Falling into his own trap
Monday, Aug 29, 2016 - Posted by Rich Miller
* Remember this Chicago police and fire pension bill that the General Assembly passed in the spring?…
Over the short term, the bill would have reduced how much taxpayers contribute to the retirement funds by hundreds of millions of dollars a year. But that delay would come at a cost of billions of dollars over the long haul. By paying less upfront, the city would see its pension debt continue to grow.
* The governor vetoed that bill and was then overridden. Gov. Rauner was not amused…
“Clearly, those who supported this measure haven’t recognized what happens when governments fail to promptly fund pension obligations,” [Gov. Bruce Rauner] said. “Instead of kicking the can down the road, local and state governments should instead focus on reforms that will grow our economy, create jobs and enable us live up to the promises we’ve made to police and firefighters.”
In vetoing the bill Friday afternoon, Rauner called the measure “irresponsible” and warned “the cost to Chicago taxpayers” in the long run is “truly staggering.”
The bill allowed the city to avoid a $300 million tax hike.
* Finke…
And then we have last week. Gov. BRUCE RAUNER’s administration let it be known it didn’t want the Teachers’ Retirement System board to vote to lower the estimated rate of return it would get on its investments. Although that recommendation comes from actuaries not under anyone’s political control, the administration said the process needed more scrutiny and input before the decision was made.
It also made note that lowering investment returns would cost the state money that could not then go to education and other programs.
Fair enough, but the other point to remember is this. Overestimating investment returns would save the state money in the short term, but that doesn’t mean the bill goes away. It just shoves it off into the future. It’s sort of a variation on the old practice of simply shorting the money outright.
For Rauner, it would make budget life a little easier next year, not to mention possibly helping to hold down the size of the tax hike everyone seems to acknowledge is coming. As for making the pension systems any healthier, probably not so much.
Subscribers know more about the motivations here, but the governor clearly fell into his own rhetorical trap on this one.
…Adding… I’m not sure who thought of it first, but it really doesn’t matter. Greg Hinz made the same comparison to the Chicago pension veto.
- Sir Reel - Monday, Aug 29, 16 @ 9:56 am:
Our esteemed Governor never let’s logic get in the way of his message.
- Anonymous - Monday, Aug 29, 16 @ 10:08 am:
Extending the Chicago ramp and statutorily lowering the payments for 4 years is a lot different than the TRS Board changing the assumed interest rates returns.They really aren’t even comparable.
- Whatever - Monday, Aug 29, 16 @ 10:09 am:
Four legs good, two legs better.
- facts are stubborn things - Monday, Aug 29, 16 @ 10:09 am:
The one thing all well funded pension system have in common is that they have made their actuarially required payments. The Gov. should applaud lowering the estimated return on pension funds to reflect proper actuarial principles. The pension system has three elements to it. The employee contributions, the employer contributions,and the investment return on the pension funds. The employees make all payments 100% of the time and the employer has often skipped payments. It is critical for the investment returns to reflect reality(so that the employer contributions are proper) and for the employer to make the actuarially required payment.
- Grandson of Man - Monday, Aug 29, 16 @ 10:14 am:
“local and state governments should instead focus on reforms that will grow our economy, create jobs”
If Rauner’s reform plans were so good, wouldn’t he have provided detailed estimates and projections by now?
Rauner won’t do what others consider sound, which is move incrementally on reforms (until the partisan landscape changes in the GA).
- Keyrock - Monday, Aug 29, 16 @ 10:17 am:
Whatever is correct.
For labor, the governor wants you to be like Boxer, and work harder.
- Last Bull Moose - Monday, Aug 29, 16 @ 10:30 am:
It is bad when the politicians ignore actuarial reality when writing pension laws and skipping payments. It is worse when the politicians try to change the actuarial calculations to suit political purposes. The Pension Board should be politically independent and actuarially sound.
Political intervention is a form of corruption.
- PublicServant - Monday, Aug 29, 16 @ 10:33 am:
Governor Kick-the-Can…sounds catchy.
- Shemp - Monday, Aug 29, 16 @ 10:34 am:
Yes, the hypocrisy on this one is undeniably deep.
- JS Mill - Monday, Aug 29, 16 @ 10:37 am:
I think they call this double talk?
I remember when the governor said he was going to be transparent and be honest and not use “budgetary gimmicks and tricks”.
That does not seem to be panning out. Oh well..
I am just waiting for that FY 2016 balanced budget the governor is supposed to submit for approval.
Just waiting, and waiting, and……
- SAP - Monday, Aug 29, 16 @ 10:44 am:
Wait, are you trying to say that the recipe for goose sauce is exactly the same as the recipe for gander sauce? Who knew?
- Anonymous - Monday, Aug 29, 16 @ 10:46 am:
Hey, give the guy a break, he is still new at the job, remember?
- DuPage - Monday, Aug 29, 16 @ 10:48 am:
Rauner ran for governor saying he would eliminate fraud and thereby eliminate the need for a tax increase. Now he is urging TRS to commit what amounts to fraud for his political convenience. Even the TRS board members he appointed refused to go along with his demand.
- Huh? - Monday, Aug 29, 16 @ 10:52 am:
They are completely different. One bill helps Rahm, which even though they are wine club pals, everybody knows that 1.4% isn’t going to lift a finger for Chicago. The TRS vote the other day hits 1.4% exactly where it is going to hurt - his own balanced budget that he has yet to offer. He has to come up with another $400 million on top of the $8 billion in unpaid bills.
Yes it is hypocrisy to veto one and plead for the other. But 1.4% was begging for the problem he has to solve. Other than wanting Chicago to go bankrupt, he doesn’t care about the city.
- Sue - Monday, Aug 29, 16 @ 10:52 am:
Folks- time to get serious- Friday’s TRS action is a come to Jesus moment. Does anyone think Illinois(forget Chicago) can survive as it starts paying 35 percent and more annually into the pension plans. Rauner may lack political finesse but you can’t argue that things need to change and quickly. The Dems belief that it can continue to spend at current levels as more tax revenue needs to pay the pension bill is utterly rediculous. It’s time to start a reform path that allows the State to survive because without sounding too alarmist that’s now what we are facing. Sure raise rates back to 5 and if any of you thinks that’s all that has to occur you are just utterly wrong.
- Huh? - Monday, Aug 29, 16 @ 11:00 am:
Sue - the come to jesus moment should have been the last time the ILSC shot down the pension reform law. What does it take for 1.4% and the GA to learn that the pensions are untouchable? Pay what is owed. The State employees had/have mandatory pension deductions from their paychecks. They paid what they owed. It is time for the State to pay what it owes.
- Sue - Monday, Aug 29, 16 @ 11:04 am:
Huh- missed my point entirely. Sure the S Ct has said pay the pensions. OK. But you don’t seem to recognize what that means for the rest of the State’s spending. Absent immediate reductions across the board- the tax rates you will need in years to come will make 5 percent seem like a dream
- Sue - Monday, Aug 29, 16 @ 11:06 am:
Oh let’s not forget that beginning on 2018 that’s to Ovamacare- the state’s on the hook for at least 800 million for Medicaid expansion. Obie and Quinn pegged the increase at 180. Guess they both failed at math class
- Joe M - Monday, Aug 29, 16 @ 11:27 am:
==the tax rates you will need in years to come will make 5 percent seem like a dream==
Yah, We may even need rates at or equal to those of our surrounding states! Iowa 8.98% — Wisconsin 7.65% — Missouri 6.0% — Kentucky 6.0%, etc, etc.
Our rates were kept artificially low for decades by not paying the pension bill. That couldn’t go on forever.
- The Dude Abides - Monday, Aug 29, 16 @ 11:27 am:
@Sue, remember that under the unpopular Pat Quinn the state was at least able to make the required pension payments every year while also reducing the unpaid bill backlog from $10 billion to around $4 billion. Quinn was able to accomplish that because of the 5% income tax rate. Letting the tax rate expire, which both sides share the blame on, was the big mistake. I agree with you that 5% may not be enough now because for the last 19 months under the current administration expenses have been greatly exceeding revenue and we have quickly run up several more billion dollars of unpaid bills.
- Whatever - Monday, Aug 29, 16 @ 11:35 am:
Sue — Rauner’s attempt to get the TRS board to hold off on recognizing that its earnings assumptions are too high is playing right into the hands of people who claim that we can continue spending at current levels and pay down the pension debt, because overstating the expected returns understates the pension debt that has to be paid. Understating the cost of any program allows understating the tax increases and cost cuts that need to be made.
- Chris - Monday, Aug 29, 16 @ 11:44 am:
“overstating the expected returns understates the pension debt that has to be paid”
The debt is the same either way.
The return assumption just acts as a partial payment on the debt–lower assumed returns = higher ‘normal’ cost.
- Juice - Monday, Aug 29, 16 @ 12:36 pm:
Sue, that 800 million figure is just wrong. Not knowing entirely what it’s based off of, that figure is more than 25% of total ACA liability. And the most that the state has to cover, beginning in 2020, is 10%, which is less than the $800 million. So Quinn and Obie appear to be not the only ones bad at the maths.
- Anonymous - Monday, Aug 29, 16 @ 1:00 pm:
sue, actually if the state can achieve and sustain reasonable revenue growth, one of the Governor’s top goals, the percent of the budget going to pension payments will be on an inexorable downward slide.
- Sue - Monday, Aug 29, 16 @ 1:01 pm:
Juice- that number is the State’s reassessment of its 2018 Medicaid contribution due to the surge in enrollment
- steve schnorf - Monday, Aug 29, 16 @ 1:01 pm:
jeez, anon 1:00 is me
- steve schnorf - Monday, Aug 29, 16 @ 1:02 pm:
1:01
- Sue - Monday, Aug 29, 16 @ 1:48 pm:
Be interested in Steve S assessment what the tax rate will need to be to fund State government including the pension payments and paying down the pile of bills Illinois has accrued.
- Whatever - Monday, Aug 29, 16 @ 2:50 pm:
Chris @ 11:44 ==The debt is the same either way.==
The amount that gets paid to the retirees is the same either way; how much the state has to pay is greater if the return on investment goes down (assuming the state doesn’t switch to pure pas-as-you-go).
==The return assumption just acts as a partial payment on the debt–lower assumed returns = higher ‘normal’ cost.==
In other words, lower return means the state has to pay more.
- Arthur Andersen - Monday, Aug 29, 16 @ 2:58 pm:
Whatever @2:50 is spot on and concise to boot.
Flip back to Friday’s posts to see a chart from the actuaries that shows the real numbers involved here.
- Trapped in the 'burbs - Monday, Aug 29, 16 @ 4:00 pm:
The governor might want to do something other than veto and complain. He can start by presenting a balanced budget with a combination of spending cuts and tax increases to present a real budget. Standing on the sidelines and complaining (or complainin’ ?) isn’t getting us anywhere. Thompson, Edgar and Ryan all found a way to work with Madigan.