Tuesday, December 10, 2013

More US Pension Blues

The workers’ “friends”, the Democrats have voted in Illinois to cut $160 billion over the next 30 years in pension payments that the state had promised to current and future state employees to fix a gap of $100 billion shortfall. An alternative plan which was refused a vote had negotiated with public employee unions, would have saved the state even more money and it would have protected more of the contractual benefits of public employees. Under that plan, public employee unions, first, gave their members a choice: they could keep either their pension or medical benefits as they had been, then accept cuts in the other benefit plan (but not cuts as deep as those now proposed). In order to protect their benefits, the union also proposed raising the employee contribution to the benefit fund. Their plan would have cut state health spending by roughly $130 billion over 30 years and reduced pension liabilities by $60 billion.

The $100 billion shortfall is not due to the employee pensions being extraordinarily generous, especially considering that most of the state employees—who include public university workers and teachers outside of Chicago—do not participate in Social Security. Instead, like most pension funds, they have suffered from recurring economic crises that reduced the value of their investments and income. Compounding the problem, for several decades politicians from both parties in Illinois did not properly fund the pensions. At the same time, political leaders have been afraid to tax businesses, including the financial transactions in Chicago’s futures and options markets, in order to provide much-needed revenue that could cover the gap.

  Labor unions and allies denounced the legislation as “theft”. Union leaders, like SEIU Healthcare president Keith Kelleher, are angry with a Democratic legislature that cuts workers’ benefits while continuing to grant huge tax rebates to companies such as Archer Daniels Midland—supposedly to keep them in the state, even though Illinois gets no income tax revenue from most of its big corporations. The Illinois constitution clearly states that the legislature can do nothing to “diminish or impair” the pensions promised to employees. However, on the same day Illinois cut benefits, a federal court in Detroit ruled that the city could declare bankruptcy and could cut pensions, even though Michigan’s constitution prohibits such action. Although potentially a dangerous precedent for workers, the Detroit decision came in the context of bankruptcy, which Illinois does not face. And an Arizona court has upheld a constitutional protection for pension similar to that of Illinois.

Major newspaper editorialists, business-backed public policy groups (like the long-established Civic Federation), and many mainstream conservative business and political leaders supported the draconian pension legislation.  But the leading Republican  primary contender, anti-union hedge fund billionaire, Bruce Rauner, criticised it as insufficiently draconian. 

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