Bruce Rauner, a Republican, liked to talk tough about unions
and public-sector pensions when he was campaigning for governor in Illinois. With
two or three pensions, some are making as much as half a million dollars in
retirement pay, he claimed. This, he thundered, is a rip-off of taxpayers and
other workers. But as soon as Mr Rauner was elected last month, the self-made
millionaire toned down the rhetoric. The size and complexity of the
public-pension mess suddenly hit him, and, aware that he had to bring together
Democrats, unions and creditors, he began to backtrack.
Illinois is like Greece in one obvious way: it overpromised
and underdelivered on pensions and has little appetite for dealing with the
problem. This large Midwestern state, with a population of 13m (Greece has 11m,
though a far smaller GDP than Illinois), has the most underfunded retirement system
of any state and the largest pension burden relative to state revenue. It also
has the highest number of public-pension funds close to insolvency, such as the
one looking after Chicago’s police and firemen.
Mainly as a result of this gargantuan pension debt,
Illinois’s bond rating is the lowest of all the states, which means
dramatically higher borrowing costs. When the state government failed to
address pension underfunding in its budget for 2014, two credit-rating
agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case
put Illinois on a par with Botswana.
The main reason for the pension debacle is decades of
underfunding. Unique to Illinois is the idea that you don’t have to pay for
pensions and you don’t have to follow actuarial recommendations. Whereas most
other states follow the rules set by the Governmental Accounting Standards
Board (GASB), which, however imperfect, require some budget discipline,
Illinois has mostly ignored them. In 2013 the state paid $2.8 billion into its
pension fund for teachers, one of its five pension funds, but GASB rules would
have required a contribution of $3.6 billion, says Joshua Rauh, a professor of
finance at Stanford University.
After the public-relations disaster of the credit
downgrades, Pat Quinn, the outgoing governor belatedly pushed for pension
reform. In December 2013 the legislature approved a bill that reduces annual
increases in pension payments, increases the retirement age and caps
pensionable salaries. Some have welcomed it as Illinois’s first actuarially
sound pension-funding scheme, designed to get the five plans fully funded in 30
Mr Quinn’s changes were supposed to become law in June, but
were held up by legal challenges and ultimately rejected by Judge John Belz of
the Sangamon County circuit court for violating the state constitution, which
makes existing pension contracts virtually untouchable. Lisa Madigan, the state
attorney-general, has appealed against the ruling to the Illinois Supreme
Court, which is looking at the case.
Union representatives disagree with this scenario. Dan
Montgomery, the president of the Illinois Federation of Teachers, believes Mr
Quinn’s reform is illegal and that the state must find ways to pay up, for
instance by extending the repayment schedule of its debt and increasing tax
revenue by closing loopholes and expanding a sales tax on services.
Mr Rauner was elected on a promise that he would not make
his predecessor’s temporary increase of income and corporate tax permanent. But
he has not explained how Illinois will cope with the loss of more than $7
billion in annual revenue. Nor has he laid out any broader plans for fixing the
pensions mess. For a start he might look to Washington and the budget deal
hashed out in Congress. This allows some distressed private-sector pension
plans to cut the benefits of retirees. In Illinois, though, more inventive
measures may be needed.
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