Why Illinois is Going Bankrupt

Squeezy the Pension Python has its grip around the Land of Lincoln.

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image: A cartoon snake named "Squeezy the Pension Python" coils around the State Capitol as part of Illinois Gov. Pat Quinn's new online campaign to get Illinoisans excited about pension reform.
Gov. Pat Quinn's office / AP

A cartoon snake named "Squeezy the Pension Python" coils around the State Capitol as part of Illinois Gov. Pat Quinn's new online campaign to get Illinoisans excited about pension reform.

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.

(MORE: Why We Need Pension Reform)

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.

(MORE: Fiscal Cliff Aftermath: New Option for 401(k) Savers)

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?

388 comments
drudown
drudown

"Reason can wrestle/ And overthrow terror." - Euripides

haxela03
haxela03

LIberalism and its insane policies destroyed Chicago, so what did America do?  We doubled down and elected one of Chicago's moonbat elite to occupy the White House.  Now Illinois can rest easy in the knowledge that not only are they headed down the drain but all of America is right behind you.

Paulhaider74
Paulhaider74

As much as I hate to be Illinoising toward the religious nut-jobs out there, the best way to convert Illinois's debt into a surplus would be to eliminate the tax-exempt status of organized religion in the state of Illinois.  In addition to raising the taxes of anyone who earns more than $100,000 per year in salary ("The Six-Figure Tax"), we should also increase the total cost of guns ($10,000 per firearm) and bullets ($5,000) per bullet.  If there are two things that we need less of that do more harm than good in Illinois, the main culprits are guns/bullets (homicide and suicide rate are exorbitant) and religion (Catholic Church continues to abuse children and suppress the rights of women).  It is time to do something in Illinois that Abraham Lincoln would actually respect in its residents; we could embrace the rational and critical/independent thinking that was demonstrated by our nation's greatest Republican president (sorry, St. Raygun was way down on that list below both Dwight Eisenhower and Teddy Roosevelt; don't forget that Ronnie tripled the defict and claimed that pollution came from trees!).  Our state should embrace what we can do to serve as a model for the other 49 states, and sending Rob BlowDryAnItch to prison was a good start. 

Paul Haider, Chicago

drudown
drudown

As a 39 year old professional, the very premise of pensions reeks of inequity, i.e., the majority of those slated to receive this windfall advocate for a "no new taxes" policy and provide no new ideas (e.g., reorganization of municipal, state and federal debt) to grapple with reality. 

Recent college graduates struggle to find paying work; tell me, why should people get "compensated" for past work performed? Puzzling.

Nowhere1111
Nowhere1111

Private sector UNIONS?? The union is protecting people from greedy owners? Uh ... no. This union is making Illinois go bankrupt and not backing down!. Talk about greedy !!!

easyweblinx
easyweblinx

The US is bankrupt............


easynewslinx.com

TerryClifton
TerryClifton

Wisconsin used to have this problem until Scott Walker took on the mafia that was sinking is his state faster than the Titanic. The Illinois Governor probably can't tell the difference between the goons in Springfield and the goons in the public sector unions that have ran his state into the sewer. This has been a long time coming for Illinois, and now the people are going to be taxed into poverty to pay for it..Good luck with that..

FrankGoudy
FrankGoudy

By the way, why are we talking about gun control or Obama's virtues and faults on this particularly post?

drudown
drudown

@haxela03 

That's funny, considering "non new taxes" is going to foreseeably bankrupt the US just as surely as "fracking" across the US will poison the People's potable drinking supply.

I guess PR robots like you want that.

Say, maybe you could just "cite" how GOP policies during W helped Americans?

Outsourcing?

$4 TRILLION war with Iraq?

Alienating most trusted Allies?

Deregulating Wall St?

Get real. Your "talking points" don't carry the day.

Gee, let me guess: "fracking" water is "totally safe" to drink, despite being radioactive?

RichardBlackmore
RichardBlackmore

As a 39 year old prefessional I would think the answer to your question would be obvious. Because compensation AT THE TIME the work was done was held off until retirement. That is to say the contract held off part of the compensation until a much later time, giving the state, city or county the use of money the worker put into the system, while allowing the government to hold off payment due until a later time. It is called a contract, rather like your working a week before you get compensated for the work you did. Except in this case you wait 20 or more years. However as someone who is in a retirement program I have to say, sometimes the economy goes to crap, and you end up doing what others owed money do, take less than then the full amount owed rather than watching the whole system crash. But if you don't like what is happening then get pissed at the brain-dead lazy, make-sure-I-get-mine and screw everyone else politicians who don't have the courage to keep on top of things.

CharlieMalone
CharlieMalone

@drudown 

In a typical, good private employment situation the employer would contribute 6.2%  of each employees pay into Social Security and then also another 3 to 4% of each employees pay into a 401(k) type plan - for a total employer contribution of 9.2 to 10.2%.  And the employee would also make that same contribution.

80% of the members of the five Illinois state pension systems are not part of Social Security.  Instead they contribute into their pension systems.  Illinois Teachers contribute 9.4 percent to their pensions, state university employees pay 8 percent, judges pay 11 percent and legislators pay 11.5 percent. State employees pay 4 percent if they also contribute to the Social Security system and 8 percent if they do not.

The State was supposed to be matching those employees' contributions. Many years the State of Illinois contributed 0% towards most if its employees retirement.  Studies show that 70% of the Illinois pension shortfall come from the State as employer skipping its contribution.   The State of Illinois skipped pension contributions in order to keep taxes at a low 3% for 20 years.  Even the current 5% rate is considerably lower than the rates most in Wisconsin pay.

 How would those in the private sector be faring if their employer made no 401(k) type contributions for its employees -- and also skipped the employer's 6.2% into Social Security?   And how would they feel if then Social Security blamed the shortfall on the employees and told them they would have to make up the 6.2% that their employers skipped all those years.  That is very comparable to the situation in Illinois. .

CharlieMalone
CharlieMalone

@drudown  

It sounds like you are saying, "If I can't have a good pension, then nobody should"   That kind of thinking just puts us all on a race to the bottom. 

RichardBlackmore
RichardBlackmore

You left out the goons in the government who didn't pay thier legal share into the fund on a year by year basis, and the tax-payers who smilled when they got lower taxes by putting of those payments. Are the pensions to high? Depends on who is getting paid what (IMO), some obviously are. But there are plenty to blame here, not just the unions.

CharlieMalone
CharlieMalone

@TerryClifton  

The Wisconsin legislature last year increased what public employees must pay toward their pensions. Before the law passed, workers paid less than 1 percent of their salaries –in some cases nothing – toward pensions. Under the new law, public employees pay 5.8 percent to 6.65 percent. Pension benefits were not changed

Most Illinois public employees already pay more than that. Teachers contribute 9.4 percent to their pensions, state university employees pay 8 percent, judges pay 11 percent and legislators pay 11.5 percent. State employees pay 4 percent if they also contribute to the Social Security system and 8 percent if they do not.  

But, Wisconsin has paid its annual pension payments rather than skipping them or borrowing money to pay them like Illinois has done.  How has Wisconsin had enough money to make their pension payments?

Individual state income tax rates:

Illinois:  5% (after being 3% for 20 years)

Wisconsin:
-- 4.6 percent on the first $10,070 of taxable income.
-- 6.15 percent on taxable income between $10,071 and $20,130.
-- 6.5 percent on taxable income between $20,131 and $151,000.
-- 6.75 percent on taxable income between $151,001 and $221,660.
-- 7.75 percent on taxable income of $221,661 and above

Illinois has a long way to go to reach the income tax rates of Wisconsin.

haxela03
haxela03

@drudown @haxela03 The EPA recently had a study done on fracking that they did not release to the public.  Wonder why this EPA Gestapo would not want Americans to see what was in that.  I'll bet you loved the Matt Damon movie about fracking.  Deregulating Wall Street had no bigger benefactor than the Glass-Steegle Act passed under Bill Clinton.  Has Barry put a stop to outsourcing?  I wasn't aware of that.  Alientating most trusted allies...you have got to be kidding on this one right?

drudown
drudown

@RichardBlackmore 

While at some level I understand that the disputed compensation was "part of the initial agreement", it seems that it creates an unfair conflict of interest vis-a-vis how our elected officials negotiate proper use of available funds. As intimated, I understand the concept of pensions. But why should the present and future generations fund pensions when don't get such contractual extravagances. Just speak to that point, i.e., it is, at least on its face, inequitable.

drudown
drudown

@CharlieMalone @drudown 

Let's look at it in another light. As a general proposition, an employment contract's consideration may be aptly summarized as follows: employee renders services for employer; employee receives compensation. Tell me, why should the taxpaying public be forced to pay additional compensation? The people slated to receive pensions were paid for the services when they rendered them. 

And for people below 40, it is simply unfair. What, your generation gets pensions and ours doesn't? Explain.

drudown
drudown

@CharlieMalone @drudown 

I think a more accurate means to summarize my argument would be: pensions do not pencil. 

Accordingly, it is disingenuous to suggest the "whole" of the current taxpaying society should sustain pension payments when there is no budgetary means to pay for them. 

The solution, in my mind, is reorganizing debt. Once that is done, pensions are feasible. But you can't pay them when there is a such a pronounced fiscal shortfall. This is particularly so in instances where there is no need, e.g., the Judge I clerked for in 2000 retired in 2004 and became a private mediator. He makes, what, $300k a year now. Why should he get an additional $120k in pension when our city is in fiscal disrepair? That is imprudent fiscal policy.

Nowhere1111
Nowhere1111

@CharlieMalone @TerryClifton Compare the 2 states in property tax? Sales tax? etc How do they look then?

FrankGoudy
FrankGoudy

You're right, I'm new.  I think I get your point!

haxela03
haxela03

@drudown I love it when liberals think they are winning an argument and puff their chest out in that "look at me fashion".  too funny

drudown
drudown

@haxela03 @drudown 

Until you proffer a substantive rebuttal to the law cited, your subjective "opinions" are as immaterial as any other Tea Party wishful thinker trying to "reform" the US against its own interests.

Either the truth of the matter asserted is there, or it is not there. 

Enlist Ann Coulter as your proxy so I can mop her up like the rest of you chickens.

bok bok bok

All you have is insults. How sad.

haxela03
haxela03

@drudown @haxela03 no he was the one planning to take over the whole country with his nefarious, amoral minions and he succeeded.

haxela03
haxela03

@drudown I won't deny that JFK's dad was a Nazi sympathizer...that's for sure.

drudown
drudown

@haxela03 @drudown 

I am officer of court, you Tea Party Traitor.

Who are you to refute the law?

haxela03
haxela03

@drudown @haxela03 you had to have all that tripe prepackaged to get it out that quick.  So much for thinking on your feet.  And stop with all the CAPS for heavens sake and the sarcasm.  Are you a grownup?

drudown
drudown

@haxela03 @drudown 

Cite the credible sources.

Is there glue in your keyboard?

Your excuses are as empty as tossing around the word "liberal" like the Nazi Ann Coulter. 

Or do want to deny Prescott Bush was a Nazi as well?

(see, e.g., documentary Dark Legacy)

haxela03
haxela03

@drudown @haxela03 and there are a hundred studies from non-liberal leaning organizations that say the exact opposite.  It's like telling providing information from the urban institute and asking me to take it seriously.

drudown
drudown

@haxela03 @drudown

Spare me the conclusory statements. Argue the merits with evidence. Want some help as to how?

Let's review some basic civics and facts to dispassionately assess (1) which branch of government and (2) which political party caused the "shut down", shall we? Just this: the CONGRESS HAS PLENARY POWER AND THEREFORE LEGAL DUTY TO RAISE AND COLLECT TAXES OWED TO THE PEOPLE. The Congress cannot “opt out” of its job function any more than a US Postal Worker or Federal Judge or Navy SEAL can. So why should ANY voter “blame” President Obama for CONGRESS failing to promulgate a commercially reasonable Budget (as required by law) for his signature? Forget the “papers” you referenced. Read Article I, Section 8 and explain how the Congress can allow the government to “shut down” when the express language says RAISE REVENUE? It is called following the law. As such, no amount of “paid for” news or faux criticism you proffer purporting to “blame” President Obama for our fiscal state make any logical sense: the Legislative branch is the SOLE and EXCLUSIVE branch that can affect the debt or spending. Period. Again, all this is in the Constitution and any 1st year lawyer knows this. So why do you, GOP pundits or Faux News even suggest the President doesn’t have a Constitutional Duty to Faithfully Execute the Law as promulgated by Congress- that is, neither President Obama or ANY President EVER could exercise “discretion” as to “how much to spend”. Why? It’s called the Separation of Powers and the “grid lock” is just ONE branch NOT doing its job: the GOP-controlled part of Congress responsible for promulgating a Budget FOR THE PRESIDENT TO SIGN INTO LAW. 


Duh. 


That is not a “liberal bias” it is just the law, i.e., GOP “supporters” keep bringing up the President’s spending when the CONSTITUTION REQUIRES that Congress exercise PLENARY TAXING AND SPENDING POWER. As such, BECAUSE the issue is thus squarely the REFUSAL of THIS Congress to FOLLOW THE LAW, i.e., the express language of Article I, Section 8 is the controlling legal authority. Period. Speaking of the Constitution, where, pray tell, is the LAW that purportedly supports what Sen. Graham claims, i.e., that he (or any single member of the Senate) can arbitrarily “halt” or “limit” the Founding Fathers’ express Appointment Power reposed in the Executive branch for the People’s benefit because "he wants more answers on Benghazi"? What a joke the GOP has become. Just this: the plain meaning of the Constitution BINDS the Congress. They can't just "make up" their own "new" laws or "refuse to fund" whatever the latest “Congressional Decider” puppet decrees. This Unlawful State Action is NOT anything new- nor is any form of Tyranny, i.e., here, it is cloaked in Legislative Veto power. [see, INS v. Chadha, (1983) 462 U.S. 919]. Just this: Procedural Due Process is required for intentional acts of DEPRIVATION by the State and/or its employees [see, Davidson v. Cannon (1986) 474 U.S. 344]. It defies all credulity for ANY GOP pundit to even intimate Congress is absolved of DUTY to the constituents its serves. THAT is how blinded by greed the GOP is by its own misstatements of applicable law. The Due Process clause's VERY PURPOSE is to provide procedural safeguards against "arbitrary deprivation" by STATE ACTION. [see, 439 U.S. 438] How does cutting Social Security or even denying Medicaid Expansion that BENEFITS the CITIZENS of the Several States not suffice?

So spare me the feigned "doe out of the 'how can you blame the Congress for Congress' inaction" routine, much less your "missing evidence from the EPA refutes the evidence" just cited.

"Thy love afar is spite at home." - Emerson

RichardBlackmore
RichardBlackmore

The government needs to admit it was the people who ran the government who caused most of this problem in the first place. Then maybe we go after those in office who refused to properly fund the system and sue them (hell if we are gooing to violate the state constiutions we can do it that way to). THEN, yea, we restructure/reorganize debt. But when we do be aware your not going to get a lot of qualified people doing the various jobs in government when they know for a fact that even a constiutional gaurantee is going to be ignored, and anything they contribute, much less what their employer contributes is the same as pissing the money down the toilet.

drudown
drudown

@RichardBlackmore 

I find it telling that the generations coming up on retirement have no qualms about leaving such a fiscal disaster in place for future generations. The government needs to restructure/reorganize debt. Period.

RichardBlackmore
RichardBlackmore

Why should the past generations fund research, highways, or rail maintainence? (that could as easily be asked when todays generations benefit from them). But to answer your question, the government(s) are  like corporations, they exist as legal entities acrous multiple generations. By the logic you have presented why pay for veterns medical expensis once they can no longer fight? As for funding, in part I am admit some sympathy to your question. The past generations (including many if not most in the retierment system) wanted low taxes, and got them in part by not insisting on taxation year by year to pay the government(s)s part of the pension, so that yes, an unequal share is now being asked of the current generations. But to call them exgravagances seems odd to me. One because for most recieving pensions they are not extravagent, and two because everyone in the systme paid into that system at a rate of 8% to 11% of their yearly pre-tax salary.

drudown
drudown

@haxela03 @CharlieMalone @drudown 

Well, raising taxes is a necessary evil. Reorganization is not mutually exclusive. 

Watch "We're Not Broke".

Congress HAS to COLLECT TAXES from US Corporations.

haxela03
haxela03

@CharlieMalone @drudown You make some good points but the overarching truth is that most pension schemes are on an unsustainable trajectory under current conditions.  Like drudown said, they just don't pencil out in the end. 

HeelsandHawkey
HeelsandHawkey

@RichardBlackmore  Raise taxes? Why? I already gave the government the tax dollars to go towards that. It sucks that what happened did, but that is reality. If I have to have my taxes raised to cover someone's outrageous pension so they can retire at age 55, something my tax dollars were already taken for, they should be willing to forgo retirement until age 67 like I will have to wait for...like most of my generation in America will have to wait for.   I'm sick of this BS.  I'm taxed enough as it is, STOP PUNISHING ME.

RichardBlackmore
RichardBlackmore

You raise taxes, and differ part of the retierment to later. Or you go to court and admit the government (and those who elected those in that government) screwed up in the past and essentialy violated thier obligations, and then pay out less than 100% of the retierment. After that you watch a rather large number of people in the government doing needed work LEAVE, with nobody qualifed comming in to an employer they know for a fact violates thier contracts.

RichardBlackmore
RichardBlackmore

Because part of their pay was differed AS retierment. Because they payed anywhere from 8% to 11% of thier pay into that system.  Because that was the contract made at the time. You want to ask this question, then ask the politicians who didn't fund the pensions year by year so they could get re-elected on a "lower tax" stand (when what they were in effect doing was borrowing future funds). Does that make it a tad bit clearer? Hell, why should anyone get anything from a 401K if we are going to use your logic?

CharlieMalone
CharlieMalone

@drudown@CharlieMalone

The pensions are part of the overall compensation package that were given to state employees, state university employees, and teachers when they were hired.  The pensions are not some added perk, but are benefits earned.   Illinois is not in pension trouble because its pension benefits are too generous - but primarily because the State skipped it share of the pension payments.  

The State of Illinois skipping pension payments is nothing new.   Illinois' state pensions were funded at about the same percentage in 1970 as they are now.   That is why in 1970 the delegates of the Illinois Constitution Convention saw fit to write public pension protection into the Illinois Constitution.  

SECTION 5. PENSION AND RETIREMENT RIGHTS Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. (Source: Illinois Constitution.)

Eric Madier, the current Illinois Senate Parliamentarian and Chief Legal Officer to Senate President John Culllerton, has written a 76-page analysis of the pension clause that was put into the Illinois Constitution in 1970. That analysis describes the history and backgroundl how the pension clause came to be inserted into the Illinois Constitution. One can read that analysis at tinyurl.com/Eric-Madierpensions

 Many (especially newspaper editors) are advocating that the State of Illinois ignore its Constitution and are also advocating that contract law be ignored.   That is why we have courts.

Arizona and New Hampshire have similar public pension protection clauses to that of Illinois, in their state constitutions. Their courts rejected those states new laws to force state employees to pay more towards their pension - and made the State pay back with interest the extra money that had been taken out of state employees paychecks. 


Courts Block Efforts at Public Pension Change
http://www.governing.com/news/state/sl-courts-block-efforts-at-public-pension-change.html

haxela03
haxela03

@drudown @CharlieMalone I think that people like the judge you speak of should not be able to "double-dip" from the system.  There are too many people out of work to allow for that sort of thing.  I see the same thing with retired military officers.  They receive lofty pensions and then go to work for consulting firms with big six figure salaries because of all the contacts they still have which helps them win contracts.  Happens everyday and it should be stopped.

CharlieMalone
CharlieMalone

@Nowhere1111 

The Tax Foundation comes up with a state comparison based on states individual income tax rates, corporate tax rates, sates tax rates, property tax rates, and unemployment insurance rates.

Illinois comes  out as the 29th best business climate based on those five criteria.  Wisconsin comes out as the 43rd best state.

http://taxfoundation.org/article/2013-state-business-tax-climate-index

But hey, I'm not knocking Wisconsin - at least they pay their bills, and have the best funded state pension system in the country.  But they have the necessary taxes in place to do so.

Paul,nnto
Paul,nnto

@FrankGoudy I said that in the nicest possible way. Things can get a bit out of hand in comments. 

Click on "oldest" and there are some on point comments that you might appreciate.