Could Illinois state and local governments fire all of their workers?

by philg

From the New York Times:

The Illinois Supreme Court on Friday rejected changes that legislators made to fix a deeply troubled public pension system, leaving the state where it had started — with a significant budget crisis, a vastly underfunded pension program and no plan in sight.

All seven members of the state’s highest court found that a pension overhaul lawmakers had agreed to almost a year and a half ago violated the Illinois Constitution. The changes would have curtailed future cost-of-living adjustments for workers, raised the age of retirement for some and put a cap on pensions for those with the highest salaries. But under the state Constitution, benefits promised as part of a pension system for public workers “shall not be diminished or impaired.”

We now know that the Illinois constitution requires that if the state or local government hires a worker at age 18 whatever pension commitments are in place at that time must be preserved for the next 30 years or so (until that worker’s retirement) and then paid until the worker’s death (another 50 years? or 100 if medical technology leaps forward?). Thus Illinois taxpayers are locked in for at least 80 years.

I’m wondering, though, if this lock-in period could be cut to 50 years. What requires an insolvent state such as Illinois to retain any or all of its public employees? Could the governments simply fire all of the workers and then invite people to reapply for jobs with a new 401k-style pension system? And, if not, what does happen when Illinois, about the same population as Greece, runs out of cash (as Greece will shortly)? Do the public employees then get ownership of the highways so that they can establish toll booths? Ownership of city parks on which they can build apartment houses or charge admission fees?

Are there enough private-sector employees with political power in Illinois to obtain constitutional changes before all of the money is gone? Could Illinois raise tax rates enough to fill what is described as a $100 billion hole (probably closer to $200 billion if one were to use realistic accounting procedures, such as not forecasting a higher return than is currently obtainable in the bond market and adjusting for the fact that people who retire in their 50s tend to live longer than average) without causing revenue to fall as people and businesses moved to nearby states with sounder finances and therefore lower tax rates? The Tax Foundation says that Illinois is already collecting a higher-than-average share of residents’ income; the state’s insolvency apparently comes from spending more (and promising government workers more) than other states, not from taxing less. Neighboring Missouri, Indiana, Iowa, and Kentucky all have lower-than-average tax burdens. Wisconsin is the only neighboring state that collects more.

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15 thoughts on “Could Illinois state and local governments fire all of their workers?”

  5. What this means is that there is no chance for reforming the Illinois system. It will have to end in bankruptcy. The only question is how long until they are forced to file for bankruptcy.

  6. Near as I can tell the courts have always allowed the government to establish different tax rates for different kinds of income. Earned income vs unearned income, income tax brackets, etc.

    I say just tax pensions over $60,000 a year at 90%. Extra little bracket. Problem solved. They get paid, just like the state constitution guarantees. The state constitution never guaranteed that income was tax free.

  7. Clearly a federal bailout of some sort will be needed. Here, it might be worth noting for states in the same predicament that it’s wise to be first in line at the bailout counter.

  8. Bankruptcy advocates: Illinois is a state and therefore, I don’t think, can avail itself of federal bankruptcy court protection. It can become insolvent (already has on an accounting basis) and then default. That’s why you don’t want to buy muni bonds from Illinois!

  9. The Social Security pension plan (at least, that is how it is routinely described to taxpayers) that everyone has to pay into, does not have similar protections. In fact, IIRC, there is no “right” to SS payouts at all, and Congress can change any aspect of the plan at any time.

  10. It sounds like the IL legislature tried to weaken the pension benefit for all current and future state workers (and, perhaps, those already retired). Why doesn’t IL just reduce the pension benefit (or eliminate it entirely) for all new hires as of a specific date. That’s what FL did in 2011. The FL legislature successfully eliminated the COLA on pensions, increased the vesting period from six years to eight years, and raised the full-retirement age from 62 to 65 for all new general employees hired on or after 07/01/11; and began requiring all employees to contribute 3% of gross earnings to the plan, up from 0%. The changes were subsequently unsuccessfully challenged.

    https://www.rol.frs.state.fl.us/forms/Member-FAQ.pdf

  11. Government employees are the new rich. As I scientist, I should have just gone to work for the federal government instead of wasting my time in postdocs, until finally getting an industry position at the “young” age of 35.

    http://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html

    Quote from a federal government worker: “Two of the best things I ever did were getting a stable, moderately well paying job with the federal government, and buying less house than we needed. At age 56, by salting away 15% of my salary, I have nearly $600K in my 401k, and should have $875K when I retire at 62. I’ll also get a pension of about $40K a year, and put in for early social security of about $22K. I could have made a lot more in the private sector, but the stability outweighs anything else. (I worked in financial in New York and was mergered or McKinseyed out of more jobs than I can remember.) And we didn’t trade up to a bigger house when we could have–we have a comfortable place with a modest mortgage. ”

    Then later, someone made a very poignant comment: “The idea that $1,000,000 is equivalent to $30,000 withdrawals over 30 years with nothing left presents an interesting wealth concept. If a 60 year old has $2,000,000, you could call him/her wealthy, but would you call the same person who got a $60,000/yr pension wealthy? Maybe people with $60,000/yr pensions are the new rich. Which employment sections would they be more likely to have worked for? Government? Maybe we should encourage our children to educate themselves for that more lucrative path.”

  12. Where else do we see this Illinois problem?

    Greece == Illinois
    EU == USA

    Question is, who will fail first?

  14. IL resident here. A couple things:
    I believe the IL constitution requires a 60% affirmative popular vote to amend the constitution. Considering the current Governor is an elected Republican, I’d say there might be enough votes to amend. No one seems to be talking about that, though.

    (E Rekshun) There are currently two plans for pensions here, at least for union teachers. New hires get a significantly worse deal than teachers that have been around longer. I always found it curious that unions would agree to that. I thought they would be more “all for one and one for all”.

    As an alternative solution, why couldn’t the state pay premiums to the PBGC and then just default a few years from now? That would make the problem a federal one, solvable with its vast money-printing ability.

    It is interesting that if you search the PBGC “covered” list, the Ill. Educators Association (the main teacher’s union) pension plan IS insured. I assume this is for the people running the union, not the rank and file membership. So, if you are a teacher, you are worried about your future benefits going away (at least prior to last week). But, if you are a union employee, you’re safe!

  15. I live in Chicago and I can tell you what the folks at the Union League Club and the University Club are saying. Everyone talks about the pension fiasco, and everyone knows there’s no way out. Democrats have a super-majority in both houses and they aren’t going to beat up on those who fund their campaigns.

    We all know that the pension problem is nationwide. The thinking here is that, while the federal government can in no way bailout all state and municipal pensions, there will be a period when the feds do try a few massive state bailouts until everyone realizes that the whole nation is in line for a bailout, and thus this can’t go on.

    So when we talk about this in Chicago, we all think that Chicago wants to be first in line for a federal bailout when they start happening. What’s the point, you often here, about reducing this collapse by 5%? None. With everything looking hopeless, Chicago and Illinois are doubling-down.

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