Pensions: All our problem

Thursday, August 19, 2010

Leaders of the state teachers unions ask, "How much longer will the Chicago Tribune allow itself to be used as a tool of terror" by reform advocates in their "quest to deprive hundreds of thousands of Illinoisans of the reasonable retirement they, in large part, have paid for?

This union attack is aimed at an Aug. 10 commentary by Dennis Byrne, which summarized a legal analysis that shows pension benefits are owed by the pension funds — not the state of Illinois — and that the state is not a "guarantor" of those pension fund obligations.

The Civic Committee and other business and civic groups are not trying to deprive teachers of their pensions. We're trying to reform the system, get adequate funding and save the pension system from bankruptcy.

Illinois is broke. The state's budget deficit this year is about $14 billion to $15 billion. We have unfunded pension liabilities of $80 billion. Illinois has additional billions in pension bond debt and about $40 billion in totally unfunded liabilities for state retiree health care.

As a result, in the absence of reforms and improved funding, the pension funds at the state level — and also those in Chicago — may start to run out of money in a decade or so, depending on the performance of the assets in the funds.

We advocate two things that would help save the pension system: (1) reform, which would preserve rights that retirees and workers have already earned, while reducing costs prospectively, and (2) improved funding of the pension system by the state and city. Both are critical.

The unions argue that even if all rights retirees have already earned are fully protected, it would be unconstitutional to make changes prospectively — changes such as those private-sector employers have been forced to make. One major Chicago law firm, Sidley Austin, has produced a detailed analysis of the Illinois Constitution showing that such prospective changes would be constitutional. Four other major Chicago law firms have concurred in this conclusion.

We are not trying to "frighten" people — but if they are working for the state, or if they are members of state pension funds, they should be concerned. If Illinois does not get both reform and improved funding, the pension funds may well run out of money. That's a result we want to avoid — not accelerate.

The unions say one cause of the problem is underfunding. They are right about that, and we've said so. The financial crisis and recession made things worse.

But the terms of state employee retirement, relatively more generous than in the private sector, are also to blame.

State workers can retire at age 55 with enough years of service. They can receive a full pension, plus automatic 3 percent adjustments each year, plus retiree health care for which the state in effect pays 100 percent of the insurance premium. In Chicago, workers can retire at age 50.

State workers also receive Social Security— although teachers do not. They also receive free health care — with zero contributions toward their premiums — during the years from 55 until 65 when they become eligible for Medicare. Teachers, by contrast, do contribute to their health care costs. So should retired state workers.

Our state cannot fix its broken budget without fixing these retirement programs. If we fail to fix them, it will be disastrous for everybody, including the workers. Nobody wants that. The better view of the law, as explained in the Byrne column, is that Illinois is not the "guarantor" of the pension fund liability. But even if it were, the difficulties faced by retirees in enforcing claims against the state would be enormous. Claims would be routed through the Court of Claims, where awards are limited. Funding of awards is at the discretion of the legislature. And there isn't enough money to pay off these liabilities.

If we look only at the revenue side of this equation and do not undertake reform and make cuts, personal income tax rates would have to rise to around 8 percent from today's 3 percent.

But the teachers unions aren't telling the public that. None of the major candidates for office will say that to the voters.

What would such a drastic tax increase mean for taxpayers? Employers? Our state's ability to attract and retain jobs?
The unions say: That's not our problem; that's the state's problem. Just raise taxes.

But it is their problem — and ours.
Pensions: All our problem
R. Eden Martin is president of the Civic Committee of the Commercial Club of Chicago.