Illinois pensions in peril

December 1, 2013 at 12:00 AM EDT
Associated Press reporter Sarah Burnett talks to Hari Sreenivasan about new legislation concerning the state’s pension system and about how it may affect retirees, labor unions and taxpayers in that state and in others.

HARI SREENIVASAN: Tonight, we continue our coverage of “The Pension Peril,” a public television initiative that will shine a light on the more than $1 trillion shortfall in funding for public employees’ retirement benefits. We’ll explore what it means for retirees and taxpayers, examine how it might threaten the fiscal stability of cities and states, and report on proposed solutions. This week, we focus on new efforts at pension reform in Illinois, the state with the worst funded public employee pension system in the nation. Estimates are that it is underfunded by a $100 billion. The situation’s so serious that, according to one recent report, about 20 cents of every taxpayer dollar in Illinois is now used to pay for pensions. But on Wednesday, state legislators announced a tentative bipartisan deal to address the problem. For much more about all this we’re joined now from Chicago by Sara Burnett. She’s with the Associated Press, has been reporting this story. So what’s the framework of this potential deal?

SARA BURNETT: Well, the biggest change is that it affects the cost of living increases, those annual increases that retirees receive on their pension benefits to keep up with the cost of living. So, it will reduce those increases from the current level. Some of the workers who have worked the longest and received the smallest salaries will continue to get increases at the level they do currently, but most everyone else will see their benefits grow at a much slower rate. Other than that, it’s raising the retirement age and making some other changes in how the state directs money to those funds.

HARI SREENIVASAN: So, people have been critical about this process as it’s been happening, from both sides. Some conservatives say these cuts don’t go far enough, and some of the labor unions say this is almost unconstitutional and this is too deep a cut.

SARA BURNETT: Yes, exactly. They believe this plan is unconstitutional. The labor unions have already said that if it passes the legislature on Tuesday, they will file a lawsuit to have it thrown out. Their belief is that these public workers and these retirees spent their careers paying into retirement systems, holding up their end of the bargain while the state did not, and that it’s unfair for them to cut their benefits to the degree that they’re being cut. The labor unions did propose a compromise deal earlier in the year, but it couldn’t get through the House because lawmakers there didn’t think it saved enough money.

HARI SREENIVASAN: And so, how unique is the Illinois state constitution? I mean, is this a case that other states are going to study and say, “Wait, you know, we have a very similar clause. The outcome matters to us as well?”

SARA BURNETT: Many states have constitutional protections, and you’ve seen — I mean, many, many other states have already dealt with these problems and are fighting them out in the courts right now. What I’ve been told is that Illinois’s constitutional protection is a particularly rock-solid one compared to how the language is written into some other states. And so it may not be an apples-to-apples comparison, but certainly people are going to be watching this one because it is such a huge case and it is so critical to the future of the state’s finances.

HARI SREENIVASAN: And what about the fact that this is a heavily Democratic state? If this bipartisan deal can be agreed on and really challenges where the labor unions sit, can that have longer term or wider implications for the labor movement in the U.S.?

SARA BURNETT: Well, that is one of the things that we’ve been looking at, is—you know, labor has taken a hit in some sort of surprising places like Michigan in recent years, and certainly, this would be a blow to the labor unions. They have had a pretty amicable relationship with both Republicans and Democrats up to this point, but it will set off what I believe will be some pretty hostile interactions between the unions and these lawmakers going forward.

HARI SREENIVASAN: So what impact does this sort of a credit crunch have for the state of Illinois and the taxpayers?

SARA BURNETT: Well, the repeated failures by the lawmakers to come up with a solution for this problem has led the credit rating agencies to downgrade Illinois’s rating multiple times over the last several years. Illinois now has the lowest credit rating of any state in the nation. So that means when they go to sell bonds, borrow money for capital projects, roads, things like that, taxpayers in Illinois are paying them a higher interest rate on that borrowed money than taxpayers in any other state. At the same time, in order to make these payments each year, as you mentioned in the intro, the state is putting about 20 cents of every taxpayer dollar into the pension funds. That’s money that could be going to schools. There are social service agencies that have not been paid what the state owes them for months at a time. They’ve got a multi– I think it’s close to $8 billion backlog of unpaid bills sitting in Springfield waiting to be paid because there isn’t money to do it.

HARI SREENIVASAN: So what are the chances? Now, this coming week, we’re going to have this be sort of proposed, maybe in both sections, the House and the Senate and state Legislature?

SARA BURNETT: Correct. We’re expecting this to move fairly quickly on Tuesday. The House and the Senate will both come in and both chambers can address it on that day. It has the support of the Democratic and the Republican leaders in both chambers, and this is the first time that there has been any pension proposal. There have been previous proposals that the two chambers couldn’t agree on or the two parties couldn’t agree on. This is the first one that has the support from all four of those leaders, which makes it — you know, people believe this is the best chance yet.

HARI SREENIVASAN: Okay, so stepping back for a second, is there a lesson that other states can learn in preventing themselves from getting in such a $100 billion mess?

SARA BURNETT: Yes, there’s probably a lot of lessons to be learned from the things that Illinois has done wrong here. First of all, legislatures, going back for decades, Republican and Democrat-controlled legislatures, for years and years did not put in their required contribution into these pension funds. They agreed to certain benefits, and then, instead of putting the money away to pay for them, they used that money for something else. And, you know, now, obviously, the unfunded liability has grown to the point where that just cannot continue any longer.

HARI SREENIVASAN: Alright. Sara Burnett from the Associated Press, thanks so much.

SARA BURNETT: Thank you.

This segment was produced for the NewsHour Weekend as part of WNET’s “Pension Peril” project funded by the Laura and John Arnold Foundation. After its production, because of a perception issue, PBS & WNET agreed to suspend the project and return the Arnold Foundation gift. WNET, the producer of the NewsHour Weekend, did not provide details about the funding of the project to reporters and producers of the segments.