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Blue Bust
Illinois Supreme Court Rules Against Arithmetic

Late last week, the Illinois Supreme Court struck down a pension reform law, affirming an earlier ruling by a circuit court that found a bipartisan effort to address the pension system’s massive underfunding was unconstitutional. The Wall Street Journal:

“The financial challenges facing state and local governments in Illinois are well known and significant,” said Justice Lloyd Karmeier, writing for the entire court. “It is our obligation, however, just as it is theirs, to ensure that the law is followed.” […]

“The court’s ruling confirms that the Illinois Constitution ensures against the government’s unilateral diminishment or impairment of public pensions,” said Michael Carrigan, president of the Illinois ALF-CIO, speaking on behalf of the We Are One Illinois coalition of unions.

Steven Malanga, writing at the time of the circuit court’s ruling, laid out the challenges facing Illinois very clearly:

Now, to pay off its retirement debt, Illinois needs more than $6 billion a year from taxpayers to make up for the skipped contributions to the pension system, along with more than $1 billion more to pay off its pension bonds. That represents more than one-fifth of the state’s general-fund budget. By contrast, states typically spend no more than 4 percent to 5 percent of their budgets on pensions.

This latest decision means that the state has two choices: slash services to the young and the poor to pay off the older, more affluent and whiter retired civil servants—or tax the economy into oblivion. Illinois’ Republican governor, Bruce Rauner, vowed to amend the Illinois constitution, “clarifying the distinction between currently earned benefits and future benefits not yet earned.”

An amendment like that could help, but basically the state supreme court has ruled that in Illinois, the constitution is a suicide pact by design.

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  • Fat_Man

    Too bad my kids are moving to Chicago. Fortunately, it is for graduate school. When they graduate and start to make money, they will have to leave.

    BTW, I favor reducing services over raising taxes. Might as well punish the voters who got them into this mess.

  • JR

    Ah yes, good ol’ let’s outlaw arithmetic trick. I’m sure this time it will work out WAY better than all the other times it has been tried. If only they just raised their taxes a little more. On the rich only.

    • dawnsblood

      It depends on how much they are paying Illinois after ‘they just raised their taxes a little more’. I am not a tax expert so I do not know the ins and outs of rates there but if they feel that pushes it too far they will leave. After all $7 billion dollars isn’t a small sum of money. They did not become successful being everyone’s favorite slush fund.

      This would probably work if the tax rate was uniform across the country but it isn’t. Smart people with the means to change residences at will can look for the best deal. Illinois is in great shape if that leaves still them as the best deal in the minds of their richer residents.

      • JR

        We do have a uniform tax rate across country. It is called federal tax, Social Security tax, Medicaid/Medicare, and if you don’t have health insurance, shared-responsibility tax. Local jurisdictions get to decide what the local tax is. And then residents get to say whether paying the state of CA extra 13+% of their income really does translate to a better outcome for them then, let’s say Miami, Florida. Or whether the pleasure of living in Chicago is really worth the extra cash you pay in taxes vs. let’s say Austin, Texas.
        Illinois is facing the same problem as Greece. You cannot spend money you don’t have on your way to prosperity. Citizenry doesn’t tolerate a level of taxation above a certain point, something that has confounded rulers for many millennia. The only way is to cut spending, which is what inevitably happens. It is happening in Greece and Venezuela, it will start happening very soon in Puerto Rico, and Illinois is not far behind.

  • Corlyss

    At last! An existential crisis for the Blue Model. I can’t wait to see how they wiggle out of it, like the EU keeps doing.

    • ljgude

      That is indeed a realistic expectation! We are in for a lot more wiggling before that Blue Catfish lies still.

      • Corlyss

        Can’t we hit it with a gaff? Please . . .

  • f1b0nacc1

    The usual suspects will be here to tell us how this is all the fault of the GOP in 5, 4, 3, 2, 1…..

  • Anthony

    Political Decay (Institutional Rigidity) percolating for decades (if not a few generations) manifests itself – “a series of rules that lead to outcomes that are commonly acknowledged to be bad and yet are regarded as essentially unreformable.”

  • FriendlyGoat

    The GDP of Illinois is said to be north of $630 billion and Chicago is home to the largest futures exchange in the world. Illinois is not Greece or Venezuela. It is not going into default.

    Challenging as this is, the Supreme Court did not rule against arithmetic. It ruled against the diminishment or impairment of public pensions in accordance with its state constitution. There are lots of manipulations of arithmetic and Illinois will find one that works for Illinois.

    • JR

      You can definitely manipulate arithmetic for a long time, which is what Illinois has done for decades. The problem is that when you push costs 25 years into the future, while getting all the benefits up front, you get a promotion in 1990. But in 2015, if you believe the article, you have to spend 20% of state budget on pensions (i.e. people who no longer work and contribute in any way), when the average cost should be 4 to 5 times lower. The arithmetic that is being ruled against is not GDP numbers, or how much more you’ll be able to squeeze CME before they relocate their servers. It is a simple fact that if costs of running a government are rising at x% a year and government revenues are y%, where x% is greater than y% and your state is consistently ranked #1 for % of people who want to leave it. As an aside when they do leave, statistics show they tend to choose places with lower taxes and less regulatory burden, but that’s neither here nor there.
      You don’t have to me a math major to realize that costs cannot grow faster than revenues indefinitely. Which is why the preferred method has been, and continues to be, pushing costs into the future. But that future is getting a lot closer. In Detroit and Greece, future of high costs of living beyond your means in the past is the present. Puerto Rico is getting close. Because when there is no more money, there is no more money. And if costs are growing faster that revenues, than you get to no more money period regardless of what your GDP is. But I think we both can agree on one thing. People who are currently buying City of Chicago or State of Illinois bonds hoping for an Uncle Sam par put need to be financially hurt and hurt badly. After Detroit, there are no excuses to lend money to obviously corrupt bankrupt entities. If “we were too stupid and venal and corrupt when we made this deal, but come on you knew that, so you can’t expect us to actually pay” is a valid defense (and it totally is, BTW), then any investor who thinks he is due to get bailed out deserves what he gets.

      • f1b0nacc1

        Absolutely correct on every point, but let me make a very minor amplification on one of them. Illinois is losing people rapidly, but worse than that, they are losing the wrong people…i.e. the productive ones who actually generate more than they consume. Retaining masses of welfare leeches in Chicago isn’t going to help them as the productive ones in the suburbs flee for less intractable states.

        • JR

          Yup… That’s what ultimately doomed places like Detroit, Baltimore, Newark, etc etc… Anyone who could get out, did get out. The ones that were left were the most useless. But I prefer to think of it as a positive. Think of all the smart people a lot of states close to IL will gain.

          • f1b0nacc1

            Perhaps, but remember the phenomenon of “Californication” where the brainless libs who initiated the policies in question flee and spread their contagion to nearby states….

      • FriendlyGoat

        Don’t you imagine that incorporated institutions and bond funds are buying the bonds more than individuals are?

        • JR

          Oh for sure. Which is why these so-called “sophisticated investors” will deserve to get it good and hard.

  • Anthony

    The problem is the Illinois Constitution, not the Justices. All of the Republican justices, some of whom are quite conservative, joined the majority opinion. It was a straight textual opinion, the kind favored by Justice Scalia. The thrust of Mead’s article is still correct though.

  • vepxistqaosani

    To be fair, I don’t think the root of the problem is in the Illinois Constitution. The problem is that state (and Federal!) legislators love to give away stuff they don’t have to find funds for and reap the resulting electoral rewards. Eventually, of course, bills do have to be paid — the trick is to make sure that the other party is in power when that happens. And guess what? Both Illinois and New Jersey have Republican governors ….

    In the words of one hapless NJ state legislator, when the state auditor gave a report to the legislature on the dire state of the various pension programs, “Nobody ever told us we had to pay for that!” (And that was about a dozen years ago, when NJ’s problems were still almost tractable ….)

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