BILL DALEY’S GRASP OF FINANCE AND ECONOMICS: WAS I MISINFORMED?

6/17/13

Today Bill Daley, who looks like a committed candidate for governor, at least at this juncture (See my 6/13/13 post BILL DALEY AND THE GOVERNOR’S OFFICE:   THE BROTHER ALSO RISES? and the posts to which it will refer you.), endorsed Mike Madigan’s pension reform package (See my 5/2/13 post, MIKE MADIGAN’S PENSION REFORM PLAN:  “THE BEST THAT (WE) CAN HOPE FOR IS TO DIE IN (OUR) SLEEP.”).   That was no surprise.  What was new, though perhaps not surprising, was a companion proposal Mr. Daley made:  He said that half the savings from pension reform should be spent on “education.”

I previously had thought that Mr. Daley had a firm, for a politician, grasp on financial and economic issues, but I suppose I was mistaken.  Let me try to explain something to him.  (Since I don’t know Mr. Daley and have never met Mr. Daley, I will have to do so in this forum.  As I have said before, it is unfortunate for both Mr. Daley and yours truly that we haven’t met.  At this juncture, it looks like the detriment to Mr. Daley of our being strangers if far greater than the detriment to yours truly.  But I digress.)

The reason that we need pension reform is not because we have a bunch of money lying around that we’d rather spend on other things than on public employee pensions.   The reason that we need pension reform is that WE DON’T HAVE THE MONEY to pay those pensions.   If we don’t reform our public pension system, we go broke.  (See one of Saturday’s posts,  WAS PAT QUINN “PUT ON THIS EARTH” TO SOLVE ILLINOIS’ PENSION PROBLEMS?)  If we do reform pensions, we avoid bankruptcy…unless the politicians go about spending the savings on other things, as one suspects this pack of poltroons will do.  

My suspicions regarding the propensity of the politicasters to blow any money we might save on other things have suddenly been heightened by Mr. Daley’s inane utterances regarding spending half the pension savings on “education,” which itself is code for “whatever the politicians want to spend money on as long as they can call it ‘education.’”  But that’s not the point.  The point is that the money is not there, is not projected to be there in any case, and will not be there even if we reform pensions.   If we could raise taxes or cut spending enough to meet our $100 billion pension liability, we wouldn’t have a problem.  But we can’t cut spending (or at least our pols, and, to be fair, almost all the citizenry, is unwilling to endure such cuts) or raise taxes to meet the liability, so we don’t and won’t have the money, whether we were to spend it on “education” or on pensions.

I hope, or at least I want to hope, that Mr. Daley, who is smarter than your typical pol, understands this and that his suggestion to spend the imagined windfall from pension reform on “education” is a purely political move, designed to garner support for pension reform from those who get a tingling feeling in their nether regions whenever a pol suggests spending money on “education.”  But I’m starting to think that my estimation of Mr. Daley’s financial acumen was inflated.  And if his proposal was purely political, someone should tell him that what Illinois needs now is not more of the same politics that got us into this soup but some leaders willing to make hard choices and to risk their lifetime sinecures doing so.

THE CULLERTON PENSION PLAN: “THE (PUBLIC EMPLOYEE UNIONS) FAMILY DON’T EVEN HAVE THAT KIND OF MUSCLE ANY MORE”???

5/8/13 

On Monday, State Senate President John Cullerton unveiled the multi-faceted approach to pension reform that he formulated in collaboration with the leaders of the state chapters of AFSCME, SEIU, and the AFL-CIO along with leaders of the IFT and IEA.   As readers will recall, Mr. Cullerton was in something of a snit when House Speaker Mike Madigan came up with his own plan for addressing Illinois’ $100 billion unfunded pension liability and vowed to come up with his own plan; see my 5/2/13 piece MIKE MADIGAN’S PENSION REFORM PLAN:  “THE BEST THAT (WE) CAN HOPE FOR IS TO DIE IN (OUR) SLEEP.” 

Mr. Cullerton’s plan is complicated because it offers workers a menu of choices, but its common theme is a trade-off between continuing to receive retiree health benefits and having pension cost of living (“COLA”) adjustments grow at simple interest rather than compound .  Unlike Mr. Madigan’s plan, Mr. Cullerton’s union backed plan would not increase the retirement age for state workers or limit the amount of a worker’s pension subject to COLA adjustment.   Again, see my 5/2/13 piece for details of the Madigan plan.

The Cullerton plan has a few virtues.  One is that, since it does not directly reduce retirees’ benefits but instead offers workers and retirees something of a Hobson’s choice between health care benefits in retirement and reduced pension benefits, the plan is less likely than the Madigan plan to run afoul of the Illinois constitution’s provision that pension benefits of public employees cannot be “diminished or impaired.”   One wonders, however, given the highly politicized nature of the court system in this state, whether any plan with the full backing of Mike Madigan would encounter more than rhetorical resistance even in the state Supreme Court.

Another virtue of the Cullerton plan is that it has the backing of, and indeed was formulated in association with, the state’s public employee unions, who are apoplectic over the Madigan plan.   But one wonders (I’m not being disingenuous here; one really does wonder.) how much muscle the public employee unions have any more.  That Mr. Madigan, a life long ally of those unions, formulated a pension plan that ostensibly sent the unions through the roof indicates that perhaps Mr. Madigan, the state’s shrewdest politician, doesn’t think the unions hold the aces they once did.

Those virtues are more than offset by the Cullerton plan’s major weakness:  it does little to address the state’s gaping budget hole.  The Cullerton plan reduces the state’s $100 billion unfunded pension liability by $10 billion while the Madigan plan lops of $30 billion, and even that $30 billion is not enough.   If we insist on getting into the fantasy land of the distant future, the Cullerton plan saves the state $46 billion over the next 30 years while the Madigan plan supposedly saves the state $140 billion.   But that larger number depends on the state’s politicians’ keeping their promises, albeit, according to the Madigan plan, legally enforceable promises. (This enforcement mechanism would only force bankruptcy…if the state isn’t already in court by 2019, the date of the first enforceable payment…more quickly if the state’s finances don’t begin to show nearly impossible improvement.  But that is grist for another mill.).   And since when have this state’s, or any state’s, politicians kept their promises?   One of the reasons this problem arose is because our state’s “leaders” refused to honor promises to fund pensions.

Two other points worth pondering…

First, doubtless some will, if they haven’t already, argue that the whole Madigan/Cullerton plan is part of some Machiavellian dance to avoid doing anything about our pension problems.   The Madigan plan has passed the House, the Cullerton plan will pass the Senate, and the whole thing will die in conference.   This doesn’t make much sense, though.  Why would Mike Madigan so infuriate the unions, especially when his daughter is apparently conducting a campaign for governor, while achieving nothing?   The unions may not have the power they once did, but it makes no sense, especially to someone as savvy as Mike Madigan, to incur their wrath for nothing. 

Some might argue the unions are in on the whole conspiracy.  While this is plausible, remember the old adage about the reducing likelihood of keeping a conspiracy secret as the number of conspirators grows.   Talk of a Madigan/Cullerton plan to appear to be doing something about pensions while doing nothing is even too cynical for yours truly and assumes Mike Madigan is even more Machiavellian than he is…isn’t it?

 Second, even if something does get done on pensions, one cannot be sanguine about the fiscal future of our state.  Note John Cullerton’s comments as he unveiled his proposal

“We know we have to pass a pension reform bill this year.  We’re the worst funded in the nation.  It’s affecting our budget.  We have to free up money next fiscal year and fiscal years after that.  And that’s why we have to pass these bills.  We know that.”  (Emphasis mine)

One suspects that when the likes of John Cullerton speak of “free(ing) up money,” it’s not to roll back the “temporary” income tax increase he and Mr. Madigan passed with the help of Governor Quinn a few years ago.   Mr. Cullerton is talking instead of “free(ing) up money” for, you guessed it, more spending…on “the children,” or “public safety,” or “health care,” or any of the many anodyne labels politicians put on ladling out your money to their contributors.  What will have been achieved if we save money on pensions only to blow it on something else?

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

MIKE MADIGAN’S PENSION REFORM PLAN: “THE BEST THAT (WE) CAN HOPE FOR IS TO DIE IN (OUR) SLEEP.”

5/2/13

Illinois House Speaker Mike Madigan has come up with a plan for reforming the states broke, and broken, public employee pension system.   The plan, which is a refinement and tweaking of a couple earlier House plans, attacks the pension problem on a number of fronts.  In broad terms, the plan

--increases retirement ages for younger state employees and provides incentive for older employees to delay retirement by postponing cost of living (“COLA”) increases in pensions until an employee is 67 years old or has been retired for five years, whichever comes first.

--increases employee contributions to their pensions starting July 1.  (Good luck with that date.)

--limits the amount of an employee’s pension subject to COLA adjustments to an amount determined by multiplying the employee’s years of service by $1,000.   So an employee who worked for the state for 15 years would have only $15,000 of his pension subject to COLA adjustments.  COLA adjustments would not be compounded.  The latter point is far larger than it appears at first glance.

 

--covers four of the five state pension funds; only the judges’ plan is excluded.

--includes various funding guarantees and schedules.

Further, the plan, at least for now, excludes a prior provision that would require suburban and downstate school districts to eventually fund their own pension plans rather than have the state pick up their tab, as it does now.   The excluded provision was a non-starter for the Republicans who, in most other contexts, like to talk about being fiscally responsible and not expecting handouts.  With the requirement that the suburban and downstate districts pay their own way dropped, the GOP leadership in the House is fully on board with the Speaker’s plan.

With the support of Speaker Madigan and House Minority Leader Tom Cross (R., Oswego), the plan sailed though committee by a 9-1 margin and is a lock to pass the House.  Prospects in the Senate are not as hopeful, however; Senate President John Cullerton is working on his own plan with the help of public employee union leaders who are apoplectic over Mr. Madigan’s plan.   Further, any plan must pass Illinois Constitutional muster; the Illinois constitution states that public pension benefits cannot be “diminished or impaired” and the lawyers are going to have a field day, and a big payday, with this one.

The politics of the situation are, as are all Illinois politics, interesting. 

First, Senate President Cullerton, in one of his rare disagreements with, or failure to pay obeisance to, Speaker Madigan, appears genuinely miffed at talk that, with the Speaker and, to a far lesser extent, the Republican leadership, behind it, the Madigan plan is inevitable.   As Mr. Cullerton said yesterday

“The fact that the president of the Senate and the unions are putting their full weight behind something means something in this building, too.”

Could this be the start of a genuine feud between the Speaker and the Senate President, with the public employee unions siding with the President?   Probably not; neither the unions nor Mr. Cullerton have the power, or the intestinal fortitude, to stand up to the Speaker.   This thing should cool down and the Senate will end up passing the Madigan plan or something very similar to it.

Second, as I mentioned before, the bill must pass Constitutional muster and the unions will fight it tooth and nail in the courts, as they are doing in the legislature and on the airwaves.   But this is Illinois and (Surprise!) we have perhaps the most politicized court system, and Supreme Court, in the country.   While there are plenty of good judges at all levels in this state, one doesn’t get on the bench here by being a legal scholar or even a good lawyer; in most cases, one gets to put on judicial robes because one has curried sufficient favor with the powers-that-be.  (See my 2/5/13 post HOW DID CYNTHIA BRIM GET ON THE BENCH…AND STAY THERE FOR NEARLY TWENTY YEARS?)  While one would think that such an august institution would be the exception to this rule, this is Illinois, so the Supreme Court is at least as politicized, and obedient to, or at least cognizant of, the state’s powers that be as the lower courts.   Mike Madigan, who is also Chairman of the Illinois Democratic Party, is clearly one of the powers that be.  He may not have as much power as Alderman Ed Burke in the judicial domain, but Mr. Madigan still makes and breaks many aspiring judges and generally works well with Mr. Burke…though this case may be an exception to the latter due to Mr. Burke’s strong union ties.   While predicting the outcomes of court cases is as problematical as predicting election outcomes or stock prices, one suspects that a Madigan plan will make it through the courts.   But don’t hold me to that.

Third, the public employee unions are, to put it mildly, infuriated with Mike Madigan over this plan.  Illinois Federation of Teachers President Dan Montgomery has called the plan a “gut punch,” and yours truly thinks Mr. Montgomery was being polite, or at least circumspect, by using that particular portion of the anatomy in his description of where the bill and, by extension, Mr. Madigan, directs its/his fist...or foot.  

Will the public employee unions take out their anger, especially if this thing is passed, on Attorney General Lisa Madigan, who is just about certain to challenge Governor Pat Quinn (no relation) in the 2014 Democratic primary for governor?   If they do, where do they go?  To Pat Quinn, who has been working for something like this plan for at least the last year?   Could this be an opening for Bill Daley, who also is pondering a run for governor?   Unless Mr. Daley is completely mercenary, one suspects not; Mr. Daley’s theme, his entire reason for running, is that he is the one who can bring fiscal sanity back to Illinois.  Backing the public employee unions in this case will not help that image.  Could the public employees go with the Republicans?   Though with the sorry batch of GOPers we have in this state, anything is possible, one can’t see even ultimate insider, collaborator, and go along, get along guy Kirk Dillard siding with the unions here, let alone someone like Bill Brady or someone even more conservative.

It looks like the unions have nowhere to go to vent their anger against the Speaker here…and Mr. Madigan knows it.

Not quite as interesting, but more important, are the strengths and weaknesses of the plan from a financial standpoint.

Yes, this is a big step in the direction of alleviating our pension funding problems; one might even call the steps Mr. Madigan is proposing draconian, especially in the context of the political realities of this state.   But even this plan only eliminates about a third of our $100 billion unfunded pension liability.   The plan does, however, promise to fully fund the four pension plans involved…by 2045, when most of the players involved, and yours truly, should be long gone.   And even that distant full funding date will be met largely due to promised $1 billion annual contributions by the state…starting in 2020 (when most of the players and yours truly will hopefully still be around) and continuing until the plans are fully funded.  

Since when have Illinois politicians, or politicians anywhere, lived up to their promises, especially to promises made in the relatively, or absolutely, distant past?   One of the many reasons that public pensions in Illinois are in such trouble is the failure of the state to make its previously promised pension contributions, contributions that it had neither the capability nor the intent to make.   Why should it be any different this time?  

Predictions are difficult, but this one is one of the easier prognostications to make:   Since full funding of our public pension plans requires politicians to keep their promises, we are not going to fully fund our pension plans…not even in 2045.   We are still going to be deeply in the red and headed toward bankruptcy.

Mr. Madigan’s plan is a step in the right direction.  He is to be lauded for formulating and/or championing the plan.  Either that or we should wonder what is really going on in that most sophisticated of political brains and ask ourselves what Mr. Madigan is really up to.   But assuming that the Speaker is sincere and this plan is legitimate, it still seems to involve a lot of pain, political and otherwise, for not enough progress.  It is, however, the best we can do at this juncture, or so it appears.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics.