Public Pensions in Illinois ... Chicago vs. Illinois

Chicago is such an interesting "state" to observe. So is the rest of Illinois, for that matter.

So let's take a sneak peek and see what's going on with Chicago-land and its new mayor these days. While we're at it, we'll check in with the Governor and House Speaker, too.

Public sector pension funding is the topic du jour.

Rahmbo vs. Springfield is subtitled "Chicago's mayor says Illinois pensions are breaking his city:" 

"As White House chief of staff, Rahm Emanuel helped stick the country with ObamaCare, but as Chicago mayor he's trying not to let a crisis go to waste in a good way. If only lawmakers in Springfield would heed his advice on pension reforms.

Regarding benefits for public employees, Illinois makes California look tough. Many teachers don't pay a penny toward pensions but can retire at age 60 with an annuity equal to 65% of their final salary plus a 3% annual compounded cost-of-living increase. The state's pension bill, which has quadrupled in five years, consumes all $7 billion of additional revenue from last year's income and corporate tax hikes. Even so, the pension funds are projected to go bust in a decade.

Rating agencies have threatened Illinois with a multiple-notch downgrade if lawmakers don't restructure benefits in their budget due this week. The raters worry that pensions are causing the state to delay payments to creditors—Illinois has a $9 billion backlog of unpaid bills—and squeezing local budgets, thereby making municipal defaults more likely. Mr. Emanuel is warning that retirement costs could drive up Chicago's property taxes by 150% over the next three years and increase class sizes to 55 students.

Maybe the embarrassment of being compared to Greece is finally getting to Illinois Governor Pat Quinn. Last month the Democrat proposed to increase worker pension contributions by three percentage points of their pay to 11% from 8% for most state employees, raise the retirement age to 67 from 60 and modestly reduce cost-of-living raises. The changes would be voluntary, though Mr. Quinn wants to rescind retirement health benefits for workers who reject his plan.

Unions say they'll sue if lawmakers approve the Governor's reforms. They argue that reducing pensions for current workers and retirees is illegal and that the "voluntary" plan is coercive. But state and federal courts have ruled that lawmakers can tweak benefits if necessary to protect public welfare. Minnesota and Colorado defended their reductions in cost-of-living increases on such grounds.

Illinois could do the same by quoting Mr. Emanuel's press conference earlier this month advocating bolder reforms: "Costs associated with maintaining the retirement system has come to a point that you cannot do the basic things that you need to do as a city, in providing for your residents—whether that's garbage collection, recycling, areas of public safety—and maintain those obligations."

Legislators are nonetheless skittish about passing significant reforms in an election year. While they want to get credit with voters for doing something about pensions and don't want another credit downgrade, they fear union wrath.

Which means they'll likely water down Mr. Quinn's reforms . . . . House Speaker Michael Madigan has already taken the retirement age and employee contributions off the table. He also wants to exempt Chicago workers and judges who would hear constitutional challenges on the reforms.

Lawmakers are way behind the voters on this one. By a three-to-one margin, voters favor reducing pension benefits over paying higher taxes. Mr. Emanuel is offering good counsel."

Summing Up

The rock and a hard place has come to Chicago and the rest of Illinois as well.

Public sector promised benefits are simply over the top.

And taxpayers prefer paying lower taxes to providing over the top benefit promises made by complicit public officials to public sector union leaders.

What will cause this miracle of fiscal sanity to occur? Illinois is out of money, and the bond vigilantes aren't likely to rescue the state from its money woes.  Not this time.

And if you're wondering who the bond vigilantes are, they're the ones with the money to loan. The would-be creditors, if you will.

But they can loan their money or not to whomever they choose or not choose.

Mayor Rahm knows that, and it looks like Governor Quinn is finally coming to that realization as well. Now we'll await Speaker Madigan's arrival on board the ship of fiscal sanity.

Meanwhile, the taxpayers are already there.

My bet is that even the House Speaker will be on board soon, too. He likes being House Speaker.

Besides, the taxpayers are sick of being bilked.

Reasonableness finally is headed to both Chicago and the rest of Illinois.

California?

But what about sunny California? Well, that's another story for another time.

But fiscal sanity will arrive there, too. It's just a matter of time.

Thanks. Bob.