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Questions Surround Bruce Rauner’s Pension Proposal, But Rauner To Be Mum on Specifics Until Court Ruling

Illinois’ pension reform law currently sits in legal limbo. But if the Supreme Court deems it unconstitutional, all eyes will shift to Illinois Gov. Bruce Rauner, who will need to propose a new solution to the state’s pension woes.

On the campaign trail, Rauner supported a plan to shift workers into a 401(K)-style plan. He has since softened his stance a bit, but hasn’t offered much in the way of clarification as to the specifics of his plan.

From the Chicago Tribune:

With Rauner taking over, the pension debt remains unsettled. As has been the case on many issues, the Republican has offered general answers about his preferences for dealing with public pensions and how he’ll respond if the new law is struck down.

“We have some very specific thoughts on that, but we’ll be developing those with the General Assembly,” Rauner said during a postelection visit to the Capitol. “We need a comprehensive, fair overhaul of the pension system, and we’ll make that a top priority.”

[…]

Asked recently if the state should begin working on a “Plan B” while the pension law is debated by the state Supreme Court, Rauner said his “preference is probably to wait until the Supreme Court rules, so we have some ground rules for what probably works and what won’t work. I think that’s a smarter way to do it.”

Would Rauner’s 401(k) plan work? Would it be constitutional? What are the specifics? And is that still his plan? From the Chicago Tribune:

In his successful campaign, Rauner spoke generally about wanting to shift public employees from receiving a defined pension benefit into becoming members of a defined contribution plan similar to a 401(k)-style system.

Rauner has said public workers should be able to keep the benefits they have already accrued, but, moving forward, go into a defined contribution system. He also has said public safety workers should stay in the current system. And, with 80 percent of public employees not eligible to receive Social Security, Rauner has said he favors some unspecified plan to create a retirement safety net.

But it’s unclear whether Rauner’s concept is constitutional, as he maintains, or how it would address the current unfunded pension liability since payments would go into a new retirement system rather than address the shortfalls in the current system.

“Not only does it not solve the problem, but it makes it worse in the near term,” Dye said. “Whatever the solution is will cost something, and I don’t know how it would be implemented. It’s hard to add (Rauner’s concept) up as a fiscal benefit for the state.”

Illinois is expected to make $6.6 billion in pension payments in fiscal year 2015. The state is saddled with over $100 billion of pension debt.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Union Leader: Solutions to New Jersey Pension Woes Are in Christie’s Hands

Dominick Marino, the president of the Professional Firefighters Association of New Jersey, penned an op-ed in Wednesday’s Times of Trenton calling on New Jersey Gov. Chris Christie to take responsibility for the state’s pension problems – and to fix them.

Marino writes:

Gov. Chris Christie continues to blame everyone for the state’s pension problems – previous governors, lawmakers, firefighters and police officers – but he refuses to take responsibility for his own actions on the issue.

Apparently, he wants the public to believe that when it comes to pensions, the buck stops elsewhere. That’s wrong and he knows it. It was Christie who, in 2011, signed a law dramatically overhauling New Jersey’s public pension system, increasing the out-of-pocket contributions from workers and mandating a seven-year schedule of state payments to get the system back in the black.

Since the 2011 signing, everyone has been doing their part to follow the law except Christie. He has decided the state simply cannot afford to live up to the terms of the law he signed and has cut $1.6 billion from the state’s obligation of $2.25 billion for the current fiscal year.

[…]

The governor can point fingers all he wants, but it will likely be up to the courts to sort through Christie’s smoke-and-mirrors approach to pensions. Three of the state’s largest pension funds are suing Christie and his administration for failing to make the legally required payments.

According to Standard and Poor’s, the problem with the pension fund is not public employees and not the economy. It’s Christie not paying his bill. This from the ratings agency: “The long-term impact of continuation of a funding policy that allows the State to contribute less than the actuarially recommended contribution could impact, at some point, the Pension Plans’ ability to meet their obligations absent significant additional contributions by the State, increased investment returns, or actions or events resulting in reductions to liabilities of the Pension Plans.”

Read the entire piece here.

Photo by Bob Jagendorf from Manalapan, NJ, USA (NJ Governor Chris Christie) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

China to Overhaul Pension System; Government Employees to Contribute More

China is planning a major overhaul of its pension system after complaints of unfair wealth distribution and favoritism towards government employees.

Reported by Bloomberg:

China will abolish a dual-track pension system that favors government employees and discriminates against others to create a fairer retirement-savings system.

Under existing rules, about 37 million employees with government agencies, communist organs and public institutions don’t have to contribute anything to their pension savings, with the government paying pensions of about 90 percent of their pre-retirement salaries. Those employed by businesses from banks to bakeries must contribute 8 percent of their salary to pension accounts, on top of 20 percent of their wages that’s paid by employers to a pooled pension fund. On average, private retirees end up with 40 percent of their working pay.

As the system has increasingly become a source of resentment among the public, Vice Premier Ma Kai said yesterday that the State Council and the ruling Politburo have agreed to implement a “unified” pension system, and government employees will have to contribute to their own pension accounts, the official Xinhua News Agency reported.

The report didn’t provide a timetable for the reforms.

Approximately 338 million people are covered by China’s pension system.

Photo by Jonathan Kos-Read via Flickr CC License

How Credit Rating Agencies Reacted to Illinois Pension Ruling

None of the three major rating agencies changed their outlook on Illinois’ credit in the wake of a lower court ruling that deemed the state’s pension reform law unconstitutional.

But rating agencies are certainly keeping a close watch on the state as the reform law moves up to the Supreme Court. And all three agencies had something to say after the ruling.

Moody’s had the harshest take, calling the ruling “credit negative” that leaves the door open for a rating downgrade. Summarized by Governing:

[Moody’s] issued an analysis on Nov. 24 that said the “state’s negative outlook indicates the possibility that factors such as further growth in the state’s pension liabilities will drive the rating lower still.” The state is appealing the decision to the Illinois Supreme Court but Moody’s was wary of its chances and pointed out that the top court this summer indicated in a separate case on retiree health benefits that would adhere strictly to the pension protection clause.

A top Moody’s official commented further in a WUIS report:

“The average state from our perspective or the expected rating for a state is AA1, which is our second highest rating. And so Illinois is A3, so that’s five rating notches below that,” said Ted Hampton, a Vice President at Moody’s Investor Service. “Which is to say, it’s still an investment-grade rating. It’s still a strong rating in the context of every kind of security that we rate. But it’s far below all of the other states.”

Hampton says Moody’s saw Illinois’ passage of the pension overhaul as beneficial, but not enough to move the credit ratings needle – because a court challenge was suspected. The recent court ruling likewise wasn’t not enough to prompt a change, though Moody’s called the decision “credit negative” in a notice sent out Tues., Nov. 24.

“We do get a lot of inquiries about states, particularly Illinois where there are problems that are in the news, and where the situation is in flux. And publishing these comments helps us get our opinion out to those investors, or to the general public,” Hampton said.

Fitch and S&P said the pension ruling didn’t move the needle much as far as the state’s credit rating. From Governing:

Fitch Ratings and Standard & Poor’s were far more forgiving. Both said they had already factored in the likelihood of court challenge into their current ratings for Illinois. “More importantly, from a credit perspective,” S&P added, savings from the pension reform are not included in the fiscal 2015 budget.”

Interestingly, Fitch’s main concern wasn’t the pension ruling. Instead, the agency said the real concern was the expiration of several tax increases. From Governing:

Fitch did note another trouble spot for Illinois’ credit lurking just ahead: the scheduled expiration of temporary tax increases in 2015. “The state passed a placeholder budget for the current fiscal year with a stated intent to revisit the issue after the November elections,” Fitch said. “Taking steps to address the long-standing structural mismatch between revenues and spending would put the state on more solid financial footing, while failure to take action would be a return to past practices and leave the state poorly positioned to confront future downturns.”

Moody’s: Illinois Pension Debt Is Worst In Country

Moody’s released a report last weekend measuring the pension liabilities of all states relative to state revenue. By that measure, Illinois has the worst pension debt in the country, according to the report. From the Sun-Times:

Illinois’ pension liability as a percentage of state revenue is far and away the nation’s highest, according to a new report from a major credit-rating agency.

The state’s three-year average liability over revenue is 258 percent, Moody’s Investors Service says.

The next closest? Connecticut, at about 200 percent.

The Moody’s report averaged the Illinois percentage from 2010 through 2012. In 2012 alone, the state’s rate was 318 percent.

The state has a $100 billion deficit in the amount of money that should be invested in the portfolios of five state-employee pension accounts.

[…]

In the latest report, Moody’s sets [the median] level at 51 percent.

Several larger states, similar to Illinois, are well below the median and rank in the 10 lowest percentages of adjusted net pension liability, including Ohio, Florida and New York. The group also includes Illinois neighbors Iowa and Wisconsin — the latter having the lowest level next to Nebraska.

Only three others states — New Jersey, Hawaii and Louisiana — have rates higher than 120 percent.

The report acknowledged the state’s pending pension reform, which currently sits in court. From the Sun-Times:

Lawmakers adopted an overhaul plan last fall that cuts benefits and increases worker contributions to significantly cut that debt.

But the law has been challenged in court. A Sangamon County judge indicated last week he wants the case moved swiftly to appellate courts, suggesting the Illinois Supreme Court’s rejection in July of a law affecting retiree health insurance could prove a model for the pension challenge.

Moody’s points out that even if the pension overhaul gets constitutional approval from the state’s high court, it still will take decades for Illinois government to dig out of its financial hole.

Photo by Chris Eaves via Flickr CC License