How Bad is Illinois' Pension and Retiree Health Care Funding Problem?

It's pretty bad. I wanted to use this post to call attention to the state's retirement funding albatross, as well as the funding obligations that are essentially an anchor strapped to Illinois' cities, villages, and towns. The common denominator, of course, is the Illinois taxpayer.

First, let's look at the state's funding problem courtesy of a report prepared by J.P. Morgan that was published last June. The purpose of the report was to evaluate the ability of states to finance the pension and health insurance obligations owed to government employees. I lifted a couple of charts from the report that tell the essential story.

Let's start with a look at where Illinois' ranks among the states with respect to the funded ratio of its pension systems:

Illinois has the worst-funded pension system among the states. But that's not a surprise. We knew that. This next chart is the real eye-opener. Keep in mind that it combines both pension and retiree health care costs to derive the percentage of state revenues required to properly service debt:

The blue bars represent what the states are presently paying, expressed as a percentage of total state revenue, to fund their annual pension obligations. The orange bars depict what they should actually be paying based on what J.P. Morgan identifies as sound actuarial practices (referenced in the graph). Based upon this analysis, Illinois would need to allocate about 40% of total revenue collections per year to properly fund pension and retiree health care costs. 

This type of financial commitment would necessitate a huge tax increase on Illinois residents, exceedingly painful budget cuts, or a combination of both options. That's why it's so imperative to meaningfully reduce the long-term funding obligations presented by Illinois defined benefit pension plans.  

Public employee unions oppose these reductions and, so far, a circuit court judge has sided with their arguments against the reductions within SB 1.  A lawsuit has recently been filed to negate reforms enacted to address the rising costs confronting Chicago's Municipal Employees' Annuity and Benefit Fund. The Illinois State Supreme Court has already ruled that requiring state retirees to pay premiums toward their health insurance benefits is unconstitutional. 

The courts seem to be affirming that the Illinois Constitution essentially establishes a financial fantasy land for public employees.

The mantra of public employee unions is that the present benefits were promised and shouldn't be reduced. This, of course, is code for "just increase taxes on Illinoisans." Is it realistic to think that Illinois will tax its way out of these financial problems? No way.  Revenue enhancements might be part of a solution, but so will spending cuts and, hopefully, sensible pension reforms. 

And we ought not forget that Illinois cities, villages, and towns are facing a pension crisis of their own. The Illinois Policy Institute (IPI) published an analysis that used ten metrics to evaluate the financial condition of municipal pension plans. Each city was provided a cumulative score along with a risk designation. Here are the "top 20" cities per the IPI analysis:

The IPI analysis includes a rank for other Illinois cites as well. Probably the most significant finding in the study is that only three cities were considered to be in "critical" condition in 2003. This number grew to seventeen by 2012. Illinois cities are continuing to slide into the pension funding danger zone. 

Illinois has significant legacy costs that must be addressed. Governor-elect Rauner knows this and wants to move aggressively to restore Illinois' finances and place the state on a sound financial footing. The biggest hurdle that could upend a long-term solution is politics. The Illinois General Assembly will either rise to the occasion,  or content itself with simply managing Illinois' decline. 

Video: Bruce Rauner Addresses BGA Event

I attended the "Bruce, Budget Blues, and BGA" luncheon hosted by the Better Government Association on Tuesday. The event featured a presentation by Governor-elect Bruce Rauner and was held at the Sangamo Club in downtown Springfield. 

I was able to record the "Q and A" portion at the end, which begins with BGA Executive Director Andy Shaw asking Governor-elect Rauner for his thoughts on the vacancy in the Comptroller's Office and then goes on to cover several other issues. The video is 20 minutes long.

(Dis)appointments

Those hoping for a smooth transition from Governor Quinn to Governor Rauner were resoundingly disabused of that hope when Governor Quinn opted to make 51 appointments to boards and commissions on his way out the door. 

That incumbent Governors have the power to make these appointments is beyond dispute. They are, after all, empowered to appoint qualified individuals to open positions. But this is a case where the question of "should Governor Quinn make the appointments" should have taken precedence over "can Governor Quinn make the appointments." 

At issue is that the term of many of these appointees will extend beyond the conclusion of a Rauner first term. In the interest of clean government that respects the outcome of elections and the orderly transfer of power, these appointments should belong to Governor-elect Rauner. Instead, the well has been poisoned with the perception that the outgoing administration is simply looking to reward friends and allies while tying the hands of the incoming administration where possible.

These kinds of appointments are not a shocking development. Last minute appointments have been a part of American politics since, in what became known as the "midnight appointments," outgoing President John Adams attempted to entrench his Federalist views by using his last day in office to appoint numerous Federalist judges. Needless to say, incoming President Thomas Jefferson was not very happy about it. 

Historical practice aside, these types of appointments will always be disappointing for those of us on both sides of the aisle that desperately want to see our government shed past practices and take the high road.

Honoring Comptroller Judy Baar Topinka

Illinois lost an irrepressible political figure with the passing of Comptroller Judy Baar Topinka on Wednesday. When I think about Comptroller Topinka, I automatically think about her straight-talking, no-nonsense, "here I am take me or leave me" persona. The Tribune editorial appropriately captured this dimension of her personality in the following paragraphs:

The straight-shooting ex-newspaper reporter never lost her penchant for directness, a lost art in the modern frenzy of carefully messaged politics. You couldn’t “message” Judy, “package” Judy, “image” Judy. 

More than a decade ago, when then-Gov. George Ryan and legislative leaders considered short-term borrowing to close a budget gap, she rejected the idea: “You just can’t spend like a bunch of drunken sailors.” 

When she ran for governor in 2006, she referred to her primary opponents as “morons.”

When she ran for comptroller in 2010, she described the post as “a watchdog, whistle-blowing, calling-out kind of job” and added, “I'm perfect for that.”

Indeed she was. And that was Judy Baar Topinka. I wish her family and friends comfort as they grieve her passing. The Illinois political scene has lost a true, straight-talking trailblazer. We need more like her.

Picture from Chicago Tribune.

Minimum Wage Increase Stalled

Legislation to increase the minimum wage was upended when it became apparent that the House didn't have the necessary votes to advance a bill. Some contend that the passage of an ordinance increasing the minimum wage to $13 in Chicago undermined support for a statewide minimum wage bill among Chicago legislators who, for political reasons, didn't want to vote for an increase that would be less than the $13 Chicago wage.  

Still, supporters of a statewide minimum wage increase definitely made themselves heard at the Statehouse today with chants of "raise the wage." 

These kinds of rallies are valuable in that they make activists feel engaged, but they rarely affect the ultimate outcome of legislation. And that ended up being the case here.

Still, the Senate decided to move forward with a bill to increase the minimum wage to $11 an hour in what is best described as a largely symbolic gesture considering that the House had already adjourned "Sine Die."  This means that the House will not reconvene until the 99th General Assembly is sworn into office and is therefore unable to vote on HB 4733. An exception would be if the House convened a special session, but that's unlikely to occur. 

In addition to increasing the minimum wage, HB 4733 included a home rule preemption to prevent Chicago from increasing its minimum wage above $13 an hour. 

HB 4733, which passed 39-18-1, was sponsored by Senator Kimberly Lightford (D-Westchester). Senator Lightford has worked tirelessly on this issue for quite some time and was obviously pleased to pass the bill out of the Senate. 

The only problem was that it had no place to go.

Fire Union Still Furiously Spinning Staffing Bill Facts

Is it possible to award more than four Pinocchio's? 

The AFFI must be getting some push back from their ill-conceived fire department staffing legislation. Despite passage of the bill, the union's president felt compelled to respond to an editorial in the Champaign News-Gazette and tried to once again get the carousel spinning in defense of the legislation. Let's deconstruct some of the "facts" asserted by the union in the op-ed:

Assertion
When Illinois firefighters in 1986 surrendered their right to strike, they traded service for the sake of the public's safety and well-being.

In return, they received several collective-bargaining considerations. One consideration was the implication that safe staffing levels could be negotiated with the employer and resolved through binding arbitration if the parties were unable to reach an agreement.

Reality
You need to read this statement carefully to understand the full measure of what's really being asserted. There's some word parsing going on. Notice the use of the word "implication?" 

Why is the word "implication" being used? Because the actual text of the law doesn't say what they want it to say. HB 5485 deliberately inserts the word "manning" into the bill because it was never there to begin with. That's why the union had to introduce HB 5485. And it's quite curious to introduce a bill that sets out to achieve what you claim to already have as a function of statutory law.  

Despite the word not being included in current law, the union persisted in telling legislators and anyone that would listen that staffing levels have always been a mandatory subject of bargaining. How do they argue this in the absence of such a provision in the actual law? The union argues that the sponsor of the firefighter collective bargaining legislation "intended" for staffing to become subject to bargaining and interest arbitration. The union points to the transcripts of the 1986 floor debate to make its point. But even the transcripts don't go that far. 

The transcripts, which are available here, only contain references to "equipment" manning. This pertains to the number of firefighters that must accompany an apparatus and is a wholly separate issue from the number of firefighters that must staff a shift. HB 5485 would require bargaining and interest arbitration over shift manning.

References to fire department staffing levels are not only absent from the text of the Illinois Labor Relations Act, but a review of the House transcripts cited by the fire union doesn't even carry the "implication" that "staffing levels" were intended to be included as a mandatory subject of bargaining within the 1986 law.

Assertion
The General Assembly's action on firefighter staffing does not establish the arbitration process for manning. It was already there and has been there for nearly 30 years. There are numerous examples of firefighters arbitrating this very important topic with their employer.

Reality
This is partly true, but mostly false because it takes an exception and attempts to suggest that it is the rule. 

Cities that have agreed to bargain and arbitrate over staffing are required by law to include staffing within future collective bargaining negotiations. HB 5485 would not alter this requirement one iota. These cities would have been compelled to continue to bargain over staffing with or without HB 5485. 

HB 5485 is a significant change in law because of what it would mean for cities that don't have staffing provisions in their contracts. These cities are not presently required to bargain over staffing. That is, unless HB 5485 becomes law. If enacted, all cities with unionized fire departments would be mandated to bargain over staffing levels as a function of law. But the union conveniently omits the full explanation of current law and the important distinction contained therein - that a few cities have elected to bargain over manning and must continue to do so, while most cities have not and are not required to bargain. Instead, the union infers that the arbitration requirement has been applicable in all cities with unionized fire departments since the 1986 collective bargaining law was enacted. This is bogus and extremely misleading.

Assertion
Furthermore, you suggest the legislation will cost local governments untold chunks of money. In fact, the opposite is true.

Let's look at Oak Lawn, a Chicago suburb whose mayor and village trustees tried to end-run the arbitration process and were rejected by circuit, appellate and state supreme courts.

The taxpayers of Oak Lawn wasted $2.5 million in lawyers' fees and court awards, money for litigation that could have paid for over 25 firefighters for a year — including salary and all related benefits.

Reality
Partly true but with a very notable omission. Oak Lawn did expend $2.5 million in trying to remove the staffing requirement from its collective bargaining contract. But the Village did so because the staffing provision is costing Village taxpayers almost $2 million per year in overtime costs in order to meet the terms of the staffing levels. Spending $2.5 million to try and save Village taxpayers tens of millions over multiple years changes the complexion of this story dramatically. But the annual overtime cost was somehow omitted from the union's narrative. Funny how that works!

The op-ed then becomes sanctimonious about how the $2.5 million in legal fees could have been spent:

Or it could have fixed dozens of potholes, replaced crumbling sewers and sidewalks or put a couple bad guys in jail. Better yet, the money could have been abated back to the people who pay their property taxes with the expectation they'll get service, not pay for lawyers' vacation homes.

Good to see the fire union so concerned about the many financial obligations incurred by the Village. Perhaps they'll give up the many more millions in unnecessary overtime out of concern for the Village and its taxpayers? Don't hold your breath. 

While on the subject of Oak Lawn, let's shine a spotlight on another matter that the union saw fit to exclude. Here's an excerpt from labor lawyer Ben Gehrt's testimony before the Senate Executive Committee:

Let’s talk a little more about Oak Lawn. The Union claims that the litigation in Oak Lawn has been a boondoggle, wasting tax payers money on lawyers. What the Union wants you to ignore is this: in 2014, Oak Lawn went to interest arbitration. The Village showed that because of minimum staffing, their overtime costs increased from $200,000 to $1.8 million. The Village proposed changes that would save $1.3 million per year in overtime costs. The Union refused to even consider those changes. In interest arbitration, the Village proved with expert testimony that it could change its staffing levels without any adverse impact on safety. 

Arbitrator Ed Benn, one of the most respected arbitrators in the state, called the Village’s proposal a “good idea.” Nonetheless, the Arbitrator’s ruling was straightforward: no, the Village has to keep the artificially inflated staffing levels simply because that is the “status quo.” Oak Lawn is saddled with $1.3 million in unnecessary overtime costs. That is money that could go towards pensions, police officers, roads, business development, tax relief, or any one of hundreds of good causes. Instead, it has to be spent on an inflated staffing level.

So the union portends to be the defender of the taxpayer and prudent fiscal practices in an op-ed (even throwing in some class warfare for good measure), but not so much at the bargaining table. And therein lies a big part of the problem, particularly when the union argues that HB 5485 will "save" money. And yes, they actually argued that point. 

Unfortunately, 9 members of the Senate Executive Committee listened to Mr. Gerht's testimony about the costs (or deprived savings) that arbitrating staffing levels can impose on taxpayers and weren't influenced by it whatsoever. 

The fire union got away with a big one here. And they received some help in doing so. But perhaps this is another case of having to pass the bill so that we can find out what's in it. 

Related Posts:
Politics Trumps Policy with Passage of Fire Department Staffing Bill
The Anatomy of a Spin Job
The Evolution of the Fire Service in Three Graphs
Is Illinois' Fire Service Economically Viable?

Legislators Should Carefully Vet Minimum Wage Legislation

Business groups have understandably cried foul about legislation in the Illinois Senate that would incrementally increase the minimum wage to $11 per hour. Raising the minimum wage would obviously increase the cost of doing business, particularly for retailers. And much of this cost would be passed onto consumers through higher prices for goods and services. Probably not a great policy at a time when Illinois' economy is already sluggish and slow to rebound. 

But now it seems that the state could potentially burden human service providers if it follows through with a minimum wage increase:

As Democratic lawmakers renew their push to raise the state's minimum wage, there's a key sector of employers that finds itself stuck in the middle — nonprofit groups that care for some of the state's most vulnerable, including the elderly and disabled. 

That's because while they'd like to pay their workers more, many of those agencies receive the bulk of their funding from the state. Given Illinois' dire financial situation — which will only grow worse if portions of a temporary income tax increase expire as scheduled Jan. 1 — it means they could be on the hook for higher salaries without getting more money from the state to cover the additional costs.

I suppose that the state could always increase payments to these providers to offset the additional costs, but anyone with any knowledge of the depth of Illinois' fiscal problems would find that to be an unlikely option. If anything, it wouldn't be surprising to see the state reducing payments to human service providers over the next few budget cycles. Governor-elect Rauner has reportedly requested that state agencies draft-up FY2016 budgets to reflect 20 percent cost reductions. Those would be some pretty significant cuts if they come to fruition. 

In any event, the impact to service providers is probably another reason for the General Assembly to exercise considerable discretion and slow things down a bit on the drive to increase the minimum wage. 

SB 68 is expected to be further amended, with one of the amendments possibly restricting Chicago's home rule authority to increase the minimum wage above the level established by the state. And there might be a disagreement brewing between the House and Senate over how many votes this would require: 

Lawmakers would need a three-fifths vote margin in each chamber to pre-empt home rule. Lightford says she has enough votes to do that in the Senate. The fate of a minimum wage hike is less certain in the House, where Democrats have a large but narrower margin and lawmakers tend to be more conservative. Legislators are scheduled to return to the Capitol for action in early December.

This is generally correct. Per the Illinois Constitution, home rule preemptions require a supermajority vote of both chambers. This is apparently how the Senate intends to proceed. But the House may see things differently. From Capitol Fax (no link):

And such a preemption bill would not necessarily require a three-fifths majority to pass, says the top House Democratic attorney.

"If the state is saying we're not going to regulate it and you can't regulate it either, that requires (a super-majority)," Heather Weir Vaught explained. However, when the state decides to regulate something and tells municipalities they can't, then that only requires a simple majority, she said.

Could each chamber require a different vote threshold based upon two different "interpretations" of the Illinois Constitution? And could this introduce the possibility of litigation over "process" questions should a minimum wage cap be enacted without a supermajority vote? Anyway, both chambers should figure this out and get on the same page if they're intent to move forward on some kind of minimum wage cap. 

Here's what Article 7, Section 6 says about preempting home rule power:

(g) The General Assembly by a law approved by the vote of three-fifths of the members elected to each house may deny or limit the power to tax and any other power or function of a home rule unit not exercised or performed by the State other than a power or function specified in subsection (l) of this section.

But there's no guarantee that the House would rush to embrace the broader minimum wage bill anyway:

House Majority Leader Barbara Flynn Currie, who is a sponsor of the minimum wage bill, doesn’t anticipate much movement. 

“We didn’t have the votes to do it in the spring, and I’m not sure even though there was good support for it,” she said.

But then again...

But Mr. Madigan got big-time help from labor unions this year, including some unions (such as the American Federation of State, County and Municipal Employees) that haven't contributed to him in many a year. He told the Chicago Tribune Nov. 13 that he's “encouraging” his members to vote for the minimum wage hike.

Illinois politics always keeps you guessing.

Update (December 1):

I spoke with Heather Weir Vaught and she said that both chambers are on the same page in the view that a home rule preemption to cap the minimum wage would only require a simple majority.