There is good reason that the acronym of Illinois’s nickname is LOL. True–it does stand for Land of Lincoln, but it is also indicative the fact that our state is the laughingstock of the country. We’ve been approaching a fiscal cliff for quite sometime. Our budgets are bloated, and our state continually borrows money. Our pension systems are massively underfunded, and our credit rating is being downgraded on a seemingly monthly basis.
Our pension problems are our latest fiscal fire. There are five state pension systems–one for legislators, one for judges, one for teachers outside of Chicago, one for state employees, and one for state university employees. Right now, these pension systems are underfunded by $83 billion (although new rules in such estimates put that number at $206 billion) and have the potential to go bankrupt by 2018. The 67% state income tax increase and 46% corporate tax increase passed in a lame duck session in early 2011 has done little if anything to help better fund education or help improve the pension situation.There are two ideas that have been pushed by Governor Quinn–pension reform and a federal bailout. Pension reform was not achieved during the most recent regular session, nor a special session this past summer. The pension reform plan that Governor Quinn proposes includes increasing individual contributions, reducing cost of living adjustments, increasing the retirement age, and requiring that state pensions only be provided to state workers (i.e. make school districts responsible for providing teacher pensions). If implemented, these partial reforms would perhaps help, but in some respects, these changes would be considered merely nibbling at the margins. These ideas are not relentless reform.
In addition to his pension reform plans, Governor Quinn is toying with another idea to help stabilize the state’s fiscal situation–a federal bailout. In his FY2012 budget speech, Governor Quinn stated (emphasis added):
Consider the state’s unfunded pension liability as a mortgage on future public employees’pension payments. Illinois has a long history of high unfunded liability—a big, decades-long mortgage problem, a big risk. After fiscal year 2010, following losses from a deep recession, the unfunded liability sat at over 60 percent. While the pension reform of 2010 improved the situation by decreasing future liabilities—and certainly the economic recovery improved net assets for the pension funds significant longterm improvements will come only from additional pension reforms,refinancing the liability and seeking a federal guarantee of the debt, or increasing the annual required state contributions. Until one or more of these options is achieved, pension funding issues will persist.
So much for that Illinois state motto of “state sovereignty, national union”! When you become dependent on outside sources to hold up your debt and subsidize your failure you begin to lose your sovereignty. The same could be said about America as a whole with roughly a third of our debt held by foreign nations.
The Illinois Policy Institute (a conservative think tank akin to a Heritage Foundation or Cato Institute) has pushed two key ideas to tackle the state pension problems. One is to change the pension funds from a defined benefit to a defined contribution system, which means that taxpayers no longer shoulder the liability of pensions and how they are invested. The other is to reject a federal bailout, as it would create “winner and loser” states throughout the country and runs counter to the constitutional concept of federalism. In short, the answer to Illinois’ problems could simply be: “listen to Governor Palin”.
This past week, Senator Jim DeMint of South Carolina joined with the Illinois Policy Institute to push for blocking federal bailouts of state and municipal pensions, and Senator Mark Kirk of Illinois had also made the same call in May 2011. Federal bailouts for states have been discussed in recent years because of the woeful straits that states like Illinois and California have found themselves in. In December of 2010, Governor Palin wrote a piece against the bailout of states by the federal government:
American taxpayers should not be expected to bail out wasteful state governments. Fiscally liberal states spent years running away from the hard decisions that could have put their finances on a more solid footing. Now they expect taxpayers from other states to bail them out, which will allow them to postpone the tough decisions they should have made ages ago and continue spending like there’s no tomorrow. Most Americans would say these states have made their bed and now they’ve got to lie in it. They accepted federal dollars and did not voice opposition to the unfunded federal mandates, and they even re-elected politicians who foisted debt-ridden programs on them that could never be sustained.
My home state made the switch from defined benefits to a defined contribution system, and as governor, I introduced a number of measures to build on that successful transition, while also addressing the issue of the remaining funding shortfall by prioritizing budgets to wrap our financial arms around this too-long ignored debt problem. When my state ran a surplus because we incentivized businesses, I didn’t spend it on fun and glamorous pet projects for lawmakers – though that would have made me quite popular with the earmark crowd. In fact, I vetoed more excessive spending than any governor in our state’s history, and I used the state’s surplus to bring our financial house in order by paying down our unfunded pension plans that some other governors wanted to ignore. This fiscal prudence didn’t make me popular with the state legislature. In addition to vetoing hundreds of millions of dollars in wasteful spending, I put billions of dollars into savings accounts for future rainy days, much like most American families do in responsibly planning for the future. I also enacted a hiring freeze and brought the education budget under control through a commitment to forward-funding. I returned much of the surplus back to the people (it was their money to start with!) through tax relief and energy rebates. I had proven as the mayor of the fastest growing city in the state that tax cuts incentivize business growth, and though the state legislature overrode some of my veto cuts and thwarted an additional tax relief request of mine, the public was supportive of efforts to rein in its government.
It’s one thing to veto spending and reduce the size of government when your state is broke. I did it when my state was flush with revenue from a surplus – though I had to fight politicians who wanted to spend like there was no tomorrow. It’s not easy to tell people no and make them act fiscally responsible and cut spending when the money is rolling in and your state is only 50 years shy of being a territory and everyone is yelling at you to spend while the money is there to build. My point is, if I could fight this fight in Alaska at a time of surplus, then other governors can and should be able to do the same at a time when their states are facing bankruptcy and postponing this fight is no longer an option.
The reforms that Governor Palin implemented helped lead to a 34.6% decrease in total liabilities during her tenure. In fact, Alaska is third best in the nation in the percentage of its pension system that is funded. Additionally, due in part to pension reform and other fiscal measures implemented by Governor Palin, Alaska’s credit rating has twice been upgraded by Standard and Poor’s and once by Moody’s since 2008. In addition to the bias of the media and the ill intentions of the GOP establishment, Governor Palin’s stellar record is not as well known as it should be because she prevented problems from reaching a tipping point by nipping them in the bud. She didn’t have to put out the proverbial fiscal fire because she removed the kindling before the fire could start. That doesn’t mean, though, that governors on both sides of the aisle can’t learn from her by implementing the reforms that helped make Alaska one of the most fiscally sound states in the country.