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To break or not to break

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Illinois

* I was actually surprised to see some Republicans quoted as saying that the spring break is no big deal. Usually, whenever the GA goes on break we see a hue and cry from the minority party about how the majority is shirking its duty…

When Illinois lawmakers walked out of the Capitol Friday for their last full weeks away before the end of their annual session, they left behind a building momentum on the effort to try to fix the state’s biggest financial problems.

But after months of furious debate, a cooling-off period might not hurt.

“We’ve been through a lot of work this month,” said state Rep. Darlene Senger, a Naperville Republican. “In order to recharge the batteries, I’m glad to have that break.” […]

“It won’t hurt momentum. The pressure the pension problem poses isn’t going away, it’s building,” said state Sen. Matt Murphy, a Palatine Republican. “Maybe (the break) will let people back out of their entrenched positions and see another way.

A couple of freshman Democratic Senators (Melinda Bush and Tom Cullerton) were quoted in the story saying they’d have much rather stayed in Springfield. And then there was this press release from a Senate GOP freshman…

“It’s irresponsible for the Senate to take a vacation while the pension debt compounds by millions of dollars every day,” said Senator Barickman. “If President Cullerton and other leaders in Illinois government were serious about actually fixing the problem, we would be in Springfield, working together to find a comprehensive solution.”

Senator Barickman says a pension bill passed by the Senate Wednesday, which specifically targets new and existing teachers, does not adequately address the financial distress faced by the state’s five pension systems.

“The bill President Cullerton passed this week was nothing more than a piecemeal approach to the problem,” said Senator Barickman. “We need comprehensive reform that is fair and constitutional.”

Freshman Sens. Bush and Cullerton both voted for one of the two pension bills last week. Sen. Barickman voted “No” on both measures, including the “comprehensive” Biss/Nekritz/Cross plan. Barickman lives in ~~Champaign~~ Bloomington, which has tons of university workers. That may explain more than he might be letting on here.

The first half of this session was mainly a tuneup. A trial run, if you will. Both chambers tested out some ideas, some passed, some didn’t. The real deadline is May 31st. If they don’t come to an agreement by then, they should be thoroughly excoriated. But I, for one, think they should be given a bit of time to reflect on what they’ve done and think about what they’re going to do in the coming weeks.

You?

* Related…

* Illinois hits a sorry milestone: Sometime this month, Illinois probably exceeded $100 billion in pension debt, a sorry milestone in the state’s long slog to fiscal hell.

* Can Assembly agree on pensions?: The Illinois Constitution says that public sector pension benefits cannot be diminished or impaired, and Tryon pointed out that judges in Arizona and Colorado have recently tossed out their states’ attempts to lower COLAs for existing employees. “The major component piece, the COLAs, has already lost in two other states within the last six months,” Tryon said. “I’m really worried that this would pass, we take a budget credit, spend that money, and then lose in court.”

* Can Legislature take next step on pensions?

* Editorial: The House creates some hope

* Editorial: Demand leaders lead

* Editorial: Wanted: Legislators who can read Constitution … and do the math

posted by Rich Miller
Monday, Mar 25, 13 @ 9:25 am

Comments

I’m in agreement that whatever passes the legislatior will spend the alleged savings right away. Leaving us worse off when the unconstitutional ruling comes down. That might be the plan create an emergency.

Comment by Fed up Monday, Mar 25, 13 @ 9:33 am
A break is a good thing. Go home. Hear from your constituents. Get some perspective. This idea that things only move forward if everyone is sitting in Springfield is pretty simplistic.

Comment by Montrose Monday, Mar 25, 13 @ 9:41 am
They’d be better off spending less time on the floor in Springfield (oversight is another matter).

Deadlines matter. Nobody likes to make hard decisions until they have to (or until they see what they can get in return). That’s just human nature.

Comment by wordslinger Monday, Mar 25, 13 @ 9:43 am
Cullerton said he wanted to spend any additional money on stuff other than pensions……..
The Crains story goes on about how we may have hit 100 billion but maybe we really didn’t.
I suspect some didn’t want to go home and avoid some angry teachers…

Comment by RNUG Fan Monday, Mar 25, 13 @ 9:45 am
Hmmm…Tryon and hopefully his colleagues will soon begin to see the forest through the trees. Passing a bill for the sake of passage is meaningless. Crafting legislation that achieves fiscal resolve and follows their mandate of protecting and respecting the constitution is reality…nothing less is fantasy.

Comment by Captain Illini Monday, Mar 25, 13 @ 9:46 am
The SURS preliminary investment return for 2013 Fiscal Year-to-Date through January 2013 was 10.2%, net of fees. Are you sure that unfunded liability isn’t heading in the other direction?

Comment by PublicServant Monday, Mar 25, 13 @ 10:05 am
The General Assembly needs to turn its attention to drafting a reasoned Constitutional Amendment to modify the current Constitutional pension guarantee. A reasoned amendment could guarantee the employee’s already earned benefits and allow for modification of benefits earned after the effective date of the amendment. Such amendment would also need to assure a fair proportion between employee and employer contributions and guarantee that the state would make its annual payments. Let the voters decide the pension issue, then the General Assembly can work without fear on constitutional challenge. Until this happens, the General Assembly is spinning its wheels.

Comment by Dave316 Monday, Mar 25, 13 @ 10:09 am
That Peoria Journal Star editorial is a joke. They’re against the Nekritz bill because it’s unconstitutional and they’re against the Cullerton bill because it doesn’t save enough. Geez, pick a lane or come up with your own solution.

This is an editorial board sounding like a waffling member of the General Assembly who’s afraid to take a position on a tough issue.

The only way to fix the pensions without raising questions about constitutionality is to inject the funds with billions of dollars in cash via a massive tax increase. Let’s see the Peoria J-S come out for that.

Comment by Frank Monday, Mar 25, 13 @ 10:16 am
Dave316, the Federal Constitution expressly forbids States from creating any law that impairs the obligation of contracts, so any State law or State constitutional change that does so violates the Contract Clause of the US Constitution…just sayin.

Comment by PublicServant Monday, Mar 25, 13 @ 10:20 am
Public servant,

That is a small time slice. yes big return here for a short time period during a HUGE run in the market. You cant count on 10% returns forever or even for just a couple of years. Better to find the average of the market over say… a 25 year period and use that as baseline.

Comment by Really? Monday, Mar 25, 13 @ 10:28 am
===But I, for one, think they should be given a bit of time to reflect on what they’ve done and think about what they’re going to do in the coming weeks.===

I agree. They (and us) don’t need to be down there all the time. Everyone needs time in their district office to prepare for the final couple of weeks. Listen and get feedback, but don’t forget that the loudest constituents don’t necessarily represent the majority (see polls from last week on gay marriage). A lot of these legislators just got sworn in and have hardly had a chance to be out and about in their districts.

Also, at least the House is going to take off another week later in April so they don’t have to buy their Springfield Administrative Assistants candy or flowers.

Comment by Been There Monday, Mar 25, 13 @ 10:30 am
Dave316, how about the General Assembly turn its attention to drafting a reasoned Constitutional Amendment to modify Illinois’ flat income tax to a progressive income tax structure, as the majority of other states have done?

Comment by StayFree75 Monday, Mar 25, 13 @ 10:33 am
The problem (or protection, depending on your point of view) is the IL SC has consistently found the rules in place at time of hiring are what apply to the current employee. Even if you remove or change the pension clause, contract law should still prevent arbitrary changes, since it was explicitly stated at the time to be a contract.

Since we’ve already made some reductions for new hires (Tier 2), it seems our only way forward is resetting the payment schedule and finding a way to afford the payments (shift TRS normal cost to districts, make current temp tax permanent, possibly close tax loopholes and/or new taxes for the needed revenue).

You could argue a contractual consideration modification if one of the choices is to keep the actual status quo, but none of the bills so far has that in them … so I don’t see any of the current choice bills passing muster.

You could offer a ‘Tier 3′ defined contribution ‘cash balance’ plan as an alternative to ‘Tier 1′ or even ‘Tier 2′, but it’s going to have be much more robust than the lame versions so far. In my opinion, the ‘cash balance’ should have a fixed percentage match by the State and it should not have the ‘notational balance’ in it; it should have cold, hard cash put into it. It should allow the employee to self-direct the investments, the same as a 401 or 457 plan. It should not penalize a State employee for resigning and withdrawing their funds from the retirement system; the employee resigning should get all their contributions, state match, and all earnings returned to them. If you wanted to put a string on it, I think IRS rules will allow the State to require somewhere between 5 and 8 years before the right to take all the money could ‘vest’, although there might have to be a sliding scale after the first 3 years.

Put all that in one bill, and you should have a constitutional solution.

Comment by RNUG Monday, Mar 25, 13 @ 10:33 am
One can’t blame the average citizen/taxpayer for wanting to cut pension benefits, despite the constitutionality arguments. She/he will pay more under any circumstance if benefit cuts aren’t the sole legislative solution — and, in reality, will still pay more regardless. (Illinois has a revenue AND a spending problem.)
For the pension systems to be solvent, C + I = B (Contributions plus Interest must equal Benefits paid out.) Interest will be what it will be. Benefits probably can’t legally be changed for current members due to the state’s constitution. That leaves contributions. The unions have said their member will increase their contributions by 2% IF the State meets its obligations (or face a lawsuit for not.) Since the local school districts and universities pay little or nothing for these pensions (despite their much higher contribution rates to IMRF), it can be argued that they should take some cost shift. And the State must pay its bills.
I see no way for the average citizen/taxpayer to avoid paying more for pensions, now or after the Court rules on the unconstitutionality of everyone’s favored solution. Taxes are going up / staying up — whether we like it or not.

Comment by Diogenes in DuPage Monday, Mar 25, 13 @ 10:40 am
Given the legal uncertainties of successfully reducing state retirees’ cost of living benefits, is somebody in state govt thinking about what can be done if the courts rule against such changes? What would they do? They’d have to do something.
And why can’t that something be done now, instead of attacking this particular segment of middle class retirement security. The Illinois Democrats who are spearheading this attack appear to be out of step with national Democrats’ and the WH priorities, which are to shore up the economic prospects of the middle class.

Comment by cassandra Monday, Mar 25, 13 @ 10:41 am
Can we get over the drive by comments on Madigan, Rich?

Comment by PublicServant Monday, Mar 25, 13 @ 10:41 am
@Really? - How about a 25 year slice through 11/30/12? That would be an average return for SURS of 8.9%/year?

Comment by PublicServant Monday, Mar 25, 13 @ 11:07 am
If you have the money to spend, what is all the fuss about ?????

“Tryon said. “I’m really worried that this would pass, we take a budget credit, spend that money, and then lose in court.”

Comment by AFSCME Steward Monday, Mar 25, 13 @ 11:38 am
Cassandra they are way out of whack with national dems but no one call ems on it.
Dogenese why not ask for a haircut from the bondholders or the contractors? Of course the bondholders could retailiate by never lending again but the contractors are in a really more vulnerable position than the employees

Comment by RNUG Fan Monday, Mar 25, 13 @ 12:17 pm
PublicServant, the 30 year returns for all the funds are pretty close (+-50bps) of the long term return assumptions. What, then, is your point? You aren’t suggesting that we can earn our way out of this hole, right?

Comment by Arthur Andersen Monday, Mar 25, 13 @ 12:52 pm
RNUG Fan,

They are all legitimate contracts that have to be paid. The contractors have just as much or more leverage; these days private for profit businesses don’t deal with the State unless they have deep enough pockets to wait for the payments and / or they jack up the prices in expectation of delayed payment. Imagine the mess if the State had to start paying hard cash for all the supplies it buys.

Comment by RNUG Monday, Mar 25, 13 @ 2:33 pm
AA, not at all. Paying the money back is the only way to get out of the debt hole that was created, just like you and I do when we borrow money. Many people say that the interest charged on the unfunded liability is unrealistic. Long term ROI proves that argument false.

As Wordslinger continually points out, the pension funds have never missed a payment…ever, and they’ve been at this percentage of underfunding before, so what’s different now that indicates that benefits must be cut?

The Civic Committee rich guys and that bastion of non-partisan thought, IPI, would have us believe that the ratings agencies will crucify our bond rating if we don’t cut benefits to reduce the unfunded liability, and that the pension funds must be 100% funded within the next 30 years.

First, there’s no shortage of buyers for our state’s bonds in spite of the state’s tactical withdrawal of its recent bond sale. The rate that we’d have to pay by issuing POBs is much less than the interest rate being charged on the unfunded liability, so one of the solutions that might be considered would be to POB a percentage of the unfunded liability. That along with the fortner proposal, and a reamortization of the unfunded liability to get to an 80% funded level would satisfy the “great and powerful” ratings agencies. Why 80%, and not 100% like private sector pensions? Easy, the state is a sovereign entity that cannot declare bankruptcy. It is an entity that exists in perpetuity, so when Nekritz talks about not considering any funding plan that exceeds 30 years, unless her crystal ball can see the State of Illinois not existing in 31 years, her argument is specious. If her crystal ball can, by the way, we’ve got other things we need to worry about, and “fixing” the pension won’t be one of them.

The ratings agencies don’t care how the state goes about reducing the unfunded liability, just that it have a reasonable and constitutional plan in place to address the issue. They’ve already warned that an unconstitutional plan is no solution. Does anyone really think the bills being proposed will satisfy the ratings agencies given the certainty of prolonged court challenges, and the widespread concensus of non-ideologues that the current proposals run counter to both state and federal constitutional protections?

The ‘Any bill will be challenged, so let’s just pass something’ argument is ridiculous. You want to present something that has a reasonable chance of passing legal muster. Now I know the law can be twisted and turned, most likely by Sidley, but if the state and federal constitutions can’t protect the state pensions from diminishment, or the pension contract from laws that impair contractual obligations, then no contract is safe.

The legislature talks about heavy lifting, but they’re not doing that by passing unconstitutional laws. The pensions aren’t now, nor have they ever been, the reason that the state can’t properly fund the programs that our elected representatives have created and prioritized. It was, and will continue to be, the state’s regressive tax structure. True heavy lifting would require addressing that.

Lastly, why all this attacking pension benefits now? The now has more to do with the double-down, kick’em while they’re down philosophy of conservative ideologues to advance their goals by attempting to tie the state’s current fiscal crisis to pensions. The recession that Wall street excesses caused has hit the middle class the hardest. Our regressive tax structure is overly dependent on that struggling middle class. In addition, the unsustainable 1995 pension ramp law has compounded the problem of recession-caused revenue shortages at the same time that more and more real people are being forced into these state programs. Dividing this state’s middle class, and financially attacking middle class state employees will only worsen the state’s deficit.

Comment by PublicServant Monday, Mar 25, 13 @ 2:51 pm
And now back to our regularly scheduled comments.

Comment by PublicServant Monday, Mar 25, 13 @ 2:52 pm
Frank and Diogenes hit the key issues this morning and lay the PJS’s argument to rest. If you just raise employee rates the initial ramp rate still grows too fast so the budget stays crowded. If you do that and inject a lot of new revenue the ramp rate can come down but taxes go up, and in some cases if the payoff is extended the long term cost to the state can go up. If the benefit side is attacked hard enough to chop off half of the unfunded liability the bill is probably unconstitutional. Probably the best one can get is to nibble at the benefits within constitutional bounds to shave a little off the unfunded liability, and increase contributions enough to bring the ramp down to a sustainable level. My guess is the editorial boards wouldn’t be to be too happy with that since they’ve seen the serious reductions in benefits that are possible in theory, and seem to be willing to risk it on a court that reverses direction.

Comment by muon Monday, Mar 25, 13 @ 3:26 pm
muon @ 3:26 pm

Increasing the pension contributions of state employees is not a constitutional option. The unions have offered a 2% increase in employee pension contributions, but this offer has been belittled and rejected. Illinois legislators and the media not only appear to consider the union offer inadequate, but they consider the union not worthy to take part in finding a solution to the pension funding problem.

It has therefore become painfully obvious that the 2% offer should be withdrawn and only constitutional options should be accepted by the state workers union. If leaders in Illinois government are serious about fixing the problem, they should modify Illinois’ flat income tax to a progressive income tax structure, as most other states have done.

Comment by Ruby Monday, Mar 25, 13 @ 4:19 pm
You are right of course RNUG . The nursing homes negoitated their late payments in exchange for rates sort of like the 25% or so increase in employee payments.
Ruby The unions can make themselves known. AFSCME gets it now the Teachers need to get over their shock and

Comment by RNUG Fan Monday, Mar 25, 13 @ 6:22 pm
One way out of this mess is - DO NOT Expire the current tax, and put the extra tax money into the pension funds until all pension funds are at 80% funded.

Comment by Mama Monday, Mar 25, 13 @ 6:41 pm
Mama,

To anyone seriously looking at the numbers, keeping the 2% temp tax is a mandatory part of any solution … and it’s not enough by itself.

Comment by RNUG Monday, Mar 25, 13 @ 8:03 pm
Rich, its time for Illinois to make lemonade.

Illinois should decriminalize, regulate and tax the sale medical and recreational Marijuana now. As per a LA times story (see http://articles.latimes.com/2013/mar/23/business/la-fi-0324-wall-street-marijuana-20130324) Wall Street sees opportunity in marijuana. “More and more people see the inevitability,” said Brendan Kennedy, chief executive of the Seattle private equity firm Privateer Holdings, which targets cannabis-focused start-ups. “They see that the Berlin Wall of cannabis prohibition is going to come down.”

Illinois could net over one billion dollars per year in revenue and GRF savings. New “pro-business” revenue would be generated from annual license fees assessed growers and distributors and thru sales tax. Substantial savings would be generated from decriminalization that would help reduce Illinois’ overcrowded prison population which is disproportionately African American.

I am not advocating the use of marijuana. However, regulating and taxing the sale of medical and recreational marijuana in Illinois to help fix our current financial crisis is a no-brainer. Politically, I believe a legislative initiative would be supported by Hispanics, African Americans, labor, business and probably educators because of the desire for a less painful pension fix.

Maybe the Spring break will give the legislators time to think outside the box they are trapped in and give an idea like this serious consideration.

Comment by Open Channel Monday, Mar 25, 13 @ 10:38 pm
Ruby@4:19 the 2% increase is constitutional if employees are given an additional benefit. The unions have proposed, and many plans have adopted, a guaranteed payment to the pension funds by the state as the benefit. Once that payment is defined as a benefit it is protected constitutionally and future legislatures cannot skimp on it.

Comment by muon Monday, Mar 25, 13 @ 11:11 pm
Making annual payments benefits the state, not employees. The employees are already guarenteed that their pension benefits will be paid when due, regardless of whether the state makes timely payments. No benefit here.

Comment by PublicServant Tuesday, Mar 26, 13 @ 7:21 am