The Chicken Little Effect on Illinois’ Pension Crisis

Years of unfulfilled warnings of imminent fiscal collapse due to pension debt have numbed Illinois voters to a still real threat and given politicians an election year escape hatch to avoid talk about the state’s most difficult problem.

Illustration: Sol Lieberman/BGA

This story was co-published with Crain's Chicago Business.

The long-running soap opera of Illinois’ perilous finances has featured a governor touting a Squeezy the Pension Python mascot, a business group fronting an “Illinois is Broke” website and a torrent of sky-is-falling warnings from pension analysts, partisans, academics and newspaper editorial boards.

Yet Illinois still stands, albeit with a pronounced fiscal slouch. In July, Moody’s Investors Service even issued a financial assessment that might charitably be described as upbeat, noting that an income tax hike imposed in 2017 left the state a little less wobbly despite an enormous pension debt albatross that remains.

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Now, some experts say the years of vocal hysteria without corresponding calamity has lent a Chicken Little quality to the pension crisis, numbing voters to any impending threat and giving cover to campaigning politicians to talk about anything other than what has long been described as the state’s most pressing problem.

“I think people have been distracted by pensions for so long that they don’t want to think about it anymore,” said James Spiotto, a municipal bankruptcy expert at Chapman Strategic Advisors LLC in Chicago. “We went through ‘Illinois is Broke,’ but Illinois wasn’t broke. It was distressed but it really wasn’t broke.”

The website, debuted in 2010 by the Civic Committee of the Commercial Club of Chicago, has been taken down.

Last Spring, as the general election battle for governor was just getting underway, the Better Government Association noted how Republican incumbent Bruce Rauner and Democratic challenger J.B. Pritzker were tiptoeing around the pension morass for fear of angering voters.

And nothing has changed as Election Day nears with the two fabulously rich candidates now having spent hundreds of millions of campaign dollars to steer the election debate to toilets, puppies, and who is the biggest liar and taxer. Still missing is any serious discussion of the single biggest problem the winner will face: the $130 billion in state pension debt sapping resources for schools, public safety and other priorities.

The political aversion to costly, painful decisions is not unique to Illinois. In New Jersey, where pension funding levels are even more anemic than here, Democratic Gov. Phil Murphy revoked an order of his Republican predecessor, Chris Christie, that would have required the state and local governments to immediately kick in an additional $800 million to plug some of that state’s pension hole.

Apocalypse avoided?

A recent report from the Pew Charitable Trusts warned many state retirement systems are on an “unsustainable course, coming up short on their investment targets and having failed to set aside enough money to fund the pension promises made to public employees.” This assessment comes, Pew said, even as contributions from taxpayers over the past decade doubled as a share of state revenue.

The Pew report is an echo of apocalyptic visions all too familiar in Illinois, where the five state-run pension funds for teachers, university workers, state employees, judges and lawmakers collectively possess enough assets to cover only about 40 percent of their long-term liabilities, state data show. Experts set a minimum 80 percent funding level as a rough measure of fiscal soundness for pension systems.

Back in 2010, then-Northwestern University finance professor Joshua Rauh created a stir with a forecast that the cash spigots at funds in Illinois and other distressed states would quickly run dry.

“This day of reckoning is in fact not as far away as some might imagine,” wrote Rauh. “For Illinois, it could be as soon as 2018.”

Rauh, now the director of research of the conservative Hoover Institution at Stanford University, projected the Louisiana and Oklahoma retirement funds could collapse by 2017 and New Jersey and Connecticut by this year.

None of that has happened. Rauh did not respond to requests for comment about his long-ago projections.

“There’s been so much bad news for so long that people are understandably thinking that they’ve heard this sky-is-falling story and they’re beginning to disbelieve it. The idea that it’s a systemic collapse, that it’s Armageddon, is not accurate,” said Chris Mier, managing director of Loop Capital.

But, Mier added, delay advances the slow decay of the systems.

“The people who run these plans and fund these plans have so much time to craft a solution, and that’s part of the problem. They don’t have a sense of urgency,” Mier said.

National context

Most states, including Illinois, have taken steps to address pension weaknesses and postpone any reckoning. Illinois lawmakers hiked the state income tax, raising more revenue to help cover pension costs, and, beginning in 2011, reduced pension benefits for new hires. The five pension funds have, on multiple occasions, reduced their annual rate of return assumptions, rendering their bottom lines more dire but also more realistic.

“But the fact that pension funds haven’t totally run out of money is not necessarily a statement that supports (the idea that) you don’t really have to do anything about it,” Spiotto said. “It’s always hard to predict when the wheels are going to fall off.”

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From The State Pension Funding Gap: 2016, Pew Charitable Trusts

Lawmakers in Kentucky this year appeared to sense that day was getting uncomfortably closer as funding levels in the pension fund for state employees dropped to only 13 percent.

In April, the governor signed a new law cutting benefits and requiring employees to kick in more for their own retirement. Enactment of the law, however, has been held up by a legal challenge.

Illinois lawmakers passed their own cost-cutting, benefit-slashing overhaul in 2013, only to have the reforms unanimously struck down as unconstitutional by the state Supreme Court two years later. The decision has sharply defined what the state can’t do to clear up its pension headache — namely, cut benefits.

There’s mounting evidence of a changing political climate that might further complicate efforts to stabilize underwater pensions for public workers in Illinois and elsewhere.

Not too many years ago, organized labor was under sustained political assault with Rust Belt legislatures and governors in Michigan, Wisconsin and Indiana approving collective bargaining curbs for public employees and enacting right-to-work laws.

In 2009, as the Great Recession was taking a wrecking ball to jobs across the land but particularly in manufacturing states, a Gallup Poll measured public support for unions at 48 percent and disapproval at 45 percent.

By last month, however, a new Gallup survey recorded a dramatic shift in attitude. More than three-fifths of those surveyed expressed approval of unions while just 30 percent disapproved.

That sentiment is partly reflected in increased activism by union members. Teachers in West Virginia, Arizona, Oklahoma and other states left their classrooms and marched to their state capitals, demanding higher pay and better pension protection.

Putting an exclamation point on a year of protest, voters in conservative Missouri in August voted by a 2-to-1 margin to repeal a right-to-work law enacted by the Republican-controlled legislature.

“There’s been a lot of overheated rhetoric, whether driven by ideological, political or selfish reasons,” said Anders Lindall, spokesman for AFSCME Council 31 which represents 75,000 public workers in Illinois. “Is the pension system ideal? Of course not. We want to see the retirement systems on sound financial footing.”

Feeling the squeeze

With benefit cuts off the table, getting there will be pricey and fraught with peril for politicians willing to stick their neck out for reforms almost sure to cost, and anger, voters. Without a fix, actuarial projections from nonpartisan sources show the pension chokehold over Illinois finances will only tighten — a la the metaphorical Squeezy mascot invoked by then Gov. Pat Quinn in 2012 — crowding out money available for schools, public health, crime-fighting and other government spending.

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By the 2020 fiscal year, the state’s bill just to keep pace with its pension debt is projected to hit $9 billion, rising to $12 billion by 2029 and $20 billion by 2045.

In the absence of an obvious political solution at the state level, Spiotto has proposed that Congress create a special bankruptcy court that would deal solely with insolvent government pension funds, much like those that handle bankruptcies of cities, though not in Illinois which does not permit municipalities to file for bankruptcy without state approval.

That, too, is problematic, in part because federal law currently bars states from declaring bankruptcy, though it’s not clear whether a pension fund created by a state would be similarly barred.

If that hurdle could somehow be surmounted, it would relieve politicians of the burden of casting painful votes but also cede control over spending decisions to a judge and put government employees and retirees at risk of a radical haircut.

The municipal bankruptcy of Detroit in 2013 proved costly to retirees, as the city was allowed to eliminate $7.8 billion in payments to retired workers and disregard $4.3 billion in unfunded health care costs.

“I don’t think we have a quick solution here,” said Spiotto, saying any fix short of bankruptcy will have to involve tax hikes and benefit cuts agreed to by lawmakers, the governor and public employee unions.

Just as members of Congress are loath to publicly talk of plugging large holes in Social Security and Medicare, debating pension fixes is never welcome in an election year. That’s no way to influence friends and win elections.

“It’s not surprising,” Mier said of pension talk largely missing from the campaign trail. “People are not going to run on issues that don’t give them a net advantage over their opponent. That’s what it’s all about.”

About the Author

Tim Jones

Tim Jones is a regular BGA freelance contributor who often writes about Illinois policy and economy.