House Promises not to Bailout State Pension Funds

With the appropriately foreboding headline, “The corruption you see; the doomsday you don’t,” The Chicago Tribune reports:

Every indication suggests that, once again, [House Speaker] Madigan and [Senate President] Cullerton will be waving from the curb as this situation grows even more disastrous. We see no evidence that Madigan and Cullerton will use the legislative veto session that opens Tuesday to reduce future pension earnings, while protecting benefits already earned, for current employees.

Yesterday, the House took up a bill aimed at preventing union leaders from collecting pensions based on salaries that they earned working for a public sector union rather than the state. While the issue of pension fund abuse has provoked media outrage, this reform would do little to help the funds’ overall solvency.

Legislators remain reticent to enact major reforms, despite the growing pressure of insolvency that state and municipal funds are facing. Part of the reason that policymakers may not believe that they have to make the difficult decisions involved in reform may be that recent federal bailouts for Wall Street, Detroit, and state governments have led to moral hazard. Under a system where legislators do not believe that their taxpayers and recipients will bear the full cost of bringing the fund back to solvency, they are not concerned with making reforms, instead perhaps assuming that the federal government will step in to bail out the ailing fund.

However, the political climate has changed markedly since 2008 when the federal government looked at bailouts as stimulus. Last week, U.S. House Republicans issued a letter stating that Congress would not step in to help state pension funds remain solvent. The Chicago Sun Times reports:

The letter bearing signatures from U.S. Rep. Peter Roskam (R-Ill.) and other members of the Illinois GOP delegation along with the influential chairmen of eight House committees, including U.S. Rep. Paul Ryan (R-Wis.), urged Springfield to “seize the opportunity to appropriately reform the state’s public pension systems to address their massive unfunded liabilities – and to do so by your own means” during the veto session.

While state leaders say they expect no help from the federal government, they also don’t seem to be in a hurry to accept the difficult sacrifices that will have to be made now that Illinois’ pensions have the lowest funding ratio of all states. As Eileen Norcross and Ben VanMetre found in a recent working paper, Illinois’s budget woes have reached this precipice because the state’s budget rules allow for overspending and permit today’s policymakers to push bills on to tomorrow’s voters. Changing these institution won’t be easy, but this is where policymakers need to start if they want real reform for Illinois.