In an op-ed in the Wall Street Journal Andrew Biggs reacts to Illinois’s request for a federal bailout of its public pension funds:
Given Illinois’s record of poor pension stewardship, Congress should reject any bailout on the merits. And yet the alternative might be worse. I have spent the past three years as a member of the federal Financial Oversight and Management Board for Puerto Rico, wrestling with the island’s 2016 insolvency, which included the exhaustion of its main public pension funds. A governmental bankruptcy is an ugly process from which no quick or clean resolution can be expected. Illinois’s unfunded pension liabilities substantially exceed its bonded debt, meaning that even a complete debt default wouldn’t put its finances back on track. A statewide economic contraction could also become a regional threat.
So Congress may want to offer assistance, but it should come with strict conditions: Any state looking for a pension handout must either live by the stricter accounting rules federal law imposes on private pension plans or freeze its pension and shift all employees to defined-contribution retirement plans.
Private-sector plans must assume more-conservative investment returns than public-sector plans and address unfunded liabilities more rapidly. As a result, private pensions today have set aside more than twice as much funding per dollar of promised future benefits than have state and local pensions. If adopted decades ago, stricter funding rules could have saved pensions such as Illinois’s. But today those states are in a bind: Many can barely make their contributions using the lenient public-sector funding rules, much less the stricter rules for private plans.
The alternative is what the Puerto Rico Oversight Board insisted on: Freeze the old pension to prevent any new benefit accruals while shifting all employees to 401(k)-like retirement accounts. Freezing a pension doesn’t make its unfunded liabilities go away. But it caps existing liabilities while shifting employees to plans in which the government’s funding obligation is clearly defined and can’t be evaded using actuarial or accounting tricks.
Illinois politicians will claim their state constitution prevents pension changes. But it was a misguided 1970 amendment to that constitution that made public pensions in Illinois a contract for life. By contrast, federal laws governing private pensions prohibit cuts to benefits that have already been accrued but allow employers flexibility to alter the rate at which future benefits are earned. Any assistance should be premised on constitutional or legal changes to align state pension rules with federal law.
I don’t think that Mr. Biggs understand the situation completely. Doing what he proposes is, in fact, against Illinois’s constitution. It is not merely a “claim”. It is settled law. It would require amending the state’s constitution.
At the minimum that would require a 3/5s vote of the state’s legislature. Is there any motivation that would impel 60% of sitting representatives to commit political seppuku? Certainly not statesmanship or public-spiritedness. If those were present in our legislators we wouldn’t be in the mess we’re in.
I also find the willingness of people to blame the voters for Illinois’s predicament distressing. The columnist John Kass has characterized Illinois’s politics as “the Combine”: the Illinois Democratic Party and the Illinois Republican Party, like two criminal gangs, have entered into an informal and corrupt pact to divide power in the state. The voters don’t have a choice between one candidate who will do the right thing and another who won’t. They have the choice between two candidates who are largely in agreement on maintaining the corrupt status quo.
The City of Chicago is a case in point. In our recent mayoral election we did not have the choice between a big-spending Democrat and a minarchist Republican. No Republican ran. As has been the case for decades here two Democrats who largely agreed on the issues squared off against each other, both of them functionaries in the corrupt political machine. In the primaries I, along with a plurality of black voters, had voted for an outsider. He came in third.
Back in 2014 I crossed party lines to vote for Republican Bruce Rauner for governor. I felt it was the only chance we had for reform. He won but, unfortunately, either he didn’t understand the political situation well enough or merely did not have the guile necessary to do what needed to be done. He was stymied by an intransigent Democratic supermajority in both houses of the legislature.
His phrasing about the Constitutional issue is quite odd; he seems to reject the legitimacy of constitutional limitation because it is actually a misguided 1970 amendment that is to blame. This is incorrect in the details, in 1970 Illinois held a Constitutional Convention to enact its fourth Constitution. This was not an amendment, Illinois Constitutional order dates back 50 years, just like the U.S. Constitutional order dates back to 1789, even though the country existed before that time.
But also, so what? The U.S. Constitution prohibits slavery, even if “just” by amendment.
Yes. As you might have noticed that irritated me.
I can’t argue with your legal point.
But after the three trillion dollar sop to the banks and big business why not ask? Does anyone think that the Federal Debt matters at all anymore?
And even if if it matters, the Rubicon is crossed, it’s all downhill from here.
They make analogies to WWII, is that how we won? Borrow trillions, gift it to the biggest business to hire and equip mercenaries? Come to think of it yes we did. Everyone made money except the brainwashed patriotic grunts.
It’s a free for all, might as well ask.
I heard a bit from Sen Cassidy (R) out of Louisiana that made sense to me. We need to help out states if we want businesses to return to normal. If we dont have police, sanitation, fire departments, etc we businesses are going to work well. He also made the specific point that this should not be used to bail out states for pre-exisitng problems. Made sense not me.
Steve
It makes sense but it, unfortunately, impossible for a reason that should be obvious after the experience of 2009-2010. Money is fungible. Once a grant goes to the state there is no way that the federal government can prevent the money replacing other money and that money being used for other spending priorities. including their public employee pensions.