Pension Failures, Governance Failures – Illinois Once Again Is The Poster Child
Longtime readers with particularly good memories may recall my first actuary-splainer: “Why Public Pension Pre-Funding Matters.” Knowing that many public pensions have had a long legacy of unfunding, and that the elected officials in charge of those plans have been plenty happy to operate them as, effectively, pay-as-you-go plans, I explained why this is actually a very bad idea indeed.
As a refresher, failure to fund pensions as they are earned traps future generations with legacy costs they may be unable to pay, if the size of the economy or the population shrinks. (You might think that won’t happen, but it has.) Even if those future generations are able to pay, it’s still unfair to expect them to pay off a prior generation’s debts, rolling over debt to their own children, and only implementing an alternate form of benefit (such as a defined contribution plan or even a shift to participating in Social Security) at great cost. It enables a mindset of promising pensions without paying any regard to their affordability for those future generations. (Again, it’s happened over and over again.) And funding failures go hand-in-hand with governance failures, which are both a cause and a consequence of the former: un- or under-funded pensions inspire gaming the system (passing the costs on to someone else, finding loopholes and tricks to avoid the reality of the debt) and, yes, tend to be a part of a general culture of faulty governance, if not outright corruption.
Can I prove that there is a direct connection between underfunded pensions and corruption? Admittedly not easily — for starters because there is no universally agreed-upon measure of corruption. In 2015, Harry Enten at FiveThirtyEight produced rankings based on several metrics, among them the results of a survey of state political reporters. Pairing this survey with the most recent summary of pension funding status by state produces a correlation coefficient of .34. Eliminate New York (where its courts have mandated pension funding) and the correlation rises to .39. (Note that this excludes purely local plans such as Chicago’s pensions.) It’s not a slam-dunk, as this falls in the “weak-to-moderate” relationship level, but, at the same time, this doesn’t take into account the various ways in which a state can be poorly governed without violating anti-corruption laws. Separately, pairing up pension funding levels with U.S. News’ Best States Ranking submetric of Fiscal Stability produces a correlation of .62, though that speaks more to the end result than the route our elected officials take to get there.
But I raise this, again, because Illinois is up to its old tricks, again.
Here are three news items:
First, as reported by Wirepoints, Moody’s is pushing back on proposals to re-amortize pensions.
“Moody’s Investors Service has issued its next warning to Illinois, noting pension debts are overwhelming the state’s economy and will continue to do so over the next year. Moody’s also cautioned against any ideas of improperly funding pensions as a way of providing relief for the state’s worsening budget. The agency said any ‘reamortization’ of pension debts would be credit negative. Moody’s rates Illinois just one notch above junk with a negative outlook. . . .
“The rating agency also quashed the hopes of some Illinois activists who continue to pursue debt ‘reamortization’ as a way to kick the can. Reamortization of Illinois’ pension debt would push repayments further into the future, weakening the pension funds even more. Moody’s added, ‘…any cuts to its pension contributions would only worsen [the state’s] long-term fiscal position by adding to its unfunded liabilities…Relying heavily on strategies like deficit borrowing or “re-amortizing” its pension contribution schedule would however be credit negative for the state, since such tactics only add to a long-term cycle of borrowing, or deferring payment, to address the consequences of those past actions.’”
Who’s pushing to re-amortize pensions? The Illinois Municipal League has called for this, for one, back in August, as has the Center for Tax and Budget Accountability, for multiple years, with a pension bond proposal which, in the fine print, reduces the funding target in 2045 from 90% to 70%. How tempted is Pritzker by these promises of an easy fix? He had proposed to stretch out the 90% funding target from 2045 to 2052, back in 2019, then backed away and has been silent on the subject since, but one presumes Moody’s feels there is a real risk, in order to find it necessary to warn against it.
Second, having rejected pension reform, the governor is putting all his eggs in the the so-called “Fair Tax” basket, threatening “nightmare” cuts or tax hikes if voters don’t approve it, and, what’s more, he and other supporters are engaging in misleading claims in order to gain voter support. What’s more, it turns out that the misleading claims have found their way not only to advertisements and politicans’ mouths, but to the actual ballot itself.
As context, Illinois’s state constitution prohibits a graduated income tax, prohibits more than one income tax, and keys the corporate tax rate off the personal income tax in an 8:5 ratio. The proposed tax amendment, which he and other supporters are calling a “fair tax,” would change each of those, allowing unlimited brackets, allowing multiple taxes (for instance, making the first-time implementation of a tax on retirement income more acceptable by using lower rates), and keying the maximum corporate tax rate off the highest tax bracket. In the tax structure which would come into effect in 2021 if the amendment passes, due to existing legislation, corporate would jump to the highest in the nation.
However, the ballot itself does not contain the actual amendment. Instead, it contains an “explanation” of the amendment, as prepared by its supporters, as follows:
“The proposed amendment grants the State authority to impose higher income tax rates on higher income levels, which is how the federal government and a majority of other states do it. The amendment would remove the portion of the Revenue Article of the Illinois Constitutions that is sometimes referred to as the ‘flat tax,’ that requires all taxes on income to be at the same rate. The amendment does not itself change tax rates. It gives the State ability to impose higher rates on those with higher income levels and lower income tax rates on those with middle or lower income levels. You are asked to decide whether the proposed amendment should become part of the Illinois Constitution.”
As Wirepoints observes, there are multiple untruths, half-truths, and omissions in this description.
First, to “impose higher income tax rates on higher income levels” is in fact not “how the federal government and a majority of others states do it.” Of those states with graduated income tax rates, only 15 have rates and brackets that single out “higher income” taxpayers; the remainder have highest-marginal-rates that start at middle-class incomes, or even lower levels. Of course, it is literally true that $50,000 is a “higher income” than $20,000, but “higher income levels” is commonly understood in an absolute sense, not simply relative to someone who hears less.
Second, the explanation likewise promises that the higher tax rates will fall on “higher income levels” and that “those with middle or lower income levels” will have lower tax rates. But there is nothing in the amendment that ensures that middle-income taxpayers will have a lower marginal tax rate than upper-income folk.
Third, the amendment’s explanation omits the removal of the “only one tax” provision as well as the keying of the corporate tax rate off the highest tax bracket.
In fact, as it happens, just today the Illinois Policy Institute filed a lawsuit asking for a Corrective Notice to be included in ballots to remove the misleading language. Will they succeed? Illinois being Illinois, I have my doubts, but their concerns are justified.
Finally, Illinois is in the midst of yet another corruption scandal.
In this case, it’s a matter of bribery.
This past July, the Chicago Tribune reported,
“A federal investigation orbiting the political operation of Illinois House Speaker Michael Madigan drew much closer to the powerful politician Friday, as prosecutors unveiled a criminal complaint charging ComEd in a “years-long bribery scheme” involving jobs, contracts and payments to Madigan allies.
“Prosecutors said the utility attempted to “influence and reward” Madigan by providing financial benefits to some close to him, often through a key confidant and adviser at the center of the probe. Madigan, the nation’s longest-serving speaker and Illinois Democratic Party chairman, has not been charged with any wrongdoing.”
Already the company has agreed to a $200 million fine.
Then, last week, the Tribune reported that former ComEd executive Fidel Marquez has pled guilty and is cooperating with prosecutors.
“The fact that Marquez is now also working with investigators significantly ramps up the pressure against others who have been implicated — but not yet charged — in the scheme, including former ComEd CEO Anne Pramaggiore; lobbyist and former ComEd executive John T. Hooker; Jay Doherty, a consultant and former President of the City Club; and Michael McClain, a former lobbyist for the utility and one of Madigan’s closest confidants.”
But as far as Illinois politics are concerned, it’s (mostly) business as usual. There is no interest among House Democrats in investigating Madigan’s conduct, and the attempt by minority House Republicans to do so has been met by roadblocks; not only has Madigan refused to testify but other leaders in the House are not confronting him. There are small encouraging signs — for instance, Gov. Pritzker has actually called for Madigan to testify, and Democratic state Rep. Stephanie Kifowit of exurban Oswego has announced she will challenge Madigan for speaker in January.
(For a history of Madigan’s connection to corruption, see the Tribune’s “House Speaker Michael Madigan says it’s not ‘ethically improper’ to find government jobs for people. Here’s what he’s failing to mention.” It’s a long article, detailing his legacy of patronage jobs and as the “rainmaker-in-chief” at a property tax appeals law firm.)
Patronage, bribery, deceit in ballot amendments, and a legacy of pension underfunding and trickery — it’s all part and parcel of a mindset that goes back to Mike Royko’s proposed new motto for city of Chicago: rather than Urbs in Horto (City in a Garden), it should be Ubi Est Mea (Where’s Mine). Of course, Royko proposed that decades ago, but Illinois is far from leaving that mindset behind.
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