In 2008, then-Chicago Tribune columnist John Kass wrote a column about corruption in Illinois, “In Combine, cash is king, corruption is bipartisan.” Commenting in the middle of the trial then underway for political fixer Tony Rezko, Kass relates a conversation with former-Senator Peter Fitzgerald, “the Republican maverick from Illinois who tried to fight political corruption and paid for it [by being] driven out of Illinois politics by political bosses, by their spinners and media mouthpieces, who ridiculed him mercilessly.”
“’What do you call that Illinois political class that’s not committed to any party, they simply want to make money off the taxpayers?’ Fitzgerald said. ‘You know what to call them.’
“What?
“’The Illinois Combine,’ Fitzgerald said. ‘The bipartisan Illinois political combine. And all these guys being mentioned, they’re part of it.’ . . .
“’In the final analysis, The Combine’s allegiance is not to a party, but to their pocketbooks. They’re about making money off the taxpayers,’ Fitzgerald said.”
Newcomers to the state of Illinois may find it odd to see the word “bipartisan” show up anywhere in reference to Illinois, but they forget that the state’s history includes jailed governors from both political parties.
And this is a bit of a preface to the history I want to share on Illinois pensions.
Here’ another preface: over the past decade, there have been a handful of scholarly articles on pension underfunding and pension reform attempts, each attempting to determine what causes some states to have well-funded and other states, poorly-funded plans. Unfortunately, the only readily available data on the topic starts in 2001, but these scholars run their regressions and try to find correlations: is it Democrats? Is it Republicans? Is it single-party control? Is it split control? Is it the influence of public unions?
Nothing especially persuasive emerges from these studies, except for one: “Polarization and Policy: The Politics of Public-Sector Pensions,” by Sarah Anzia and Terry Moe, published in 2017 at Legislative Studies Quarterly.
Their main argument: before the Great Recession, in those states with un/underfunded pensions, both parties were the cause of the underfunding. Simply put, the public at large simply had no interest in pension funding, but was very much interested in a high level of government services and a low level of taxation. There was therefore no incentive for politicians of either side to fund pensions. As they write,
“[Politicians] are in the position of being able to promise public workers and their unions much-valued benefits without having to pay the true costs—for if they fail to make the necessary contributions, the bills won’t come due for many years, when other politicians and generations of taxpayers will be responsible for paying them. Thus, current politicians have incentives to behave myopically: by increasing benefits, keeping contributions lower than they should be—and relying on others, in the future, to pay the full costs. . . . This is an alluring calculus that knows no party lines.”
Only after the Great Recession, when a crash in the stock market combined with the emergence of the Tea Party (and, I would add, the pending implementation of GASB 67 in 2014, which required that state and local governments disclose their pension liability more visibly, along with increasing attention by rating agencies), did a split emerge, in which Republicans were more likely to support pension reform/pension funding measures, yet even still without a complete partisan divide.
And a review of the history of Illinois’ pension funding is a case study in how this pre-Great Recession bipartisan pension funding indifference played out. The whole history was outlined in great detail in a 2014 report by Eric Madiar, who at the time served as Chief Legal Counsel to Illinois Senate President John J. Cullerton; while the objective of much of his document is to argue a political point, his history lesson is extremely helpful, and starts with a 1917 report by the Illinois Pension Laws Commission lamenting that pension plans were not being funded and calling for the legislature to begin to fund pensions when benefits are earned. Throughout the 40s, 50s, and 60s, dire reports were issued by similar commissions, to no avail, with the result that the Illinois constitution of 1970 essentially treated the pension protection clause as an alternative to funding pensions.
But it gets worse: the low levels of pension funding were not the result merely of haphazard pension funding, but an intentional funding policy. In 1973, under Democratic Governor Dan Walker, the state legislature explicitly adopted a “pay-as-you-go” policy, contributing into the plan only as much as was needed to pay out benefits for the year. And in 1982, under Republican Governor Jim Thompson, as a budget-savings measure, even this level of contribution was abandoned, with the contribution level reduced to only 60% of benefits, where it remained until 1995. The only reason that pensions did not become insolvent was that at the same time, they shifted from investments only in low-risk, low-return investments such as government bonds, to more aggressive investments of the sort we expect today.
As the 80s continued, it was widely recognized that this policy was unsustainable, and in 1989 the state passed new legislation with a 7 year ramp and a goal to reach full funding in 40 years’ time. But the legislature never actually appropriated the funds to make these contributions.
Then, in the 1994 election between incumbent Republican Jim Edgar and Democratic candidate and current state comptroller Dawn Netsch, the underfunded pensions became a political issue, and Netsch criticized Edgar for failing to implement the 1989 funding plan. Each candidate had a competing plan: Edgar’s was a 50 year plan with a 20 year ramp, and Netsch offered a 10 year phase in. After Edgar won the election, the legislature enacted a bill modeled on his proposal, with a 50 year 90% target and a 15 year ramp. But even based on projections at the time, this plan would have taken until 2034 to begin to reduce the unfunded liability, as until then the contributions would not have covered the full cost of each year’s new benefit accrual and interest on the debt.
And the story doesn’t even end there: in 2003, under Democrat Rod Blagojevich, the state issued $10 billion in Pension Obligation Bonds (POBs), and counted the repayment principal and interest as part of its pension contribution. Then, during 2006 and 2007, the state took two contribution holidays. Note that this preceded the Great Recession. And in in 2010 and 2011, now under Democrat Pat Quinn, the state issued more bonds, in this case using the proceeds not merely to boost the funded status but to cover part of the annual required contribution. (This last part of the story comes from Jeffrey R. Brown and Richard F. Dye’s “Illinois Pensions in a Fiscal Context: A (Basket) Case Study.”) To be fair, it was under Quinn that Illinois for the first time implemented a pension reduction, the Tier II benefit, and none of what I’ve chronicled pairs together the legacy of benefit increases and who bore responsibility for these — simply because there is no similarly convenient summary of this history.
So there you have it: a century-long legacy of unfunded pensions in Illinois.
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