Ill., Pa. offer contrasting lessons for PERA

As Colorado PERA ponders how to address it’s alarming future solvency issues, it can look to Pennsylvania for a possible path forward, and to Illinois for a path to avoid at all costs.

Crain’s Chicago Business published an op-ed column last week laying out the contrasts between how the two states addressed dire pension problems.

Pennsylvania’s pension reform is not perfect. Current employees are grandfathered into their outdated and expensive plans. But new hires, excluding public safety employees, have to opt in to one of three plans, including a 401(k)-style “defined contribution” plan, as well as two “hybrid” plans that combine elements of both defined-benefit and defined-contribution plans. These reforms will provide budget relief over the long term, while cutting into the billions of dollars in unfunded liabilities for which taxpayers are currently on the hook.

Meanwhile, Illinois opted for optics over substance, the latest in that dysfunctional state’s sprint down the road to ruin.

Despite talks of a “grand compromise,” in which Republican Gov. Bruce Rauner would accept a tax increase from his Democratic legislature in return for structural reforms, a deal to turn around the state’s financial situation barely materialized. Instead the House and Senate passed a 32 percent personal income tax increase as well as hike in the corporate tax rate with no underlying structural reforms. As promised, Rauner vetoed this proposal, but his veto was overridden in the Senate and the House. The Illinois legislature’s inability or unwillingness to tackle the long term structural problems, as displayed throughout this budget process, is precisely why the state is in such terrible financial shape.

Remember those two words: structural reform. As PERA’s board forwards recommended fixes to the legislature later this year, anything short of real, structural changes to its pension funds will fall short of what’s needed. Sure, raising retirement ages, reducing cost-of-living adjustments, or increasing employer or employee contributions would help. But not nearly enough.

Meanwhile, here’s a sad little addendum to the Illinois mess. Right at the deadline, Chicago Public Schools made a partial payment of $464 million to its pension fund June 30. But the district owes $713 million. And $380 million of that payment was money borrowed at 6.39 percent, which is extraordinarily high by short-term lending standards. The loan will cost the school district $70,000 per day in interest payments between now and the fall, when an infusion of property tax revenue will allow the district to pay off the loan.

This sounds like a good way for CPS to fall off the back of the treadmill.

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