We’ve written quite a bit this year about the fiscal crises unfolding among America’s state and local governments. Illinois became something of a poster child for the problem when, in May, the state Supreme Court struck down a pension reform bid, triggering a Moody’s downgrade for Chicago.
After that, the situation in Springfield worsened materially and before you knew it, the state was paying out lottery winnings in IOUs and missing hundreds of millions in pension payments.
The Illinois high court decision effectively set a precedent. “My reaction was, ‘Yeah, that’s going to play here,’ “ John D. McGinnis, a lawmaker in Pennsylvania, told The New York Times [5] back in May. As the Times went on to note, Pennsylvania “has been diverting money from its pension system, setting the stage for a crisis as more and more public workers retire.”
“The judiciary in Pennsylvania has been solidly of the belief that there are ‘implicit contracts,’ and you can’t deviate from them,” McGinnis said. “If lawmakers in Harrisburg were to unilaterally cut pensions now, they could be taken to court and be dealt a stinging rebuke, like their counterparts in Illinois.”
Those comments underscore the extent to which Illinois is not alone in struggling to deal with fiscal mismanagement.
Indeed, Pennsylvania just broke a record for longest budget impasse in state history. “The current impasse is dragging on as Democratic Governor Tom Wolf and the Republican-led legislature can’t agree on a spending plan for the year that began in July,” Bloomberg said earlier this week [6], adding that “the delay is threatening Pennsylvania’s credit rating and has investors demanding higher yields on its debt.”
For his part, Wolf blames the evil Republicans. “A historic compromise budget that included the largest increase in education funding in history, reforms in public pensions, and a reduction in the deficit was within reach,” Wolf said on Wednesday, referencing the Senate’s move to shelve a complete spending bill in favor of kind of half-measure that included less funding for schools. “It is deeply disappointing that today the Senate has caved to those same House leaders and extreme interests to continue the failed status quo and harm our schools and children by denying them these critical additional funds.”
Wolf is alluding to the fact that, in a replay of what we’ve seen in Chicago, the partisan stalemate is beginning to threaten the state’s schools. As we pointed out back in August [7], Pennsylvania schools started the year "minus $1 billion" in funds.
[8]
“Tensions in Harrisburg have ratcheted up as warnings from nonprofits and schools that have gone without funding hit a new level,” WSJ wrote [9] on Wednesday. “The head of the Philadelphia public school system, the nation’s eighth largest with 134,000 students, said this month that schools could begin to cancel classes on Jan. 29 if the budget impasse isn’t resolved.”
The Senate defended their "unexpected" move to pass the bill which contains less education funding by contending that it was the quickest way to get the ball rolling. “We were being the grown-ups in the room,” Jennifer Kocher, a spokeswoman for Republican Senate Majority Leader Jake Corman, said. “We wanted to get funding out for the schools and this was the fastest way to get something to the governor’s desk.”
Wolf says the Republicans just wanted to go home and sit by the Christmas tree: “It seems that the Republican legislature is intent on continuing the Harrisburg status quo and getting out of town to go on vacation."
Meanwhile, Illinois' long-running impasse is creating a particularly perilous situation for the state's notoriously underfunded pension system. "Only one other state, Illinois, has failed to pass a budget for the 2015-2016 fiscal year," WSJ continues. "There, Republican Gov. Bruce Rauner is pushing for curbs to public-sector unions as a condition to raise taxes to meet a projected $5 billion budget shortfall."
Illinois pension debt totals some $111 billion of pension debt which breaks down to $8,000 per resident. Or, visually:
[10]
[11]
[12]
In October, Comptroller Leslie Geissler Munger announced that the state would "postpone" a $560 million retirement-fund payment next month, and could make the December contribution late. "The delay on the budget is definitely delaying anything being done about the pensions," Dan Solender, head of municipals at Lord Abbett & Co. in Jersey City, New Jersey, which manages $17 billion of local debt, including Illinois general-obligation bonds told The Chicago Tribune [13]. "The longer you wait to try to catch up on funding, the worse the situation gets." Here's more:
It's been seven months since the Illinois Supreme Court rejected the state's solution. Justices threw out the 2013 restructuring that took six attempts over 16 months to pass, despite one-party rule at the time. The measure was projected to save $145 billion over 30 years by limiting cost-of-living adjustments and raising the retirement age.
Illinois enters 2016 snarled in partisan bickering as Gov. Bruce Rauner, the state's first Republican chief executive in 12 years, and the Democrat-controlled legislature can't agree on annual appropriations, much less an overhaul of a retirement system that must withstand an inevitable legal challenge. The state constitution bans reducing worker retirement benefits.
Illinois is set to pay about $7.5 billion to pensions this fiscal year, and another $7.8 billion in the year that starts July 1, according to the Civic Federation, citing preliminary estimates by the retirements systems.
Even with the record budget impasse, about one of every $5 from the state's general fund coffers is going toward pensions, according to a Civic Federation report that cites estimates from Illinois Senate Democrats published on Aug. 13. The state's four plans are only 42 percent funded based on the market value of assets, according to the Commission on Government Forecasting and Accountability. That compares to 60 percent a decade earlier.
The lack of a budget forced the state comptroller to delay a $560 million November payment to the state retirement system. Illinois's unpaid bills totaled $7.6 billion as of Dec. 18, according to that office. The November retirement payment will be paid in the spring when the state has more revenue from income tax collections, according to the comptroller's staff.
And so, we see what happens with gross fiscal mismanagement meets petty partisan bickering. You're reminded that all of this is complicated by the fact that public sector pension funds are allowed to use absurdly unrealistic return assumptions (i.e. discount rates) which means that the unfunded liabilities are probably orders of magnitude larger than what the official data shows.
Where Illinois and Pennsylvania go from here is an open question, but the sheer absurdity inherent in not having a budget for a fiscal year that started six months ago should be readily apparent to everyone and underscores how divisive American politics has become. Perhaps the good folks inside the Beltway need to start setting a better example because as anyone who follows politics is acutely aware, legislative gridlock is pervasive in Washington.
