Will Taxpayers Drown in Pension Uncertainties?

river-730485_1280.jpg“Do not cross a river if it is on average four feet deep.” – Ancient proverb

Crossing a river is no small task: a mistake can mean catastrophe. Rivers are murky. Rivers flow quickly. River beds are uneven.

Illinois’ public pension funds share similar risks, including an assumption that these funds will steadily gain an expected “rate of return” each year, for the indefinite future. Currently, the expected rate of return for our state pension funds is set at 7.5%. Pensions are always supposed to be 100% funded, so the contributions made in the year of work should, decades later, be sufficient to pay the promised benefits. A higher rate of return means the money will grow faster, so you can put in less now, while a lower rate of return means more money must be deposited up front to get the same benefits down the road.

Just like a river bed, the rate of return on a pension fund can fluctuate wildly. That four-foot-deep river bed may be two feet deep across two-thirds of the river—but it’s the eight-foot-deep drop that will drown you. But on average, the river bed is still four feet.

Here’s where the analogy breaks down: rivers are fixed and can be measured with some precision. But there’s no way to measure the actual rate of return of a pension fund. An expected rate of return is a prediction of the future, a prediction of future returns in highly volatile financial markets.

This uncertainty is a primary reason that most private employers no longer offer guaranteed pensions. And many private plans have gone insolvent, paying pennies on the dollar to retirees who had been counting on those funds. The Teamsters’ Central States Pension Fund recently announced a bid to cut payments to current retirees in half (or worse) starting in July, to avoid the collapse of that fund.

Now, you may say, that 7.5% expected rate of return doesn’t sound unreasonable, so what’s the big deal? Well, up until 2014, the experts had set the expected rate at 8%. But in 2014, the pension funds lowered the rate to 7.5%. With that 0.5% reduction in expected growth of the funds, the math changed, meaning that we had not put in enough money up front, so our unfunded liability went up by billions of dollars. And the annual pension payments were immediately increased by hundreds of millions to make up the shortfall.

And, unlike a mutual fund or stock portfolio, pensions are supposed to be safe. The bankruptcy courts recently forced the City of Detroit to lower its estimated rate of return to 6.75%. The federal government requires private plans to use a 6.2% estimated rate of return. And Moody’s Investment Services relies on the safe, guaranteed nature of pensions in using a 4% estimated rate of return when calculating pension debt.

If the true future rate of return earned in the financial markets by our pension funds turns out to be closer to 6.75%, much less 4%, the consequences for your tax bill will be grave.

Right now, roughly 25% of general revenue tax dollars go to pay pensions, a large majority of it to pay off the back pension debt earned for prior years’ work, and a smaller portion to make the annual contributions for this year’s work. A majority of the debt was incurred year after year because state politicians refused to annually set aside the estimated amounts necessary to cover the pension benefits earned for each year.

But a substantial part of our pension debt is due to overly optimistic estimated rates of return. It’s a little-known fact that, even if pensions were funded at the estimated levels, we would still be tens of billions short of what we will need to pay our pension obligations. Going forward, if reality proves the “experts” wrong, and their estimated rates of return are too high, taxpayers will be on the hook for their mistakes, to the tune of billions and billions of dollars.

Everyone should have a sound retirement fund, but the question is how to get there. Should taxpayers bear the risk of guaranteeing against the swings of the private financial markets? Or should each family bear the burden of putting together a large enough amount in mutual funds, stocks, bonds, and other investments to ensure for retirement? The answers may not be easy or simple, but we won’t solve these big problems without honestly and seriously asking questions like these. The risks of drowning in the uncertainties of the future are way too high.

Regardless of Election Results: IL Government is Out of Touch & Costs too Much

dollar-1294424_1280.jpgLife is different this morning across Illinois. You may not notice driving to work or the supermarket, but yesterday marked the crescendo of several multi-million-dollar political fights waged throughout the state. Today, either Speaker Michael Madigan or Governor Bruce Rauner will be declared the "winner" or "loser" of these primary election contests. The impact will be felt for the remainder of the legislative session in Springfield, with the "winner" emboldened and the "loser" left wondering how or whether to change course.

Whatever the election results, the problems with state government remain clear: crushing debt, a culture of corruption and over-regulation, and a refusal to live within our means. If your political leaders are trying to fix these issues, they’re on the right track. If not, they’re on the wrong track—and for decades, we’ve been on the wrong track.

Over the past 20 years, our state politicians have increased spending well beyond the rate of inflation and population growth. State tax revenues have increased modestly over that rate of growth, such that we should have an extra $2 billion in surplus this year. Instead, we’re being told that every spending item is “critical,” no reforms are necessary, and taxes must be raised to cover a $4 billion shortfall—in all, a total of $6 billion more in spending than our historical level.

Illinoisans are generous people. But we’re already bearing the 2nd worst property tax burden in the country, the worst sales tax burden, and a substantial income tax burden.

Illinois government is out of touch and costs too much.

"Gotcha" Government

dollar-499481_1280.jpgImagine you’re at the shopping mall on a Saturday afternoon. You fought through the crowds, eventually found a few nice things to buy, and you’re headed back to your car. As you approach, you see something under your windshield wiper.

Maybe another pizza coupon? An ad for driveway sealing? No, it’s a $50 city ticket! You’re a law-abiding citizen, but you missed the deadline to renew your license plates, because the state government didn’t mail you a renewal notice. Since Springfield pols can’t balance the budget, you’re out another fifty bucks.

This isn’t a fairy tale. The Village of Schaumburg recently decided to take advantage of the lack of renewal notices to make extra money off folks shopping at Woodfield Mall. Schaumburg staff attacked the parking lots of that private shopping mall, ticketing cars with reckless abandon. And they made a ton of money doing it: monthly fines from tickets are up 25%, 50%, or more.

Not to pick on the good people of Schaumburg, but theirs is the same municipal government that put a red light camera at the main entrance to Woodfield Mall, even though there was no indication that the intersection was unsafe. They made millions, but boycotts of the mall ensued, eventually shaming village officials into removing the camera.

Why do we see so many examples of this kind of “gotcha!” government?

The news is full of stories about how government is breaking down across the state, from social services to universities to pension funds. Instead of tightening their belts to match programs to the funds available to pay for them, governments turn to increasingly outrageous cash grabs. Springfield doesn’t help matters: the majority party in the House and Senate won’t even consider a balanced budget, much less the sorts of reforms that could help school districts, municipalities, and other units of government lower their costs.

For instance, did you know that the state requires universities to use soybean-based ink in all their printing? That requirement alone adds millions to the cost of our children’s educations, but it doesn’t do a thing to help those kids get good-paying jobs or become better citizens. (However, it does keep the soybean lobby checks flowing to the politicians!)

I get a lot of special interests demanding that I vote to raise taxes. But recent studies have shown that, accounting for inflation and population growth, Illinoisans pay a lot more in taxes than we did 15 years ago. In other words, even though more money goes into the system today than it has before, we’re more broke than we’ve ever been.

More money isn’t the answer, but reform. We can have the government we want and need, but we have to focus on delivering effective services to taxpayers, not on propping up bureaucracies and special interests.

Rep. Breen Questions Sponsor of AFSCME No-Strike Legislation

On Tuesday, February 16, 2016, Rep. Peter Breen vigorously questioned the sponsor of Illinois House Bill 580, Rep. Chris Welch. The bill is commonly known as the AFSCME no-strike bill, and it is almost identical to last year's Senate Bill 1229, which was vetoed by Governor Rauner. If this bill were to become law, it would take the governor out the contract negotiation process and replace him with unelected arbitrators. Click on the youtube video to watch the floor debate. 

Better Politics?

A_New_Way_Image.pngPresident Obama gave an address to the General Assembly this past Wednesday, nine years to the day in 2007 he announced his candidacy for president, on the steps of the Old State Capitol in Springfield. The speech was what some called the beginning of his “farewell tour,” and his tone was much different than we’re used to hearing from him.

After the president finished, I turned to one of my colleagues and said, “I could’ve given 90% of that speech.” Apart from a brief recounting of specific policy prescriptions, the speech was about the corrupting influence of special interests in our political life: how the establishment negotiates sweetheart deals for itself, deals that we all know about but feel powerless to stop. The disparate treatment of the politically connected, without anchor in anything but raw power, has hardened our positions and stripped away the ground for compromise. If neither side stands for anything of substance, there’s no place to “meet in the middle,” because there is no “middle.”

Across the country, this feeling is causing a divide within and throughout our existing political party structure. The dividing is less about philosophical labels like “conservative” versus “liberal” and more about the basic concepts of establishment versus reform.

For the rest of the day on Wednesday, my Democratic colleagues were positively glowing—there was hope in the air, even joy. We were going to have a “new kind of politics” in Springfield .… then came Thursday.

On Thursday morning, House Speaker Mike Madigan jammed a highly controversial bill through committee. If passed, the bill would result in billions in salary increases for state workers, without any regard for how to pay for them. Our state workers are the best paid in the nation, and with the incredible pressures on families in Illinois—and with no state budget—it’s not time to be talking about massive raises.

This isn’t a new bill, either: it is a refiling of the most heavily contested bill we faced last year. Floor debate on that bill went on for hours, and it was vicious. The Governor vetoed the bill before, and there’s no reason to think he won’t veto it again. The timing was odd, unless you’re following the politics. We’re coming up on the March 15 Primary Election, and Speaker Madigan wants that bill voted on in time to influence a number of key primaries across the state—both Democrat and Republican.

I happened to be in the committee where the bill was considered. With President Obama’s speech fresh in mind, I vigorously questioned the lobbyist presenting the bill. Despite the flowery language he used to describe the measure, the whole thing was a clear power grab. Click here to listen to the audio of our exchange.

We’re facing a budget crisis, a jobs crisis, and at heart, a leadership crisis. In political life, you always ask whether something is a “70% or 80% approval issue”–in other words, if put to a vote of the public at large, would 70 or 80% or more support the policy? In this seemingly intractable political crisis, maybe the key to finding the “70% or 80%” way forward can be found by asking a different question: not which policy gives a “win” in the traditional Republican versus Democrat framework, but does the policy promote reform, or the stagnant, stale, and corrupt status quo?

PS—You’re seeing a microcosm of the reform versus establishment debate locally, at the College of DuPage. Congratulations to David Olsen, who was chosen to fill the vacant 7th trustee position on the COD board. David will bring a fresh perspective and a proven commitment to open, transparent government to the College. At only 27 years old, David is already Deputy Mayor of Downers Grove, and while in school at U of I, he was student body president, so he’ll connect well with the students at COD. He’s a great pick to break the logjam and protect taxpayers.

Rep. Breen Questions AFSCME Leader on Potential Budget Busting Bill

At an Illinois House Labor and Commerce Committee hearing on Thursday, February 11, 2016, Rep. Peter Breen vigorously questioned Michael Newman, Deputy Director of AFSCME Council 31, about HB 580 - also known as the AFSCME no strike bill. He expressed concern that the bill could potentially have a negative impact on taxpayers and the budget. 

“Illinois taxpayers are represented in contract negotiations by their elected representatives. HB 580 would reverse the will of the people and strip from our democratically elected Governor the ability to work for a union agreement that meets the needs of all Illinoisans,” said Breen, who sits on the Labor & Commerce Committee.


Breen Endorses Elliott for DuPage County Board District 4

Tim_Elliott_Family_Picture.jpegWith all the problems in Illinois, we need more principled people to run for public office at every level. That’s why I am pleased to endorse Tim Elliott for DuPage County Board District 4. I'd ask you to take a yard sign for him if you live in District 4. Request a yard sign at www.timelliottforcountyboard4.com. A map of District 4 can be found at www.dupageco.org/CountyBoard/Dist4Map/.

I see Tim as a person who will make us proud on the DuPage County Board. Tim's proven himself accountable to the residents of his community, and he has demonstrated the highest standard of ethics in his public service and in his professional work. When the reformers at College of DuPage needed an attorney they could trust, they turned to Tim. He is pro-life, and he is committed to stand up for the vulnerable and helpless in our human family. Tim is even an Eagle Scout!
Again, to request a yard sign for Tim or to learn more about him, go to www.timelliottforcountyboard4.com or call his campaign office at 630-510-4910. If you live in District 4, I'd appreciate your support for Tim Elliott. 

A Sad State of Affairs?

We are now in the 8th month of Illinois’ unprecedented budget impasse. Illinois’ backlog of unpaid bills is currently $7 billion and growing. People are hurting, because ministries are not being paid and services are being cut. And the word on the street is that Speaker Madigan won’t allow a resolution to this budget crisis to be voted on until after the November General Election. Instead of doing the right thing, he and the politicians he controls continue to hold the State hostage.
Into this storm, Gov. Bruce Rauner delivered his annual State of the State address last week. For 2016, Gov. Rauner has laid out a “transformation agenda,” with the goal of making Illinois government more effective and efficient. While some of these transformation items won’t make the front page of the morning paper, they will have a significant effect on how government services are delivered and at what cost. For instance, buying things for state government takes too long and costs too much. Simple reforms to how we purchase products and services for the state will save us over $500 million per year. Other states and private companies have made these changes, as part of “procurement reform,” and succeeded in both lowering the price paid for goods and services and lowering the cost of the process of buying itself.

You can click on the video below to hear my thoughts on the Governor’s address.

Read more

Establishment vs. Reform at COD

COD_meeting.jpgThe College of DuPage has been in the news a lot over the last year: for taxpayer-funded booze fests and hunting trips, sweetheart contracts for connected insiders, and federal and state criminal investigations. COD was even put on two years’ probation by the community college accrediting authorities.

Fraud, mismanagement, and corruption in state government are not shocking to Illinoisans. But folks in DuPage County don’t expect it locally. So, during the last election, those voters elected a group of three new trustees for the COD Board: called the “Clean Slate,” they were political outsiders who ran on a platform of substantial reform. After winning a mandate from the people, these three new trustees, plus the lone reformer from the prior board, formed a 4-3 majority.

An election like that one should have chastened the three holdover “establishment” trustees. But this is Illinois. Instead of backing down, the establishment doubled down. There are plenty of skeletons they’d prefer stay in the closest and arrangements they want to keep quiet. And when one of the reformers stepped down this past December, the old guard smelled blood and attacked even more furiously.

The COD board is now at 3-3, evenly split between new and old. The three old guard trustees have refused to show up for several regularly scheduled meetings—and they’ve even skipped numerous “special meetings” which they themselves called.

With the situation at a stand off, all eyes are on Lazaro Lopez, newly appointed by Governor Bruce Rauner to chair the Illinois Community College Board. By state law, Lopez must fill a community college board vacancy, if the local board doesn’t act within 60 days. Since the old guard trustees won’t attend any meetings, there’s no way they would agree to someone to become the deciding member of the board.

Love him or hate him, Governor Rauner ran for election on a platform of shaking up the status quo. While people of good will could disagree on who should be elected governor, there’s no room for reasonable disagreement here: the people voted for reform of the College of DuPage via a “Clean Slate,” and the new trustee must be someone who has the fortitude to stand for that reform. There’s no partisanship here: my friends who are liberal Democrats are just as mad about the corruption at COD as are my friends who are conservative Republicans.

I supported Bruce Rauner in the last election because I believed he would appoint the right people throughout Illinois government, to root out and upend the special interests and insider deals destroying our state. Even so, none of us knew that the resolution of the crisis at College of DuPage, the largest community college in Illinois, would come down to one of those appointments.

The issues are clear. The voters are fully behind reform. The deciding vote of the COD board is entirely within the hands of one of Governor Rauner’s trusted appointees. In a year of near-total gridlock in Springfield, the choice of a new trustee is one place where the Rauner administration can get a win: by appointing a real reformer to the College of DuPage board.

New Year, Old Games

happy-new-year-1092457_1280.jpgWhen you enter a new year, it’s a time to take a good hard look at where you are. A key part of this honest assessment is then making resolutions to improve the state of things in the year to come.

Unfortunately, the current state of affairs in Illinois is that the one who pays the most wins. This has been going on for decades. It’s more than just the whole “you scratch my back and I’ll scratch yours” mentality: a prominent political commentator recently had the insight that our state’s government runs similar to the Corleone crime family portrayed in the movie, The Godfather.

Giving priority to special interests and not the people’s interests is how we got into the trouble that plagues us today. Because of this way of doing business, we are the close to the bottom of the barrel in many key categories. Illinois is ranked 42nd worst in property tax competitiveness. Now, some of the other states with high property taxes will compensate by having other state and local tax burdens at a lower rate. Not us in Illinois—our other state and local tax burdens are higher than our neighbors in almost every area.

You may have seen the example in the news of the town of Harvey, a south suburb of 25,000 residents. It’s on the brink of financial collapse. People are taxed to the limit, but the mayor of that town wants more and more money. Years of rampant corruption and absolutely no transparency led them to this situation. Investigative reports have now found allegations of “questionable spending that benefited insiders.” Has the mayor been run out of town and replaced by those who would bring reform? No, not in Illinois. (The “reformers” in Harvey are instead asking for oversight and more money from the State and Federal Governments.)

It’s really about who you know, and that’s a sad state of affairs.

Next week, we are back in Springfield to kick off the 2016 session. There’s still no budget to speak of, much less a balanced one. There’s talk that Speaker Madigan won’t allow a budget to be voted on until after the November 2016 General Election. Nor will Speaker Madigan allow Gov. Rauner’s budget bills to the floor for debate, let alone a vote. If he did allow such debate and votes, it would put many of his members in a difficult place politically, since they would then have to explain to their residents why they refused to compromise and support a balanced budget.

But why not compromise and run on that as a campaign platform? Well, Speaker Madigan just received $2.8 million in political contributions in the month of December – with 68% of it coming from left-wing special interests. Rauner’s wide-ranging “Turnaround Agenda” includes several key reforms that could financially impact these connected interests, and these groups are dead set against them.

The problem is that doing nothing is not the answer. People continue to leave our state at record numbers – approximately 1 every 5 minutes. 

Why are they leaving?

Job growth is on the decline. Manufacturing businesses can’t afford to stay in Illinois and are leaving for greener pastures in our neighbor states. Yes, we need to protect workers’ safety and rights, but there needs to be a balance. The 2011 worker’s comp reform had some very good changes, but there’s much more work to be done. For example, a loophole was discovered that allowed physicians to continue to dispense drugs at much higher costs than pharmacists – often between 60% and 300% more. There are also incentives for doctors to prescribe and dispense more drugs, because they make more money.  Because of this, certain providers win, while patients, employers, and ultimately our state, loses.

Illinois is in real trouble, and it can’t be fixed without some tough and decisive action. No politician has all the answers, but Gov. Rauner has some good ideas worthy of discussion. We need true, sincere discussion, debate, and votes – without any games. It’s time to come together and hash out a plan to save our state.