Friday, July 06, 2007

Capitolfax’s Rich Miller wrong on State Pension fix

Rich Miller, in the hard copy of his Capitolfax briefing for today makes the argument that Governor Blagojevich has misleadingly framed the argument about dealing with the State’s underfunding of the state employee and teacher pension debt. Blago argues the legislature has three choices:

• Blago’s suggested choices to deal with state pension underfunding

1. Buy into Blago’s plan to issue 16 billion dollars of bonds at 5%, or so, and then use the new bond revenue to invest and earn 8.5 %, or so, in the stock market. In short, John Filan, Blago’s Chief Operating Officer and Chief Budget Guru, argues, with some confidence, that the State can arbitrage the bond-equity markets. Also, the State would enter into a 75 year lease of the lottery, receiving a lump sum payment of 10 billion dollars now in exchange for loss of an estimated 650 million dollars/year over the next 75 years. Taken together, Filan estimates these financial maneuvers save the state as much as 60 billion dollars in future funding of the pension system [presumably, the 60 billion dollar figure is not discounted to present value terms, but Filan doesn’t say, or at least today’s Tribune story reporting on Filan’s thoughts [and other budget impasse issues] doesn’t say].

2. Raise taxes to meet successively larger, scheduled, annual state pension funding payments, reaching Four billion dollars in 2010 and almost five billion dollars by 2015, or

3. Reduce pension payments of new state employees and teachers [Or, at least the ones that are covered by the state pension plan].

• Blagojevich pension funding choices misleading?

Miller argues, at some length, in today’s "must read," Capitolfax hard copy but not at his "must read" Capitolfax blog that the above choices are predicated on the notion that the 1994 law that results in the demanding, pension funding payment schedule is some, “holy writ handed down from on high.” To the contrary, asserts Miller. He says that the payment schedule that dictates the above choices reflects an effort to make sure the pension systems were 90% funded by 2045. That was easy for Governor Jim Edgar to advocate, says Miller, because Edgar knew he “wouldn’t have to pay the price.”

Rich Miller’s cure- Repeal the 1994 law

Rather than sticking with arbitrary, difficult choices, Miller suggests why not lower the 90% number or extend the target 2045 date for acceptable pension funding solvency. So, implies Miller, go with maybe 75% by 2080, and the required payments in the short run are much more feasible.

Miller also says, “nobody wants to cut benefits for workers.”

Do Illinois citizens want to cut employee benefits for new government workers

But, putting aside Miller’s argument that the legislature should essentially solve the pension underfunding issue, for now, by repealing the 1994 law, this journalist thinks Miller is way off about “nobody wanting to cut benefits for [State government] workers [and public school teachers joining schools or government now or in the future]." The Democrats are way too wedded to state employee unions to do anything about benefits for new state employees and teachers. But, the Republicans, despite past associations, should be able to make the break. And, the mood of the State is not one of bestowing extravagant benefits on future state employees. It is bad enough that past and current state employees and teachers were treated so well.

Public Choice economic theory

Standard economic public choice theory suggests that politicians will focus on the relatively few employees who benefit a lot from maintaining above-normal employee benefits, as opposed to the greater number of taxpayers who will benefit from the lower state employee benefits. Public choice theory says the taxpayers, individually, don’t benefit that much from the lower taxes and the taxpayers are too diffuse to be an effective political lobby on this one issue. Indeed, this is how the State got into paying extravagant state employee benefits.

An option for Republicans

Notwithstanding Public Choice theory, in this case the Republicans should give it a shot. They need to be the equivalent of political entrepreneurs. Resurrect the proposed reforms of Blagojevich in 2004 [about only 25% of which were adopted] to reform the state employee pension system by cutting benefits for future employees, e.g., change from a defined benefit system to a defined contribution system.

Republican leaders Cross and Watson should get some experts to pull together the arguments that the state employee pension system is out of sync with the private sector and calculate the amount saved over the next sixty years, say, of adopting a new pension benefit schedule now. Most of this work was done a few years ago in Illinois, so it should be easy and cheap to pull together the analysis. Indeed, Speaker Mike might join the Republicans on this. Further, how can Blago argue against these reforms—he proposed them only a few years ago.

And, if the Democrats want to say no to the reforms, that’s fine, too. Then the Republicans have an issue for ’08. You have to ask yourself why wouldn’t the Republicans do this?

What will Watson, Cross and McKenna do?

Well, maybe Senate Republican Leader Watson is afraid he might diminish his minority position from its current 37-22? Or, maybe House Republican Leader Cross is afraid he might diminish his 67-51 minority position? Or, maybe State GOP Chairman McKenna is afraid his gubernatorial candidate in 2010 might do worse than Judy Baar Topinka’s 40% effort in 2006?

The saying in Illinois is that the Republicans never miss an opportunity to miss an opportunity? Will they be true to form on this one?
Jeff Berkowitz, Show Host/Producer of "Public Affairs," and Executive Legal Recruiter doing legal search can be reached at You may watch "Public Affairs," shows with Presidential Candidates Obama, McCain, Giuliani and Cox and many other pols at