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posted: 7/26/2013 5:00 AM

For Illinois' leaders, a warning from Detroit

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  • Paul Kersey

      Paul Kersey

 
By Paul Kersey

Since the city of Detroit filed for bankruptcy, there have been many comparisons made between Detroit and Illinois. The parallels between the two are striking: both are losing population, both suffer from stagnant economies and both are saddled by unbearable government worker retirement costs.

There is one more similarity that Illinoisans should keep in mind: the pension protection clauses contained in both Michigan's and Illinois' state constitutions.

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In Illinois, government workers have long relied on language in the state constitution stating that government pensions are "contractual" arrangements that cannot be "diminished or impaired." Michigan's constitutional language on pensions is very similar.

But constitutional protections or not, here is the cold truth: Detroit is broke, and Detroit's pensioners could wind up accepting steep cuts, regardless of what the state constitution says. When the money runs out, the money runs out. And that's why government workers in Illinois should pay close attention to what happens in Michigan, because what happens in Detroit could be repeated here.

Conditions in what used to be the Motor City are dire. Day-to-day operations in Detroit city government were taken over by a state-appointed emergency financial manager with the power to rewrite contracts and restructure government, but despite so much decision-making power, the manager was unable to balance the books.

Detroit's crisis did not happen overnight. It is the result of ignoring financial realities for years. Detroit's political leaders assumed better times would come. They never did. After decades of politicians avoiding tough decisions, Detroit city government is staring at $18 billion in debts and unfunded liabilities, which works out to $25,000 for each of the city's 707,000 remaining residents.

Detroit politicians did no favors to the city's residents or its employees by ignoring the financial math for so long. Government unions failed miserably by letting the politicians get away with making so many promises they couldn't keep.

What is happening in Detroit could happen in Illinois. While Illinois cannot technically file for bankruptcy, that doesn't mean that the state cannot rack up debt to the point where it simply does not have the assets it needs to cover its pension obligations.

Already, the head of the Illinois Teachers' Retirement System has said that without changes to the pension fund for K-12 teachers, the fund will run dry by 2029. There is no court that can make the state pay benefits with money that does not exist.

Here in Illinois, just as in Detroit, governments are piling up debts they cannot repay. Politicians refuse to consider restructuring defined benefit pension plans into more manageable defined contribution retirement programs. Some are even ready to double down on defined benefits with funding guarantees that will cut into essential services. Government worker contracts remain as generous as ever; in fact, state workers were awarded raises in their most recent contract.

The strains are already showing here in Illinois. State lawmakers should be making budget cuts to prepare for the end of the temporary state income tax hike, but instead Illinois' budget grew by $2 billion compared with what was approved for the 2012-2013 budget.

If Illinois wants to avoid Detroit's fate, it must avoid Detroit's mistakes. Government does its workers no favor when it makes grand promises it cannot keep, or fails to level with workers when conditions change. Detroit's example shows us that as difficult as it might be to trim employee benefits now, the alternative -- a shattered community and failed retirement programs -- are much worse. Illinois' political leaders must stand up for sound financial management for everyone's sake, government employees included.

• Paul Kersey is director of labor policy at the Illinois Policy Institute, a free-market think tank.

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