systems to avoid tax increases, cuts in public services or both. Some may not admit it, but they know it. They also know this practice is the primary reason why the systems are underwater.
Since much of my time over the last three years has been spent on our State’s pension problem, I wanted to find out how long it’s been that way and how long we have known about it. Well, as chronicled in an article I wrote now published by Chicago-Kent College of Law, I have an answer.
1917. No, that’s not a typo.
In 1917, the Illinois Pension Laws Commission warned State leaders in a report that the retirement systems were nearing “insolvency” and “moving toward crisis” because of the State’s failure to properly fund the systems. This nearly century old report also recommended action so that the pension obligations of that generation would not be passed on to future generations.
The 1917 report’s warning and funding recommendation went unheeded, as were similar warnings and funding recommendations found in decades of public pension reports issued before and after the Pension Clause was added to the Illinois Constitution in 1970.
These reports have consistently warned the public and lawmakers for decades of the dire consequences of the State’s continued underfunding, and of the significant burden that unfunded pension liabilities posed for taxpayers. They have also been advised that the Pension Clause bars the legislature from unilaterally cutting pension benefits of retirees and current employees.
Indeed, one of the Clause’s purposes is to prevent the State from reneging on its pension obligations during a fiscal crisis due to the burden imposed by the State’s unfunded liabilities. The Clause was added at a time when the pension systems were no better than they are today.
These reports also reveal that, as early as 1979, Moody’s and Standard and Poor’s advised the State that it would lose its AAA bond rating if the State did not begin tackling its increasing unfunded pension liabilities. Also, in 1982, Governor Jim Thompson succeeded in passing legislation making pension funding far more dependent upon stock market returns to stave off higher State pension contributions. Interestingly, that legislation resulted from a report commissioned by Governor Thompson, which highlighted how the pension systems should consider investing in mortgage-backed securities to obtain higher stock market returns.
Further, a 1985 task force report noted that Standard and Poor’s reduced its bond rating for Illinois from AAA to AA+ due to the State’s “deferral of pension obligations,” and that another rating agency viewed the State’s pension funding as a future financial “time bomb.” Finally, the much heralded 1995 pension funding plan was designed to increase the State’s unfunded liabilities and postpone the State’s actuarially-sound pension contributions until 2034.
Given this well-documented history, it’s extremely hard to legitimately believe that our State’s current situation is so surprising that the Illinois Constitution can be ignored and pension benefits unilaterally cut. As noted in my previous legal research, the Pension Clause does not support such a result.
The likelihood of that result occurring seems even more remote given the Illinois Supreme Court’s July decision. In that decision, the court explained that the Clause was intended to “insulate” benefits from “diminishment or impairment by the General Assembly”, and that the court could not rewrite the Clause “to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve.”
Make no mistake about it, the court’s July decision strongly signals doom for the argument that the 2013 pension reform bill is constitutional because the legislature can trump the Pension Clause when it declares a fiscal necessity. So too does the State’s sordid history of failing to properly fund the State’s pension system.
When it comes to Illinois’ pension funding problem “what’s past is prologue.” Addressing this problem, however, requires the acceptance of this history as well as the obligations and boundaries imposed by the Pension Clause.
- Soccermom - Friday, Sep 26, 14 @ 10:46 am:
I am such an admirer of Madiar. I may start writing fanfic. “Eric Madiar: Warrior Against Pension Reform. And Voldemort.”
- Frenchie Mendoza - Friday, Sep 26, 14 @ 10:48 am:
Given this context — a great article I read earlier this morning — how can Rauner run on the idea of transferring current employees to a 401K? I see no one challenging Rauner’s position here — and I even heard him mention that while police and firefighters might remain on pensions, their benefits would likely be cut.
For a state worker 45 or 50 years old, a 401K plan won’t do much good — and will, in fact, be a significant, significant impairment.
My guess is that Rauner might offer a choice — salary cut by 30% and pension plan or full salary and 401K — a terrible, terrible forced choice.
- Formerly Known As... - Friday, Sep 26, 14 @ 10:49 am:
Was he saying this during the debate over the pension reform legislation? I assume so…
- walker - Friday, Sep 26, 14 @ 10:59 am:
On the fast track to “insolvency” since 1917!
- Angel's Sword - Friday, Sep 26, 14 @ 11:00 am:
==“Eric Madiar: Warrior Against Pension Reform. And Voldemort.”==
I would… like to read that.
- Secret Square - Friday, Sep 26, 14 @ 11:01 am:
If the pension funds were already nearing insolvency in 1917, how on earth did the State survive this long? What happened to the pension funds during the Depression — I would think if the pension “time bomb” were ever going to explode, it would have happened then. If we can “kick the can down the road” for 100 years, why all of a sudden can we NOT do so now?
- Cassiopeia - Friday, Sep 26, 14 @ 11:01 am:
Truth and honesty from a political insider is so rare that we often speculate if there is a hidden plan.
In this case though it is just plainly intellectual honesty.
- Formerly Known As... - Friday, Sep 26, 14 @ 11:02 am:
I agree with Mr. Manar. But this raises a few more questions than answers
If the Senate Dems legal counsel was telling them this legislation was likely unconstitutional at the time, why did they pass it anyhow?
It sure would have helped to hear something other than “No comment” from the Attorney General during the pension legislation discussion. She recused herself from the pension discussions but not, for example, the NRI investigation? Her voice, along with Mr. Manar’s, could have made a difference.
How crazy is it that our politicians have been ignoring these warnings since 1917?
Thank you, Mr. Manar, for speaking up and helping draw attention to this looming problem before the Supremes overturn this law.
- Formerly Known As... - Friday, Sep 26, 14 @ 11:02 am:
I mean thank you Mr. Madiar lol
- Anonymous - Friday, Sep 26, 14 @ 11:06 am:
Remember that IMRF which is not allowed to skip payments or skim from is funded at over 80%. A recent figure I saw indicated that if no money had been “borrowed” (stolen) from the TRS fund, it would currently be funded at 94%.
- RNUG - Friday, Sep 26, 14 @ 11:07 am:
- Formerly Known As… - Friday, Sep 26, 14 @ 11:02 am:
It’s all about who gets the blame. The GA passed it because the legal solution, raise taxes to pay the pension funds, was not politically palatable. Now that it appears the SIC will close that door, the unthinkable becomes possible because someone else made the GA raise taxes.
- RNUG - Friday, Sep 26, 14 @ 11:07 am:
ISC … good thing Rich doesn’t deduct for typos
- Anonymous - Friday, Sep 26, 14 @ 11:10 am:
“on the fast track to insolvency”
Yes. The other half of contributors scammed the funds. Workers never have. Workers shouldn’t be punished.
- northshore cynic - Friday, Sep 26, 14 @ 11:10 am:
I thought Rauner’s solution to the pension problem was that he and other members of the wine club would make up the unfunded liability for state pensions.
- PublicServant - Friday, Sep 26, 14 @ 11:10 am:
I tried to call Ty to get his opinion on this, but he was calling Judge Garman for some reason. I guess I’ll chat with him later.
- Wensicia - Friday, Sep 26, 14 @ 11:10 am:
==If the Senate Dems legal counsel was telling them this legislation was likely unconstitutional at the time, why did they pass it anyhow?==
Because they wanted to be seen as passing something, anything on pension reform. Madigan knew it was more than likely unconstitutional.
- Grandson of Man - Friday, Sep 26, 14 @ 11:12 am:
Thanks Rich for posting about the depth of the pension problem.
Frenchie Mendoza, the Rauner campaign boasts about how well GTCR did for public employee pensions, and now that Rauner is running for governor, he wants to make drastic cuts?
This shows Rauner’s character–telling people one one hand that he successfully enriched government employees and on the other calling them overcompensated and wanting them to take large cuts.
- Anonymous - Friday, Sep 26, 14 @ 11:14 am:
Pension legislation was passed because the momentum to do something, anything was there and the momentum painting workers as the cause of this problem was also there. As the public has become more aware of the facts and the realization that this problem lies squarely with our elected, they can now claim victimhood. The ISC just wouldn’t cooperated with their efforts to save us all.
- ZC - Friday, Sep 26, 14 @ 11:21 am:
Basically agreed with all the above, except there’s a natural human tendency -after- a court makes a ruling, to say, “Oh, I knew that all along; of course the court would rule that way.” Plenty of people were confident Obamacare would be ruled unconstitutional and if John Roberts had gone the other way, they would still be lecturing us about how it was obvious from the beginning the law would be struck down, and why did the US Congress and the Democrats ever think they could do this.
I don’t think it was quite as obvious as some people are going to make it out now to be, that the pension legislation that passed the IL legislature would be struck down. Certainly a lot of commentators were hedging their predictions (RNUG is an obvious exception). I think the IL legislature was a bit, well if there’s a 10% chance the Supremes might go for it, why not try? All the remaining alternatives are so unappealing.
- Six Degrees of Separation - Friday, Sep 26, 14 @ 11:28 am:
To this day, Gov. Quinn still repeats the mantra that SB 1 has a good chance of passing muster with the ISC. And Rauner seemingly begrudges the rights of existing retirees, but won’t address how the current obligation will be rationally dealt with. Who will be the first to acknowledge the 500 lb. gorilla in the room? My guess is that neither wants to address it until after the election, and that this little piece of analysis won’t move that needle.
- wordslinger - Friday, Sep 26, 14 @ 11:29 am:
How many pension checks have been missed since 1917?
- walker - Friday, Sep 26, 14 @ 11:30 am:
To be fair, this isn’t claiming “I knew it all along” post facto. Madiar was open and clear before the pension bills were considered that this was his well-researched and considered opinion.
Others had other lawyers arguing different approaches. What was in the minds of individual legislators is pure speculation, until they tell us directly.
- Jake From Elwood - Friday, Sep 26, 14 @ 11:35 am:
1917. Wow. Illinois wasn’t even 100 years old and it was already in a pension crisis. Just three years away from the Centennial. Almost as long as the last time the Cubs won the World Series. This puts things in perspective.
- Very Fed Up - Friday, Sep 26, 14 @ 11:36 am:
It’s shameful how this was underfunded or not funded at all for so many years. Does not change the current reality.
If the reform law is struck down, the 5% current tax rate will not come close to raising enough money. Will need to raise to to 6..7..8 etc %.
- walker - Friday, Sep 26, 14 @ 11:36 am:
@ZC: You’re right. I for one thought it had at least a 50/50 chance. But I was surprised at the recent related court decision too. Show’s how smart I was!
- Norseman - Friday, Sep 26, 14 @ 11:36 am:
Madigan to Madiar: you didn’t help!
I join with everyone who has admired Madiar’s excellent work on this subject. I would also give kudos to Cullerton for having the courage and intellectual honesty to allow Madiar’s paper to be publically released. (Too bad the President acquiesced to Madigan’s unconstitutional approach.)
- dupage dan - Friday, Sep 26, 14 @ 11:49 am:
One has to wonder how bad it really is if, as word says, no pension checks have been missed in almost 100 years. Fast track to insolvency indeed!
I understand the need to maintain a certain level of funding and avoid the pension holidays that have caused some problems but SB1 looks like an attempt to “not let a crisis go to waste”. If successful, the diminishment of pensions (which could include my own) could free up revenue (you GOTTA know that the taxpayers won’t see any relief, right?) for the GA without those pesky tax increase votes. This scheme approaches Machiavellian proportions. Unless we want to believe that Madigan is unaware of these facts.
So, do we also believe that Quinn, too, is unaware and is being led by the nose or does he know and doesn’t care? Either way, I can’t see supporting someone that ignorant or that cynical as a governor.
- Jack Handy - Friday, Sep 26, 14 @ 12:05 pm:
One idea to get some state employees in a 401k style retirement is to fire all the merit comp workers and offer their jobs back to them as contractors.
Drops them from future pension contributions and from state funded healthcare.
- Anonymous - Friday, Sep 26, 14 @ 12:14 pm:
CNBC has a story about the nations $2 trillion Public Pension nightmare: http://www.cnbc.com/id/102036184
Guess who’s in the lead.
Annual Requred Contribution is only 10% of all revenues. OUCH!
- Jack Handy - Friday, Sep 26, 14 @ 12:17 pm:
Has anyone done an apples to apples comparison of the unfunded liability over time as compared to total state revenue? It seems like all the stats show unfunded liability as a percent of total funding.
- Ghost - Friday, Sep 26, 14 @ 12:18 pm:
=== I am such an admirer of Madiar. I may start writing fanfic. “Eric Madiar: Warrior Against Pension Reform. And Voldemort.” ====
ROFL best quote of the year.
===how can Rauner run on the idea of transferring current employees to a 401K===
I have posted this several times, so I will just post the summary. Defined benefit plans outperform 401k’s. A 401k is a downgrade from a defined benefit plan. Companies like Rauner’s make more money off of 401k plans, but they are not good for anyone.
SHort version, in a 401 k you start aggressive, and move conservative in your investments as you get cloer to retirement. You hops as you make these changes not to hit a down year and take a big loss with the move. Also if the market goes donw right beofre you retire, you can lost most of yuor savings and go from conmfrotable to poor.
Defined benefit plans exists forever. They can cover a wide range of strategies and do not need to shift around at various points in the employees life. They can aborb downturns without having to sell. Selling being the moment you actually capture the loss.
If you compare defined benefit plans against 401k;s they outperfrom on rates of return. We should be moving the priovate sector to get employees out of the voltile 401k system and into defined benefit plans.
historically the purpose of the 401k was to supplement defined benefit plans for higher paid managers; not to be the retirement plan.
Lastly with a 401k you have to fund the employer contribtuion or its worthless. Same with a defined benefit plan. If the State funds the employer contribution we will get a better rate of return staying with what we have.
Final note. Retirees spend money and drive the economy. if you make State workers poor on retirment, instead of spending money and driving the economy they will just consume social resources and cost the economy money.
- Saint Crispin - Friday, Sep 26, 14 @ 12:21 pm:
Anonymous @11:06,
Please share the source that claims the TRS would be 94% funded had the state paid. Really like to see how they arrived at that number.
- RNUG - Friday, Sep 26, 14 @ 12:21 pm:
- Very Fed Up - Friday, Sep 26, 14 @ 11:36 am:
Actually, we are pretty much at the top of the 1995 pension ramp and any future increases should be easily handled by normal tax growth. If the 5% tax rate is maintained AND the last couple of year’s fiscal restraint kept, the State could muddle along … but there wouldn’t be any extra money for current spending and projects, let alone shiny new stuff like expanded school funding.
- Nearly Normal - Friday, Sep 26, 14 @ 12:23 pm:
==the pension systems should consider investing in mortgage-backed securities to obtain higher stock market returns.==
How’d THAT turn out?
- JS Mill - Friday, Sep 26, 14 @ 12:24 pm:
= “not let a crisis go to waste”= 100% agree with this. I believe it was Kwame Raoul who said that the pension reduction (not reform) legislation was not the only option it was just the most politically expedient.
Madair has conducted some excellent research on the Pension. He tried to track down every underfunded penny a few years ago and his results were very compelling.
The only way the money gets where it is supposed to go, moving forward, is if the payments are not made by the state but by schools etc. This is the very reason IMRF is ok. I am not saying that is the best plan but it is the only way it gets done. The state cannot be trusted to do the right thing or the legal thing.
- RNUG - Friday, Sep 26, 14 @ 12:32 pm:
- Jack Handy - Friday, Sep 26, 14 @ 12:17 pm:
The annual reports for the pension systems have both the percentages and absolute dollar amounts but only the last so many years are available online; for SERS you can go back to between 200 and 2002 depending on which source / table you want to use. Should be similar for GARS and JRS since they all use common reporting format. TRS & SURS may be a bit tougher to dig out.
IDOR has tax stats back to 2000 online; overall revenue and spending would probably be more accurate than the proposed budget numbers.
If you want to go back before 2000, either reference some of the research such as Madiar’s papers or find old copies of the Illinois Blue Book at the library.
- Michelle Flaherty - Friday, Sep 26, 14 @ 12:34 pm:
So it turns out this is all Gov. Frank Lowden’s fault.
- JS Mill - Friday, Sep 26, 14 @ 12:54 pm:
@Jack Handy- If the unfunded liability is $100 Billion (probably a low number now) and revenue is roughly $36 Billion then liability to revenue should be about 278%. The numbers are not exact but the math should be pretty simple.
- RNUG - Friday, Sep 26, 14 @ 1:00 pm:
- Six Degrees of Separation - Friday, Sep 26, 14 @ 11:28 am:
Until the courts toss the SB-1 case, Quinn has to say he believes it is legal or undermine the State’s case. I think Quinn accepts the pensions have to be funded; he’s been making the full “ramp” payment and he argued for retaining the 5% income tax rate. But he isn’t going to publicly say so before the election.
Rauner I have serious doubts about. He keeps saying you can keep what you already have but listening to exactly how he parses his statements, I think, in his mind, the annual 3% AAI that hasn’t yet been received is not part of what the retirees already have and is not part of any diminishment because the retirees have not yet received the future increase.
- Archimedes - Friday, Sep 26, 14 @ 1:06 pm:
As to the doom and gloom that tax bills will sky rocket if SB1 is found unconstitutional, the sabings compared to the pebsion ramp was $1.2 billion per year for the first 20 years. The big savings is at the very end - when the liability is fully paid off under SB1 and would still go another 10 years under the pension ramp.
Making up the $1.2 billion a year is maybe 1/3 of a cent on the income tax.
The sky will not fall if SB1 is unconstitutional.
- tsavo - Friday, Sep 26, 14 @ 1:12 pm:
Later, when asked to clarify, Rauner said that pension benefits would not change at all for current retirees. They would keep the 3 percent compounded cost of living raises that were taken away in the pension reform bill. The same would hold true for current workers. They would keep all benefits accrued up to this point in their pension, including, apparently, the yearly 3 percent compounded cost of living raise on that portion of their income in retirement.
But current workers, under Rauner’s plan, would eventually have their pensions frozen and switch over to a 401K-type plan. Rauner did not explain how the pension system would be able to meet its obligations under his plan without newer, younger workers paying into it. Many pension experts and lawmakers have called the compounded COLA the main driver of the state’s $100 billion unfunded liability.
RNUG,
As a retiree (State Police) I appreciate all your posts on the pension issue. I believe Rauner stated retirees would continue to receive the 3% AAI.
- Geronimo - Friday, Sep 26, 14 @ 1:14 pm:
Ghost at 12:18==instead of spending money and driving the economy, poor state retirees will consume social services and cost the economy==
Those I know already are costing the economy. In the uncertainty of what will happen to the only pension income they have, I know many who have radically changed their personal spending habits to conserve and not spend. If you assume that most public retirees are doing the same, we’re not talking about 20 people.
- PublicServant - Friday, Sep 26, 14 @ 1:18 pm:
RNUG, I don’t think parsing is necessary. Rauner’s position is the Sidley & Austin position, and the one backed by R Eden, Ty, and Msall. The court will soon make it clear that the AAI is a protected benefit of membership in the pension system, just like the health premium payment is.
Bruce will just try to take a permanent pension holiday, but that would take Madigan and the legislature to enable by revoking the pension ramp. I don’t see that happening.
- RNUG - Friday, Sep 26, 14 @ 1:19 pm:
- tsavo - Friday, Sep 26, 14 @ 1:12 pm:
I heard what Rauner said but he parsed his statement very carefully. We’ll just have to agree to disagree. Remember, he comes with a venture capitol mindset that everything can be circumvented if you find the proper legal method to do so.
- JS Mill - Friday, Sep 26, 14 @ 1:46 pm:
@ tsavo- per Madair, the compounding COLA is the biggest driver of the ANNUAL costs not the unfunded liability. The two biggest factors in the $100 billion or so in unfunded liability (again per Madair) are #1 the states failure to make required annual payments #2 investment misses.
- A Jack - Friday, Sep 26, 14 @ 2:06 pm:
I am curious whether the federal government would even allow a state to have a 401k, especially since it already has a 457b. A quick look at the IRS website doesn’t look like a 401k is allowed unless it was established before 1986. But certainly I am no expert on federal pension rules.
- My two cents - Friday, Sep 26, 14 @ 2:31 pm:
Life is full of choices. Don’t blame others for your poor choices or their good fortune.
- Old and In the Way - Friday, Sep 26, 14 @ 2:36 pm:
A Jack
This is one of several problems in trying to move employees to a 401k. In fact there is a very real possibility that those employees who are under the Tier II (diminished benefits) plan implemented in 2011 will find that program illegal in that it is less of a benefit than SS!
Don’t bother either Quinn or Raunner with reality at this stage of the campaign. However, I have personally heard Raunner take three entirely different positions on pensions in the course of about three week. Quinn is not much better.
As for those who think that the state can kill the pensions by not funding them, the court is pretty clear on this. The pensioners would merely go to the courts, as other creditors do, and the state would have to pay. No question about it. Pensioners are second in line just behind bond holders. The message is clear and Madiar said it best in his original paper…..”welching on pensions is not an option.”
- Lobo Y Olla - Friday, Sep 26, 14 @ 3:06 pm:
===RNUG, I don’t think parsing is necessary. Rauner’s position is the Sidley & Austin position,===
About that, that infamous memo was famously unsigned. That never happens. Never.
- facts are stubborn things - Friday, Sep 26, 14 @ 3:18 pm:
This is all about a legal and fiscal problem playing out with a political solution. Most of us on this board see the pension issue a through the prism/lens of morality and law. Many in the GA and PQ see it through the prism/lens of politics. When your goal is to get elected or hold your majority and you see all decisions through that lens, you get this whole pension mess. It was best for them to spend the money and keep taxes low and now they are trying to see what they can get away with and how they can try and divert the blame etc. The ISC will follow the law because we are a land of laws. After the ruling the elected class will continue to figure out what to do and how to get elected and hold on to majorities.
- facts are stubborn things - Friday, Sep 26, 14 @ 3:19 pm:
PQ is a car wreck and BR is a train wreck.
- RNUG - Friday, Sep 26, 14 @ 3:33 pm:
- A Jack - Friday, Sep 26, 14 @ 2:06 pm:
I’ve assumed all along that what Rauner was really talking about was a 457 plan like today’s Deferred Comp and modifying it so it would (1) be mandatory instead of voluntary and (2) have some portion of State match.
- RNUG - Friday, Sep 26, 14 @ 3:36 pm:
- Old and In the Way - Friday, Sep 26, 14 @ 2:36 pm:
Glad to hear from you.
I would contend that once the SB-1 case gets decided for good, the State may well find itself in the position of the pension payments being co-equal with the bond payments … or maybe even ahead of them, depending on the language used.
- Old and In the Way - Friday, Sep 26, 14 @ 4:17 pm:
RNUG
Agreed and actually that is one of the issues that the big money folks (ie Bond Holders) have been worrying about. However, thinking that Raunner, or anyone else, is going to beat the courts by withholding payment has not read the courts decisions on this. Nothing in the Healtcare ruling contradicts that. In fact it strengthens previous rulings.
I was out of the country when the July ruling came down. The reaction in Europe was interesting. Most wondered why it was even an issue! We have a very long way to go in the US……
- H2H - Monday, Oct 6, 14 @ 11:11 am:
So what is different between 1917 and 2014? Basically, the number of social programs either mandated or voluntary competing for Tax Dollars and of course Votes! You bet, Social programs equals Votes and every politician knows it.