Thursday, January 17, 2013

The Illinois Pension Reform Conundrum

I recently read this post by Ralph Martire in Crain's Chicago Business.  Ralph Martire is the executive director of the Center for Tax and Budget Accountability, which is a bipartisan fiscal policy think tank based in Chicago.

He brings a fresh perspective to the Illinois pension crisis that I have not heard mentioned by any of our elected officials.  As most everyone knows, the Illinois General Assembly once again failed to take any legislative action to address the $95 billion pension liability currently facing Illinois.  Martire notes that the system has
just 40% of the funding they should have currently, which is well below the 80% generally deemed healthy for public systems.
However, he argues that instead of being upset at the lack of legislative action to cut almost $30 billion in benefits, we should be relieved, because such action would not have solved the problem.

Martire believes that benefits are not the true cause of the problem.  If the only issue facing the pension system were benefits, then the system would be about 70% funded, and there would be no crisis.  The major cause of the current pension crisis is not benefits, but rather debt.

Martire states
...for more than 40 years, the state used the pension systems like a credit card, borrowing against what is owed them to cover the cost of providing current services, which effectively allowed constituents to consume public services without having to pay the full cost thereof in taxes.
The problem is now the repayment schedule for this debt.  It is so back-loaded that making the payments is unreasonable.  Martire goes on to say
It is this unattainable, unaffordable repayment schedule that is straining the state's fiscal system--not pension benefits and not losses from the Great Recession.  And no matter how much benefits are cut, that debt service will grow at unaffordable rates.  Which means decision-makers can't solve this problem without re-amortizing the debt.
Martire also believes that re-amortizing this debt is an easy process, and should be pursued by our legislators.

I find it interesting (and disturbing) that this approach is receiving no attention in the General Assembly.  If, as Martire points out, cutting benefits does not solve the pension crisis, why wouldn't our legislators go after the real cause of the issue--debt?

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