|Illinois Section AWWA Members|
January 31, 2014
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Trenches Dug On DNR Fracking Rules
It was almost too good to be true. Whenever there is a highly charged, emotional, controversial issue that somehow gets resolved by all parties negotiating an agreement, however tenuous, there’s always cause for celebration. But also in these cases the parties know that once you leave the negotiating table the selling of what has been agreed to can sometimes like walking a tightrope. And in the case of the proposed rules on hydraulic fracturing in Illinois the person on that tightrope seems to flailing.
Last year industry and environmental interests got together and negotiated a settlement on fracking after two years of negotiations. The bill was hailed as one of the toughest in the nation, but many environmental groups who were not part of the negotiation didn’t, and don’t, see it that way … and they let the state know exactly how unhappy they were by deluging the Illinois Department of Natural Resources (DNR) with over 32,000 comments on the administrative rules that were released in the fall. They were of the opinion that the rules were not as strict as the law, and the Sierra Club, one of the negotiators, agrees with that position. The Illinois Chamber of Commerce and other industry groups take issue with the objectors and are of the opinion that they are trying to renegotiate the law during the rulemaking process.
In the middle of the fracas is DNR who will have to manage some way to find a way to write rules that placate as many of the parties on both sides as possible. There are some fracking opponents that oppose it period and point to many studies that show the process as environmentally harmful. Others took the position that if fracking was going to come to Illinois then they should have a say and try to get the most responsible legislation possible. That’s what they thought they did last spring. But, for them, this winter has been particularly harsh. There is still a long way to go in the process of writing the administrative rules and also the hope that cooler heads prevail.
State Shaping Up?
Five years to the day since he took office, Governor Quinn provided a glimpse into the future with the annual State of the State message this past Wednesday and during his speech he indicated that as bad as things are they’re better than they were when he assumed office. He also provided a five year "blueprint” relying heavily on small business initiatives, stronger education initiatives – in particular early childhood programs, and building the state middle class by increasing the minimum wage, doubling the state’s Earned Income Tax Credit, and more.
It’s tough to quarrel with the initiatives he has put forth, especially those that empower the small business community that creates three out of every five new jobs, or early childhood initiatives that have been proven to save $7 for each $1 spent. The question, of course, is how do the new initiatives get paid for? The one item that the Governor did not mention was the temporary income tax which sunsets on January 1, 2015. The potential loss of revenue ($1.6 billion reduction for the upcoming fiscal year and $4 billion thereafter) could make his proposals non-starters until there is some decisions made as to its status. That and the $6-8 billion in unpaid bills that are awaiting payment in the Comptroller’s Office create a negative synergy that might cause legislators to look askance at his requests. The Governor’s budget address is on tap for February and there may be some answers provided then.
Over the last five years there have been some significant achievements that have been the product of the Governor’s Office and legislature working together, and others that have been legislative initiatives that the Governor counts among his list of achievements. But, in terms of seeing the sunrise of state fiscal health, we’re only about half way past midnight.
Benjamin Disraeli was once quoted as saying, "There are lies, damn lies, and statistics.” If he were alive today he certainly would agree that his quote is applicable to the Illinois pension funding debate. Numbers in the billions are thrown about in conversations and debates about whether or not the reform package signed into law recently provides enough revenue to solve the underfunding problem over the next 30 years. Keep in mind that nobody has a crystal ball (psychic readers excepted – and they don’t count) and trying to project anything over the next three decades with any bulls-eye accuracy is impossible. Last week Warren Buffett offered to pay $1 billion to anyone who could predict a perfect March Madness bracket that takes place over a month, let alone 30 years. The odds of a perfect prediction in the Illinois pension deficit sweepstakes is just a tough, maybe tougher. All anyone can hope for is that when the last dart is thrown in 30 years that it hits somewhere on the target.
Over the last few weeks there have been a number of arguments about whether or not the final pension package will meet expectations – provided that the Illinois Supreme Court ultimately provides a "thumbs up” on its provisions. Some of the altered statistics have come from credible sources while others have come from entities whose only goal is to throw out the current pension system and replace it. Credibility is not one of the hallmarks of the second group.
When considering pension funding there are three relevant factors. First, the timetable, considering all factors by which the fund will meet the goal of 100% funding. Second, the amount of investment and other income that will be earned that will shrink the outstanding indebtedness, similar to paying down the principal on a loan. And third, the amount of revenue savings that will accrue as a result of the "pay down”.
Regarding the third point, the projected savings from the pension reform legislation was estimated to be $160 million. Last week it was reported, after a review by the pension system actuaries, that the savings may be "only” $145 million. How this recalculation will be interpreted by bond houses and others can’t be predicted, but the report also said that even with this downsized estimate the Teacher Retirement System would be funded at 102% at the end of 30 years. So by narrowly missing the bulls-eye there is still room for success.
The second factor also looms large in the ultimate success of the reform package. Part of the pension funding problem being faced today is that pension investment income went south during the Great Recession. Well, last year was one for the positive books and pension system investment income soared so much that it has been estimated that the "principal” of the pension debt could be an additional $3 billion lower right out of the box if the courts approve the full package. Because of economic cycles it’s horribly difficult to predict investment income over time, but a strong or steady economy will provide a boost to the pension payoff bottom line.
All these numbers are meant to meet long-term goals. A basic rule of investing is not to look at investment gains or losses daily or weekly or even monthly because that only represents a snapshot. But critics of the plan will be critiquing results every quarter for the next 30 years trying to find some solid argument for scuttling the current program, even though it has been revised dramatically. But, the way it looks when judging the data provided by the "neutral” parties, it looks as if the reforms should accomplish what they set out to do … unless the Supreme Court moves the goalpost.
Pension Suits Filed Rise To Four
The We Are One Coalition, along with two retired state employee associations and another association representing retired teachers have filed lawsuits arguing that portions of the pension reform legislation should be ruled unconstitutional. Cost of living changes, the increase in retirement age and the salary cap are among the chief issues being contested, along with a number of others. All four of the cases were filed in various circuit courts and no date has been set, as yet, to hear any arguments. There also may be other lawsuits on the horizon filed by other retiree groups. The We Are One Coalition is the largest of the groups and is comprised of a plethora of labor organization that represent in excess of a half million retirees and others.
The following provision of the Illinois Constitution, Article XIII, Section 5 states, "Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired,” and the objectors will argue that because of that "contractual obligation” the benefits that individual accrue during their terms of employment cannot be changed. That’s a pretty compelling argument given the specificity of the language contained in the provision. The state, on the other hand, will no doubt argue that the state is in a huge crisis and in order to preserve benefits for all in the future modifications must be made now. That argument will be buttressed by the passage of the reform plan itself that seeks to preserve the pension system over time. The state will be hoping that the judges understand the immensity of the crisis and that there may be no second chances to shore up the system. They will try to convince the judges that this is it. Take it and help obtain solvency, or leave it and seal the fate of an unsustainable system.
There is no telling if the judiciary will begin proceedings prior to the actual June 1 effective date of the Act. But in addition to the benefits to the pensions systems themselves, there are millions of freed up general revenue dollars that can help ease a budget crunch or bill backlog and can help ease the state a few small steps away from the fiscal cliff.
Session Schedule/Deadline Dates
Here are relevant dates for the legislative session:
- February 10-14 – No session scheduled
- February 14 – House/Senate Bill Introduction Deadline
- March 10-14 – No session scheduled
- March 28 – House/Senate Committee Deadline
- April 11 – House/Senate 3rd Reading Deadline
- April 14-25 – No session scheduled
- May 16 – House/Senate Committee Deadline
- May 23 – House Senate 3rd Reading Deadline
- May 31 - Adjournment
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