It’s not quite fair to say that Illinois officials are doing nothing to defuse the most threatening pension time bomb in America. Darn close to nothing, that’s fair, which explains why the ratings agencies Fitch and Moody’s have put the state on their negative watch lists. The Land of Lincoln is heading toward yet another downgrade of its battered bond ratings if this near-paralysis keeps up. To say “nothing,” however, ignores Squeezy the Pension Python.
Squeezy is the cartoon co-star in a YouTube video featuring Illinois Gov. Pat Quinn. Hoping to raise awareness among voters and put pressure on the legislature, Quinn took to the ether last year to explain why underfunding the state pension system (the deficit is deepening by more than half a million bucks per hour) is not a good idea. When the state has to pay promised pensions even though the coffers are empty, said the governor, other priorities get squeezed—like schools, roads, and law enforcement.
Cue the snake.
It might be argued that Squeezy is too cute to set off alarm bells among fans of the Chicago Bears. More to the point: awareness of the pension mess is not really the problem in Illinois. Everyone has known for years that the state is a fiscal wreck, with Exhibit A being the smoking crater in the pension fund. Thanks in large part to the rapidly growing slice of state spending that goes to pensions, Illinois has gone ten years without a genuinely balanced budget, and the state was essentially broke even before the Great Recession hit. Now it is roughly 300 days behind in its payments to vendors—despite having tried every accounting trick in the book to hide the red ink. In fact, awareness of the problem inspired the state legislature to raise taxes and deposit some actual money in the pension fund last year, rather than toss in the usual IOUs.
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The problem is … well, there are several problems, the first of which is leadership. Illinois did not have much during the period when former Gov. Rod Blagojevich followed his predecessor, former Gov. George Ryan, out of office and into federal prison on corruption charges. As the Chicago Tribune has amply documented, Illinois labor leaders, lobbyists, legislators, aldermen—even longtime Chicago Mayor Richard M. Daley—have been more likely to pad pensions than to properly manage them, starting with their own comfy retirement cushions.
Lawmakers promised more and more benefits to retired teachers, police officers, firefighters, and other government workers over the past decade; meanwhile, the pool of money to pay these pledges was neglected. The estimated shortfall of nearly $100 billion between now and 2045 is, believe it or not, a rosy scenario, given that a) it assumes robust investment returns and b) doesn’t include local pension disasters, like the estimated $20 billion hole in the City of Chicago system.
Quinn and Chicago Mayor Rahm Emanuel both urged the legislature to tackle the crisis during last year’s session. “The day of reckoning has arrived,” Emanuel warned. All sorts of repairs were floated: raising the retirement age for public employees, increasing employee contributions, freezing cost-of-living increases, shifting younger workers into 401-(k) style savings. Quinn even proposed that responsibility for teacher retirement plans should be shifted to local school boards. You can guess what the locals thought about that.
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Even after Squeezy’s debut, the result was nil. Public employee unions are a powerful force in heavily Democratic Illinois, and they have not only clout but the law on their side. The contracts that grant retirement benefits to public employees are guaranteed by the state constitution, the unions argue. Such promises must be kept. Stymied by so many unpleasant options, the legislature stalled during its regular session, dodged Quinn’s call for a special session, and punted during a lame-duck session that ended early this month.
So much for the day of reckoning.
The Pew Center on the States, which tracks the pension funding problem nationwide, says Illinois now faces the worst mess in the country, with less than half of its pension obligations currently covered. But other states are suffering from symptoms of the same disease. According to Pew, 34 states were short in 2010 of the recommended 80-percent funding level considered safe for pension systems. (That is the most recent year for which data is available; defenders of public pensions argue that 2010 figures exaggerate the problem because they collected near the bottom of the bad economy.) In all, Pew estimates the total shortfall in state pensions to be $1.38 trillion.
Fixing problems of this scale, where the political price is immediate while the benefits are stretched out over decades, is never easy. The widely acclaimed reforms passed in Rhode Island last year are bogged down in litigation, as unions fight to preserve the deals they negotiated. But each day that passes without major reforms, the mathematics of the Illinois crisis grind on: ever more retirees, collecting steadily larger checks, as tumbling bond ratings make it more and more expensive to borrow money to mask the hole.
As a new legislature, dominated by Democratic supermajorities, takes another whack at the snake in the coming months, leaders in other states around the country should watch Springfield and heed the lesson: tempting though it is to do nothing, it only makes the problem worse.
MORE: How Bad Is America’s Pension Funding Problem?
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