August 12, 2015
By: Sheila Weinberg
I want to commend Dave McKinney for his story in Crain’s on Illinois’ pension disaster, which pointed out key actions that governors and legislators purposely took that created the financial crisis.
Here is the overarching theme: politicians misleading citizens with claims of balanced budgets that implied that state debt was not increasing.
Governors and legislators have not followed the intentions of the state’s constitutional balanced budget requirement, which are to promote accountability, curtail borrowing and avert financial crisis.
Instead, elected officials have used the budget as a re-election arsenal. Voters have been enticed with, as McKinney says, “short-term gratification of funneling more money into schools and other operational needs.” State worker and union support was obtained by providing what some believe are overly generous pension promises without setting aside adequate funding to pay for these constitutionally guaranteed benefits.
If the intent of the balanced budget requirement had been followed, taxpayers would have been charged for the additional spending and pension promises. But elected officials knew raising taxes to cover overspending would been looked at unfavorably in the voting booth. To avoid making tough, unpopular choices, governors and legislators used the loose wording of the balanced budget provision to commit the “parade of horribles” mentioned in McKinney’s piece.
Specifically, the balanced budget provision requires “expenditures” to not exceed “funds estimated by the General Assembly to be available.”
‘EDGAR RAMP’ LED RIGHT OFF A CLIFF
The “Edgar ramp” was a program to fund the pension plans 90 percent by 2045. But instead, this program allowed politicians to set artificially low payments in the early years, ramping up to insurmountable payments later. This scheme was permitted because “expenditures” means only the checks the governors and legislators chose to pay, not all of the expenses and costs incurred. Total employee compensation expenses should have been included in the budgets. In addition to the employee paychecks, these expenses should have included the pension benefits employees earn and the liability the state incurs each year.
The governors and legislators can’t claim they did not know the proper pension contributions, because each year the pension plan actuaries calculated these amounts. Since 1997 these “annual required contributions” have been included in the state’s audited financial report.
The state’s governors and legislators should have been held accountable at the time they promised more pension benefits. When they received the political advantage for enacting legislation to enhance pension benefits, such as increasing cost-of-living adjustments and offering early-retirement options, the related costs should have been included in the budget. Then a truly balanced budget would have forced them to take the political hit for increasing taxes to provide funds to offset these increased benefits.
The balanced budget provision’s use of the wording “funds estimated by the General Assembly to be available” led to politicians to come up with the concept that revenue could be created by borrowing money. This permitted Gov. Rod Blagojevich to borrow money and use it to pay pension contributions for two years.
Shortly after this happened, I pointed out to John Filan, Blagojevich’s former budget director, that bragging that they paid five years of contributions all at once is like being proud that you paid off your Visa card by charging it to your MasterCard.
IGNORING THE MATH
Often in McKinney’s article, former governors and legislators claimed they just didn’t know the current or future costs involved in the legislation they voted for and signed. These governors and legislators should have demanded the necessary information to understand they were creating a crisis. They never should have increased benefits without knowing the costs that would have to be paid by current and future taxpayers.
Former SEC official Peter Chan said, “I sometimes wonder whether people understood the math.” The governors and legislators understood that the political math they were using allowed them to claim they were meeting the constitution’s balanced budget requirement—and get re-elected—by providing increasing services and benefits without losing votes due to the tax hikes necessary to cover these expenses.
The governors and legislators understood the math. It is the math that they make corporations throughout the state use to calculate taxes. It is the math used to compile the state government audit financial report since 1997.
The citizens of Illinois need to elect governors and legislators who take their duty seriously. The state balanced budget requirement must be strengthened to prevent the accounting gimmicks that have been used to balance the budget, while incurring $104.6 billion of pension debt.
With annual revenue of $44 billion, Illinois government has grown to be one of the state’s top 10 businesses. Its annual revenue of $44 billion is higher than the revenues of Deere, Sears Holdings and Allstate. State laws don’t allow businesses like these to use shoddy budgeting and accounting practices. To avoid sinking further into the financial abyss, Illinois citizens should demand the same from their elected officials.