Our View: State shouldn't steal from future to pay for pensions

Tuesday, September 07, 2010

As though there weren't enough casualties - schoolkids and teachers, the elderly, disabled and their caregivers, to name just a few - in the fiscal trainwreck that is the Illinois budget, now we can add more. Retirees. And taxpayers, of course, who are always on the list.

At the end of last month, officials for the state's five major pensions plans announced that they are considering selling as much as $4.8 billion worth of assets - about 10 percent of their total portfolio of stocks, bonds and other investments - in order to continue cutting checks to current retirees. The problem? With its $13 billion budget deficit, Illinois doesn't have the cash on hand to pay what it owes its pensioners. The state is obligated by law to pony up; there's no way around it. It's happened before, just never this bad.

Think of this maneuver as akin to selling off the furniture, then digging into your savings account - say, cashing in some CDs - to pay the mortgage because there's nothing left in the checking account. The dilemma is that even if you were to get a windfall down the road that fills your checking account and lets you replace what you took out of savings, you will have lost out on any interest income earned in the meantime.

Now, for a household, that choice might be inadvisable, but unavoidable. In the current environment, your interest earnings from a savings account would still be less than the interest you're charged on a bank loan to make your payment. But here's the rub: For the state it's the opposite. Illinois, Inc. could get a loan to pay the pension systems - it needs $3.7 billion - and would end up paying up to 5 percent interest, officials say. The assets it will have to sell instead - some of them are already gone - were part of a portfolio returning 8.5 percent. Because that interest income goes toward funding future pension payments, and compounds over time to the tune of tens of millions of dollars, Illinois would in effect be taking a loss, and borrowing ... make that stealing from its retirees today and tomorrow.

Make no mistake, we're not doing back flips at the idea of a cash-poor state ringing up more debt. More spending cuts and more reforms to future pension benefits are necessary (and both could help improve the state's credit rating, letting government get a better interest rate if and when it does have to borrow). That's the preferred solution of the Civic Federation of Chicago, and ideally ours as well. But in the here and now the pension payments still have to be made, and of the two options on the table, taxpayers deserve the one that costs less.

That would appear to be borrowing, though there's debate on that score. The debt accumulated in just the last 18 months, with perhaps more to come, has resulted in a lower credit rating for the Land of Lincoln, costing the state more than a half-billion dollars from higher interest rates alone. Civic Federation President Laurence Msall says borrowing another $3.7 billion could convince rating agencies to downgrade Illinois again, which means it's more of a lending risk, which equals higher interest rates. Beyond that, it's "not creating an environment for the state to balance its budget," he says. Those are legitimate concerns.

In any event, lawmakers of both parties seem content to fiddle while Springfield burns on this issue and many others.

Earlier this year, a number of Republicans, including gubernatorial candidate Bill Brady, agreed that borrowing to meet the pension payments might be necessary. Then, when the proposals came forward, suddenly they were dead-set against it. A borrowing measure finally passed in the House after two Republicans defected, but Senate leaders couldn't get it through that chamber. They ultimately chose to go home for the summer rather than hash out the problem. Gov. Pat Quinn has been unable to convince recalcitrant Democrats or Republicans that borrowing makes sense; according to some media reports, he hasn't exactly been breaking his back trying.

Bottom line, deciding to ignore things until the November veto session - conveniently after the election - doesn't cut it. The governor should be of a mind to call legislators back to Springfield for a fresh debate over the most economical way to meet the state's pension obligations. Every day they delay, every asset the pension systems have to sell off while awaiting cash from the state treasury, is likely to cost Illinoisans more, potentially much more, in the long run.