Monday, July 17, 2017

Illinois and Unfunded Liability

Illinois has $130 billion in unfunded liabilities and just shy of 13 million in population. So very roughly speaking the burden of those liabilities is $10,000 for every man, woman, and child in Illinois.That's the problem. Almost none of the discussions of Illinois politics really cut to the heart of the matter. Any serious discussion about Illinois' fiscal problems would recognize the magnitude of the problem and then state clearly whose ox is going to get gored: the taxpayer's ox, or the pensioner's ox.

You could make this $10,000/person figure more meaningful in various ways. One could specify the cost per household rather than per individual. (After all, what does a $10k unfunded liability mean to my non-tax-paying children?) Or by netting out the benefit to Illinois retirees, such that those people are have a positive net balance, and the remainder of the population owes more than the $10k. (After all, what does a "$10k unfunded liability" mean to you if you're the recipient of the promised payments? Those aren't a "liability" to you!) Different people are burdened with different portions of that liability. For simplicity's sake let's call it $10,000. It's a substantial stack of money that we're all being asked to cough up.

Most of the commentary I see on this problem is completely unserious.

Here would be a somewhat serious answer: "Make the taxpayers cough up the full $10,000, and pay the full value of the promised benefits." The actual problem of a $10,000 unfunded liability doesn't go away, but at least this "solution" indicates who will pay for it. It at least says, "Hey, Joe Taxpayer, your ox will get gored. Johny Pensioner's ox will not get gored at all." Note that you wouldn't have to tax the $10,000/citizen all at once, but you'd have to raise taxes such that the average citizen pays an additional $10,000 eventually.

Another somewhat serious answer: "Make the pensioners take a total haircut on that $130 billion unfunded liability. Johny Pensioner's ox will get gored completely. Joe Taxpayer's ox will not get gored at all." Again, there isn't a "solution". There's $10,000 worth of "pain" per person to spread around. That doesn't go away when you specify who takes what proportion of that hit. But at least this is an adult conversation about how to spread that pain around.

Some unserious answer are things like, "Bruce Rauner is a big meany. If only he weren't so mean, we could solve this." No. If someone waved a magic wand over Bruce Rauner, that purified his soul and changed his alignment from Lawful Evil to Lawful Good, there would still be $130 billion worth of unfunded liabilities.

Or, "Mike Madigan is a corrupt deal-broker, drunk on his own power." Sorry, but you could wave the same magic wand over Madigan and you'd still have this unfunded liability of $10,000 per person to divvy up. We can talk about Madigan's long career, how he should have solved the problem earlier, how he and his colleagues bought off a powerful voting-block by overpromising future benefits, how he manipulated the liability with unreasonable rate-of-return assumptions, how an honest way to raise state employee compensation is to vote on a tax increase specifically tied to increasing employee salaries (such that there is a democratic check and a transparent budget). But after all the blame-passing, the damage is still done. You can lay all the blame on one guy if you want. There is still a $130 billion hole, and it's too late to fill it.

Apparently some people think that the budget problems would be completely solved if we just "eliminated corruption". I think this is facile. The bulk of the unfunded liabilities are for long-term retirement benefits to state employees and teachers. We could maybe have an adult conversation about how Illinois spends too much, and special interests capture some of that spending. Surely there is pork to cut out of the Illinois budget, and this would get us some of the way there. I would absolutely applaud an effort to make comprehensive cuts to Illinois' budget. But it would leave the bulk of that $130 billion untouched.

There are some hard constraints. The language of the Illinois constitution forbids reneging on a contract. See here: " Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." So to legally change the benefits we'd have to have a constitutional amendment. Another inescapable constraint: states can only raise taxes so high before they chase away their tax base. That's already happening in Illinois. People are seeing the writing on the wall and leaving the state. The Laffer Curve is real, but its effects are particularly acute at the state level where people can pack up and leave easily.

One might appeal to moral principles rather than practical constraints. "A pension is a promise" one might say. But there's a problem with this. "Yeah, a promise to rob me because you failed to adequately fund your pension!" one might fairly retort. There is no clear moral trump card here. While one can make the case that the pensioner's promised benefits ought to be paid, failing to acknowledge the rights and interests of whoever is paying seems to be a pretty serious omission. Anyone who just thinks "It's so obvious" that the pensioners should get 100% of their benefits, or that the taxpayer should not be liable at all for the badly managed public finances, isn't really thinking seriously about the problem. When there is a conflict of rights, the appropriate thing is to at least acknowledge both parties before you start talking about splitting the difference or resolving entirely in one party's favor. 

I'm not trying to take some lame "split-the-difference" middle-ground approach here. I have opinions, and in a different kind of post I would argue for a certain kind of resolution. I would make an argument for whose ox deserves to get gored more or less than the other party's. But this isn't that post. I'm merely trying to articulate a fair framing of the issue, which requires acknowledging that somebody's ox gets gored under any conceivable "solution." This is at its core a conflict of rights.

*The $130 billion figure appears to be under-counting. This piece from the Illinois Policy Institute suggests it's more like $200 billion when you count local government liabilities.

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