War­ren Buf­fett and oth­ers warned about pen­sions. Illi­nois pols whiffed.

Yet an­other rea­son to vote down Pritzker’s grad­u­ated-tax amend­ment

Chicago Tribune (Sunday) - - EDITORIALS -

Imag­ine an Illi­nois whose state and lo­cal of­fi­cials hadn’t buried tax­pay­ers un­der lay­ers of pen­sion crises.

The gov­ern­ment in Spring­field wouldn’t have to spend a fourth of its an­nual bud­get just on re­tire­ment costs. There’d be more money for ed­u­ca­tion, health care and pub­lic safety. And Democrats wouldn’t be hus­tling even more bil­lions via their mis­lead­ing grad­u­ated in­come tax pitch.

A cen­tury of ig­nor­ing fire alarms

That pros­per­ous Illi­nois might ex­ist if, some­time in the last cen­tury, this state’s politi­cians had tamed their pen­sion mon­ster. Eric Ma­diar, a Spring­field lob­by­ist and at­tor­ney, in a prior life re­searched Illi­nois pen­sion his­tory for state law­mak­ers. A para­graph from his work cited one cru­cial alert the politi­cians have fool­ishly flouted:

In 1917, in a re­port com­mis­sioned by the Gen­eral As­sem­bly, the Illi­nois Pen­sion Laws Com­mis­sion de­scribed the con­di­tion of the State and mu­nic­i­pal pen­sion sys­tems as “one of in­sol­vency” and “mov­ing to­ward cri­sis” be­cause the “fi­nan­cial pro­vi­sions (were) en­tirely in­ad­e­quate for pay­ing the stip­u­lated pen­sions when due.” The Com­mis­sion rec­om­mended that the Gen­eral As­sem­bly adopt a “re­serve plan” whereby the amount needed to pay pen­sions when due “should be set aside at the time ser­vice is ren­dered” by the State and mu­nic­i­pal­i­ties so “each gen­er­a­tion of tax­pay­ers pays its own obli­ga­tions for ser­vices ren­dered.”

Straight­for­ward ad­vice. Yet a cen­tury of Spring­field pols have dodged real re­forms. In­stead they’ve pre­tended the pen­sion debt they’ve im­posed on tax­pay­ers is a nasty sur­prise that just hap­pened to Illi­nois, a nat­u­ral dis­as­ter for which they bear no blame.

In truth it’s a de­ba­cle they’ve cre­ated, tol­er­ated and made worse. State gov­ern­ment ad­mits to a $137 bil­lion un­funded pen­sion li­a­bil­ity owed by Illi­nois tax­pay­ers. But the in­de­pen­dent Moody’s In­vestors Ser­vice says the true num­ber is $240 bil­lion.

The Or­a­cle of Omaha fore­saw fi­as­coes like Illi­nois’

Through­out th­ese 100-plus years of Illi­nois pen­sion fi­as­coes, economists and fi­nance ex­perts have alerted politi­cians — the stew­ards of tax­payer dol­lars — that their mis­man­age­ment of pen­sions in­vited dis­as­ter.

To­day we fo­cus on per­haps the most suc­cinct of th­ese pen­sion prophets. Al­most a half-cen­tury ago, in­vest­ment man­ager War­ren Buf­fett, aka the Or­a­cle of Omaha, drafted a 19-page memo to Katharine Gra­ham, head of The Wash­ing­ton Post Co., on whose board he served. Buf­fett dis­tilled decades of lessons about pen­sion fol­lies into a clas­sic doc­u­ment that for decades has been uni­ver­sally avail­able — and re­spected for its pre­science.

Eas­ier to prom­ise than to pay

Buf­fett has given the Tri­bune Editorial Board per­mis­sion to quote his doc­u­ment’s warn­ings — many of which, like those of other fi­nance spe­cial­ists, fore­shad­owed the crises that Illi­nois state and lo­cal pols foisted on tax­pay­ers:

The first thing to rec­og­nize, with ev­ery pen­sion ben­e­fit de­ci­sion, is that you al­most cer­tainly are play­ing for keeps and won’t be able to re­verse your de­ci­sion sub­se­quently … So rule num­ber one re­gard­ing pen­sion costs has to be to know what you are get­ting into be­fore sign­ing up. Look be­fore you leap. There prob­a­bly is more man­age­rial ig­no­rance on pen­sion costs than any other cost item of re­motely sim­i­lar mag­ni­tude. … The lex­i­con is ar­cane, the num­bers seem un­real, and mak­ing prom­ises never quite trig­gers the vis­ceral re­sponse evoked by writ­ing a check.

A pas­sage that screams, ‘Wake up, Illi­nois!’

Buf­fett also ex­plained the risks cre­ated by pub­lic of­fi­cials who doomed the tax­pay­ers they should have pro­tected. They hap­pily ex­panded pen­sion ben­e­fits for their pub­lic union al­lies while fail­ing to in­vest enough money to meet all those fastin­flat­ing obli­ga­tions.

Decade af­ter decade, vot­ers who didn’t un­der­stand all the risks trusted state and lo­cal politi­cians to look out for their in­ter­ests:

And, as will be­come so ex­pen­sively clear to cit­i­zens in fu­ture decades, there has been even greater elec­torate ig­no­rance of gov­ern­men­tal pen­sion costs. In no other man­age­rial area can such huge ag­gre­gate li­a­bil­i­ties — which will be re­flected in pro­gres­sively in­creas­ing an­nual costs and cash re­quire­ments — be cre­ated so quickly and with so lit­tle im­me­di­ate fi­nan­cial pain.

The folly of trust­ing Spring­field …

You might think this cen­tury of fail­ure would hum­ble to­day’s Illi­nois politi­cians. Wrong. The cur­rent crop of Democrats who run Spring­field want vot­ers in Novem­ber to ap­prove switch­ing the state from a flat in­come tax to a pro­gres­sive tax. Their scheme at first would hit only the top 3% of in­come tax fil­ers.

For how long? They don’t say. Here’s why.

Soak­ing this small group can’t pro­duce enough new rev­enue to pay for the Democrats’ costly agenda and to mean­ing­fully re­duce their vast pen­sion short­fall. Soon enough the pols will stick mil­lions of mid­dle-class tax­pay­ers, too, with higher in­come tax rates.

In a smarter Illi­nois, the Dems would “Let the peo­ple vote,” in Gov. J.B. Pritzker’s mem­o­rable re­frain, to per­mit re­duc­tion of pub­lic pen­sion ben­e­fits earned in fu­ture years. But in the Illi­nois we have, a cen­tury of fail­ure to rein in run­away pen­sions be­comes an ar­gu­ment for higher tax rates. As if to tell tax­pay­ers, Gosh, who knew this could hap­pen? We didn’t think about run­away pen­sion costs. Too bad — now give us more bil­lions of tax dol­lars.

As Buf­fett warned:

… (M)ost man­age­ments I know — and vir­tu­ally all elected of­fi­cials in the case of gov­ern­men­tal plans — sim­ply never fully grasp the mag­ni­tude of the li­a­bil­i­ties they are in­cur­ring by rel­a­tively pain­less cur­rent prom­ises. In many cases in the pub­lic area the bill in large part will be handed to the next gen­er­a­tion, to be paid by in­creased taxes or by ac­cel­er­ated use of the print­ing press.

‘Will they gouge my com­pany? My em­ploy­ees?’

Half a cen­tury af­ter his pen­sion warn­ings, Buf­fett has seen many of them come true. Pen­sion costs are the tail that wags gov­ern­ments. In Illi­nois and other slop­pily man­aged high-tax states, politi­cians haven’t suf­fered con­se­quences — yet — for chas­ing off tax­pay­ers and de­ter­ring po­ten­tial em­ploy­ers:

■ With ris­ing pen­sion bur­dens and ris­ing taxes, Illi­nois has seen big drops in pop­u­la­tion for six straight years. New cen­sus es­ti­mates say that in the last year alone, Illi­nois con­tracted by an­other 51,250 peo­ple. The six-year to­tal ex­ceeds 223,000.

■ In an early 2019 in­ter­view with CNBC, Buf­fett ex­plained why many em­ploy­ers steer clear of states where, as in Illi­nois, politi­cians have doomed tax­pay­ers: “If I were re­lo­cat­ing into some state that had a huge un­funded pen­sion plan, I’m walk­ing into li­a­bil­i­ties. Who knows whether they’re go­ing to get it from the cor­po­rate in­come tax or my em­ploy­ees — you know, with per­sonal in­come taxes. … And when you see what they would have to do, I say to my­self, ‘Why do I want to build a plant there that has to sit there for 30 or 40 years? ’Cause I’ll be here for the life of the pen­sion plan, and they will come af­ter cor­po­ra­tions, they’ll come af­ter in­di­vid­u­als. They — just — they’re gonna have to raise a lot of money.”

Vote down the grad­u­ated-tax amend­ment

The al­ter­na­tive to trust­ing Illi­nois politi­cians with more bil­lions in taxes is that vot­ers in Novem­ber re­ject Pritzker’s con­sti­tu­tional amend­ment to al­low grad­u­ated in­come tax rates.

If you missed this point we of­fered in the hub­bub be­fore the hol­i­days: Illi­nois politi­cians won’t rein­vent and re­form gov­ern­ment un­til vot­ers force them to rein­vent and re­form. Make your 2020 res­o­lu­tion now: I’ve looked at Spring­field’s record — and I’m vot­ing No.

SCOTT STANTIS

DANIEL ACKER/BLOOMBERG 2014

A half-cen­tury af­ter his pen­sion warn­ings, in­vest­ment man­ager War­ren Buf­fett has seen many of them come true.

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