Last March 24, the pols who run Illinois nearly ruptured multiple vertebrae by slapping themselves so enthusiastically on the back.
In one day they had rammed through the Illinois General Assembly a bill establishing scaled-down pension benefits for public employees — but only those hired in 2011 and later. This was the so-called major pension reform that had Gov. Pat Quinn and his budget director, David Vaught, bragging that they had saved taxpayers $200 billion over nearly 35 years. Why, they even estimated that Illinois could reduce $300 million to $1 billion from the state’s required pension contribution in the fiscal year that began July 1. House Speaker Michael Madigan and Senate President John Cullerton were thrilled too. Pension mess? Solved! Slap, slap.
Democrats and Republicans who voted for this bill could pretend that they had done something worthwhile about the pension monster — even though this meager reform didn’t begin to pay down the state’s already staggering unfunded obligations. That’s because, as Madigan repeatedly reassured legislators and public employee union officials on March 24, “this bill does not affect anybody who works for a government today.”
And that was the problem. The Democratic leaders wanted to look heroic, but didn’t want to alienate their labor supporters by reducing the future — and unsustainably generous — retirement benefits earned by current employees.
We’re refreshing your memory on this because the federal Securities and Exchange Commission is now on the case. In September the SEC began examining state government’s “communications relating to the potential savings or reductions in (pension) contributions by the state.” We know the SEC is probing last year’s boasts because Quinn’s administration itself has disclosed that inquiry — not in a straightforward admission to Illinois taxpayers, but in a legal prospectus for a $3.7 billion pension bond offering that the state has planned for February. That borrowed money would cover this year’s contribution to the state pension system, which is ceaselessly cited as the most underfunded in the nation.
Essentially, the SEC wants to know whether Illinois officials misled potential investors by claiming pension cost reductions that didn’t exist. The SEC in August accused New Jersey of fraud for inadequately disclosing that it was shortchanging its two biggest pension funds when it went to market to sell $26 billion in municipal bonds. New Jersey reached a settlement without admitting, or denying, the SEC’s serious allegations.
This sort of ramped-up SEC oversight isn’t just about protecting rich Wall Street swells from politicians who play fast and loose with very big numbers. Millions of middle-class Americans have ownership stakes in the municipal bond market via mutual funds, retirement plans or, yes, pension systems.
These investors, who loan money to Illinois and other governments by buying bonds, don’t have some of the safeguards that people who buy corporate bonds do. And some governments don’t tell investors the whole truth about their finances. Fears that government bodies will default on their bond promises — and that public officials are hiding the true depth of their problems — are spreading fast: Mutual-fund investors alone have yanked some $20 billion in recent weeks from the municipal bond market.
We have no idea what the SEC will conclude about the pension funding boasts of Illinois politicians. We do know they wanted to put their chronic underfunding of the pension system behind them without cutting benefits for current employees. They declared a bigger victory than they had won.
The Dems’ subsequent borrowing and taxing are part of their campaign to prove that they’re fine stewards of the public purse. Meanwhile, they have not reformed how recklessly they spend taxpayer dollars — and the pension system remains dramatically underfunded.
The Quinn administration proclaims itself innocent of any attempt to mislead anyone about Illinois’ pension debacle. We’ll all know soon enough whether the SEC concurs in that rosy verdict.
