As Illinois staggers painfully toward pension reform, the suggestion appears in some news accounts and editorials that if Springfield would just pass one of the pending proposals — the Nekritz-Cross-Biss (NCB) version — then we could all breathe a deep sigh of relief. Illinois’ finances would be saved. Annual pension funding could be reduced by perhaps $2.3 billion, so the state’s financing of education, health care and safety-net programs could be restored. And Illinois could pay its bills. “Morning in Illinois.”
If only it were so.
1. First, NCB is not a “settlement.” If enacted it will face a union court fight. There are good arguments in its favor, but it’s far from a sure thing.
2. Even if NCB survives court review, we still will be left with enormous unfunded pension obligations. NCB might carve an estimated $28.5 billion out of the estimated present total of almost $100 billion. That leaves over $70 billion unfunded — and going up 8 percent each year. (The real “value” of the obligations, using the right discount rate, is much larger.)
3. Today, these are obligations of the pension funds, not of the state. But NCB would make the state a guarantor. If the liabilities go up, as they almost certainly will, so will the mandated annual funding. If the values of assets in the fund pools go down, then the mandated funding will go up some more. And that guaranteed-funding provision trumps virtually all other state debts and obligations.
3. Wholly apart from the pensions, Illinois has enormous unfunded retiree health care obligations — perhaps in the range of another $55 billion. NCB doesn’t reduce that.
4. NCB would do nothing to reduce the pension burden now smothering Chicago and CPS, as well as municipalities throughout the state. Chicago’s pension funds alone are underfunded by almost $24 billion. Its teacher’s fund is under by about $8 billion.
Chicago soon will have to double its payments into its pension funds for police and firefighters. CPS is said to be looking at a $1 billion operating deficit next year. Springfield gave CPS a pension-funding holiday several years ago. When that funding resumes next year, it will cost CPS another $400 million annually.
Chicago’s reserves have been pretty much used up, as have CPS’ reserves.
5. Illinois’ 2011 “temporary” income tax increase — to 5 percent from 3 percent for individuals — is scheduled to roll back partially in 2014. If it does, the state’s operating budget will be in even worse shape. The more likely question is whether taxes will be increased again, which may depend on who is elected governor. Chicago also will be under enormous pressure to raise taxes.
6. The more Illinois and Chicago raise taxes, the more pressure there is on individuals and businesses to move away, thereby reducing the tax base.
This is the hard truth: Even if NCB passes, Illinois will still be broke. Indeed, by hanging the pension-funding guarantee around the state’s neck, NCB would make things worse. Chicago and CPS aren’t far behind. Yet the unions will continue to press for increased wages and benefits, such as those AFSCME recently squeezed out of Quinn.
The NCB version of pension reform won’t by itself prevent this train wreck. It will only slow down the train a little.