Editor's note: This article was originally published at Wirepoints.org
Solving Illinois’ pension crisis is one thing, getting Illinois politicians to tell the truth about the scope of the problem is another.
NPR recently interviewed Illinois’ four statehouse leaders on a variety of topics, but it was Senate President Don Harmon’s comments on pensions that deserves the most scrutiny. His language contained the typical errors and half-truths about the crisis and the solutions this state needs. Below are his statements that need to be corrected.
1. “The short answer is, on the legacy [pension] debt, we’re going to have to pay it.”
Like many Illinois politicians, Harmon underestimates – wittingly or not – just how big Illinois’ debt burden is. We are the nation’s extreme outlier when it comes to pension debts, both in nominal terms and on a per capita basis (See Appendix A). No state uses more of its budget to pay for pensions than Illinois does.
Moody’s calculations put Illinois’s total state and local retirement shortfalls at $420 billion, which is the equivalent of nearly $90,000 per Illinois household. That retirement debt will have to be paid down with ever-bigger tax hikes if the shortfalls aren’t significantly reduced by pension reform.
But Illinoisans are already taxed-out. They pay one of the highest overall state-local tax burdens in the country. In fact, Kiplinger calls Illinois the nation’s “least tax-friendly state.”
Harmon may think he can force Illinoisans to pay down those pension debts – for services already rendered – but he forgets Illinoisans can flee that burden by just moving to other states. Illinois is already a national outlier in out-migration, according to IRS data, and it was one of only three states to lose population over the last decade, according to the U.S. Census (See Appendix B).
2. “…that transition from a tier one pension model to a tier two pension model will solve this problem over time. It’s a problem that took a century to get into this deeply, it’s going to take decades to get out.”
Tier 2 is not a solution. It does nothing to solve Illinois’ massive pension debts, which are entirely connected to Tier 1 workers and retirees. The growing number of Tier 2 workers does not reduce that debt.
The state’s number-crunchers report that even under the state’s overly-optimistic actuarial assumptions, pension costs will eat up over 25 percent of the state’s general fund budget for the next 25 years. And even that understates the problem for three reasons.
First, if investment returns in the pension funds fall short of assumptions or retirees live longer than currently estimated, then the burden on the budget – meaning Illinoisans – will be even larger than expected.
Second, those numbers in the COGFA graphic do not include the state’s $56 billion retiree health insurance shortfall, pushing the cost of retirements today closer to 30 percent of budget.
And third, political or legal pressure could force lawmakers to dismantle Tier 2 sometime in the future, significantly increasing the state’s pension obligations. Harmon even admitted Tier 2 will have to be changed, saying the plan grants “a much-reduced set of benefits, so low in fact, Social Security may ding us and force us to raise some of those benefits.”
How can Harmon say that all we have to do is wait for Tier 2 to eventually fix things, but in the same breath, admit that Tier 2 benefits will have to increase? Did he think no one would notice the contradiction?
In fact, increases to Tier 2 benefits have already begun. Lawmakers’ increased the benefits of downstate and suburban public safety workers in 2019 in an attempt to get ahead of any demands by Social Security to boost Tier 2 benefits.
Considering all that, waiting on Tier 2 to “solve” things is a terrible mistake.
3. “Those benefits are protected, not only by the Pension Clause, but also by the Contracts Clause of the state Constitution and the United States Constitution.”
Sen. Harmon is wrong on both counts. The state’s Pension Clause will not be an issue if it is amended by the people of Illinois, and the United States Supreme Court has long made clear that the Contract Clause is not an absolute. Using the guidelines the high court has provided, many courts in many circumstances have permitted modification of a variety of contracts. As to pensions in particular, experience in other states shows that, in the right circumstances, reasonable modification of pension contracts is permissible.
The two states with the most relevant changes for Illinois are Arizona and Rhode Island.
Arizona, which has constitutional protections that mirror those in Illinois, reduced its public safety pensions in recent years by amending its constitution not just once, but twice. Those opposed could have challenged those reforms under federal law, but five years on, no one has tried.
In the second example, recent municipal pension reforms in Rhode Island faced significant public-sector resistance. The state has no pension protection clause, so opponents claimed the reforms violated federal law, including the federal Contracts Clause. The Rhode Island Supreme Court rejected that argument, and the U.S. Supreme Court declined to hear an appeal, leaving the reforms intact.
The experiences in both states contradict Harmon’s claim that the state and federal constitution automatically prohibits any changes to pensions.
4. “A constitutional amendment would do nothing to erase the legacy debt.”
Again, that just isn’t true. Amending the pension clause of the Illinois constitution would allow structural changes to the benefits of current workers and retirees. As long as the reforms are “reasonable and necessary” and narrowly tailored to honor contract rights as best as reasonably possible, cutting legacy debts by altering pension benefits is legal under the federal Constitution’s Contracts Clause.
Both the reforms in Arizona and Rhode Island were successful in reducing legacy debts. Arizona reduced the compounding cost-of-living adjustment for police and fire retirees. And so did Cranston, Rhode Island, which implemented a 10-year suspension of their 3 percent COLA.