At the conclusion of his Aug. 16 commentary in The Bond Buyer, Christopher Mier asks us to believe that with the aid of “creative lawyering,” rewriting pension contracts will solve the fiscal problems of Illinois and other states.

Editorial boards, civic organizations and now municipal bond analysts are targeting pension systems as the primary source of the record deficits that states are currently facing.

But for Illinois and, most likely, other states, Mier’s assertion that curtailing pension benefits “is the holy grail of budget savings” is simply incorrect.

And heaven help all of us — citizens, bondholders and pensioners — when we start to depend on creative lawyering as a path towards budgetary solvency.

Mier wants us to consider that path because a wide variety of tax increases, including those on income, have already been tried. This certainly is not true in Illinois, where the state’s 3% income tax rate has remained unchanged since 1989.

As citizens, we are expected to debate the mix of tax hikes and expenditure cuts that are needed to achieve fiscal solvency.

Bondholders are interested in these debates, but there is little reason to believe they would prefer the curtailment of pension benefits, with the attendant risk of litigation and the uncertainty of results, over an increase in income taxes as the solution to Illinois or any state’s fiscal imbalances.

The budget-based deficit for fiscal 2011 reported in Illinois’ most recent official statement is $5.8 billion. Add to that $6.6 billion of unpaid bills from June 30 and we see that Illinois has a $12.4 billion problem.

If Illinois were making $10 billion in annual pension contributions, there would be a financial reason for believing that reducing pension benefits would help solve the state’s fiscal problems. But scheduled pension contributions for fiscal 2011 are only $4.2 billion out of total budgeted expenditures and transfers of $33.5 billion. 

Mier does not discuss the actual savings that might arise if benefits were curtailed, but recent news stories from Colorado may provide an indication.

First, the elimination of the 3.5% cost-of-living increase is saving the state’s pension system $80 million this year. Second, Colorado may be facing a $500 million to $1 billion shortfall in its next fiscal year.

As Mier notes, there is “political cover in correcting overly generous pension 'schemes,’ ” but the potential savings from curtailing pension benefits simply are not sufficient to eliminate Illinois’ $12.4 billion deficit.

Pension reform that somehow produces $1 billion in savings still leaves $11.4 billion of additional taxes and expenditure cuts that must be considered before fiscal balance is restored. 

The “holy grail of savings” as Mier calls pension reform, looks more like the Maltese Falcon.

After acknowledging that nine states, including ­Illinois, offer constitutional protection to their pension funds, Mier stands ready to let lawyers sidestep these provisions upon discovering that in Illinois, pension payments are an obligation of the ­pension fund rather than a legal ­obligation or debt of the state. (This is from section 22-403 of the Illinois Pension Code, not Sidley Austin’s legal opinion.)

Holders of revenue bond, lease appropriation and moral obligation debt, be forewarned.

If creative lawyering can set aside state constitutional provisions protecting pensions because these payments are solely an obligation of the pension fund, what does that say about the legal provisions that secure any type of limited obligation bond of a state?

Annual legislative appropriations are the source of payment for state certificates of participation, moral obligation bonds and contributions to the pension system.

If we accept that in times of fiscal stress, states can set aside statutory provisions and reduce pensions without the consent of workers and retirees, why not also recognize that it is acceptable for states to stop making debt payments on any project that is no longer benefiting the public?

Indeed, no creative lawyering is needed for states to simply end annual appropriations for non-callable and high-interest rate certificates of participation and moral obligation debt as a strategy for negotiating lower debt payments with bondholders. 

Does Mr. Mier really want this?

The average pension paid by Illinois to almost 200,000 retirees in fiscal 2009 (most of whom do not receive Social Security) was $32,702. Another 523,000 workers, about 8% of Illinois’ labor force, are active members or entitled to benefits from the state’s pension funds.

Systems that provide retirement security are essential for the well-being of our society. So are the contract provisions that bondholders rely on to secure their payments.

There are better ways for Illinois and other states to achieve fiscal health than asking the public to consider policies based on costly litigation with uncertain results and that are detrimental to both bondholders and a large number of ­citizens.


Dan Kaplan is the president of Kaplan Financial Consulting Inc., a financial ­advisory firm based in Wilmette, Ill.