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Lessons of 2 states: What Illinois, Wisconsin can teach the world

By   /   April 17, 2012  /   No Comments

By M.D. Kittle | Wisconsin Reporter
MADISON — To fiscal conservatives and pension system reformers, Illinois is a cautionary tale.
For numbers crunchers like Steven Malanga, Wisconsin is a guide to fiscal thriftiness.

Both states serve as lessons for lawmakers and taxpayers alike.
Malanga, senior fellow at conservative research organization The Manhattan Institute, criticizes, compares and contrasts Illinois to what Malanga believes to be the state’s more responsible neighbor to the north in his latest analysis pointedly titled “Illinois Shows What Not To Do.”
While Wisconsin’s GOP-controlled Legislature and its embattled Republican governor cut deeply — in draconian fashion, Democrats charge — to fill a $3.6 billion state budget shortfall, Illinois’ Legislature and governor’s office, controlled by Democrats, imposed the largest tax increase in state history.
“Little more than a year has passed, and Illinois is right back where it started,” Malanga notes in the report, pointing to about $9 billion in unpaid bills dogging the state’s finances. The deficit comes even after Illinois posted tax revenue gains of 15.3 percent, among the top states in tax revenue collection, according to the U.S. Census Bureau‘s 2011 Annual Survey of State Government Tax Collections.
“Meantime, Wisconsin’s state and local governments have made substantial strides toward long-term budget stability,” the Manhattan Institute report states.
“The different fiscal outlooks of the neighboring states illustrate a crucial fact in today’s budget wars: You can’t tax your way to a better future.”
Malanga declares Illinois as a “poster child for fiscal irresponsibility,” a statement Illinois Gov. Pat Quinn is sure to take umbrage with.
Quinn’s website in advance of Wisconsin Gov. Scott Walkers speech to Illinois business leaders Tuesday in Springfield, blasted Walker’s record of job creation and his handling of the Badger State’s economy at large.
“One would wonder what a governor with a terrible economic record could have to say about jobs and economic growth,” the website said. “While Governor Walker might be fond of anti-worker and tea party rhetoric, the facts aren’t on his side.”
“Team Quinn” noted Wisconsin’s six consecutive months of employment contraction in the latter half of 2011 compared with gains in Illinois, although it does not note that Wisconsin’s economy has added thousands of jobs in the first two months of the year, the latest federal data available.
What Quinn does not note, and what the Manhattan Institute points to in particular, is Illinois’ deep pension problems.
The 99 percent

Wisconsin’s public-employee pension system, considered among the healthiest in the nation, was funded between 94 percent and 99 percent in 2010. 

Meanwhile, Illinois’ five state-funded pension systems recorded total unfunded liabilities of 53 percent, about $81 billion, as of June, 2011, said Dave Urbanek, public information officer for the Teachers’ Retirement System, or TRS, of the State of Illinois.

TRS, which includes 362,000 members, 101,000 of those retired, outside of the Chicago School District, is the largest pension system in the state and holds more than half of the unfunded liability — about $44 billion.
Urbanek, like so many on the front lines of the troubled pension system, acknowledges the state system is a big problem. He said Wisconsin’s situation was different, but state leaders realized changes were needed “before Wisconsin became another Illinois.”
The multibillion dollar unfunded liabilities, Urbanek said, are the direct result of the Legislature failing to fulfill its fiscal promises to the pension funds.
“Since 1970, the Legislature has redirected $15 billion that should have come to TRS,” he said, noting average returns of 9.3 percent over the past 40 years would have filled the funding gap.
But there’s more to the problem than legislative underfunding, Malanga said. The problem, he said, is the system itself, and a Legislature that is “beholden to public-sector unions,” to the point that lawmakers have been paralyzed in making the decisions needed to straighten out the financial mess.
Since 2003, Illinois has floated more than $15 billion in pension obligation bonds rather than pay for workers’ benefits out of its annual budget, according to the Manhattan Institute report.
“They’ve been faced down by the unions,” Malanga said. “It’s an untenable situation.”
Walker and the Republican-controlled Legislature took on organized labor in the “budget repair bill,” which included the controversial Act 10, curtailing collective bargaining for most public employees.
Tens of thousands of protesters, many from the biggest unions in the state and nation, crammed the state capitol in Madison fought the bill. It became law, with the support of a united GOP.
Public employees now must pay 5.5 percent of their paychecks to their pensions, and as much as 12.6 percent of their health-care premiums.
In that respect, Wisconsin took a tip from its neighbor to the south, which demands teachers, for instance, pay 9.4 percent of their salaries to fund their pensions.
Unlike Wisconsin, Illinois’ pension protections are written in the state’s constitution, with at least seven court decisions effectively affirming that employees in the system are guaranteed benefits earned for life.
National scope

Illinois isn’t alone. By some conservative estimates, the pension hole facing states, municipalities and other local governments tops $1 trillion.
Malanga said pension-troubled states need to look closely at states such as Wisconsin and Rhode Island, which once boasted one of the worst public pension crises in the United States. It devoured a big portion of its unfunded liability through systemic changes, like freezes to cost-of-living increases.
Urbanek sees the fixes differently. His pension system’s board has called on the state to fund state pensions through standard actuarial math. In TRS’ case, the system would receive $3.8 billion next year, not the $2.7 billion under the state of Illinois’ math.
And Urbanek said organized labor wants guarantees from the Legislature that it will appropriate the money needed to fund pensions, or there needs to be some legal recourse to recover the funding.
Malanga said states, too, must be more realistic about rates of return on funds. Constant projections of 8 percent or better have only dug the hole of unfunded liabilities deeper.
There’s also the question of political capital. While pension problems may be a matter of math, not politics, political realities surround the pension question.
Walker, Lt. Gov. Rebecca Kleefisch and four Republican senators, all facing recall elections in June, their peers say, are paying the price for making changes to Wisconsin’s collective-bargaining system.
Malanga said elected officials are going to have to make tough choices at the risk of their own political futures or deal with governments on the brink of insolvency, like Stockton, Calif.
“We are entering an era in state and local governments where taxpayers are paying more and getting less in services because of pension funds eating up” resources, he said.