The Illinois Pension Crisis: Stop Calling it a Time Bomb

A new Tribune report on Illinois’s underfunded pension systems shines a light on how it got so bad—it took a long time, and a lot of bad legislation—and offers a different way of looking at the crisis.

Illinois statehouse

 

Recent months have seen a series of news stories about pension scandals, like the lobbyists who turned a day of substitute teaching into a state pension (we’re hardly alone; Texas governor Rick Perry recently retired in order to collect his pension, though you may have noticed he didn’t retire in the sense of quitting his job). The legislature has moved to address them—and moved back a bit more recently—but the scandals, scandalous though they are, are considerably less of a problem than the considerably less interesting neglect of the state’s pension system.

Fortunately, Jason Grotto and Ray Long have a long, outstanding piece in the Trib today about how we got here. There are some remarkable details, like this one about how we can’t even be responsible responsibly:

The most significant of those changes was a 2010 plan, known as Tier 2 and sponsored by Madigan and Cullerton, that cut costs over the long term by lowering benefits for those hired after Jan. 1, 2011. During the next three decades, the move is projected to lower the state’s contributions by more than $70 billion and cut the total pension liabilities nearly in half, by $256 billion.

Although the bulk of the savings from Tier 2 won’t begin for a number of years, the state began counting them right away and, in the process, lowered the amount it had to contribute into the funds.

The Tribune editorial board calls this “the pension corruption you see, and the pension doomsday that, until the system implodes, you don’t.” It’s possible, in the long run, that the state’s pension systems could implode, but I’m not sure it’s a very helpful way to think of it. It’s more like a chronic, poorly treated condition that’s sometimes exacerbated with bad habits:

With the country gripped in the worst financial crisis since the Great Depression, the Legislature continued to alter the formula for state pension contributions, further undermining the 1994 compromise. In recent years, the Legislature twice passed laws that allowed the state to borrow an additional $7.2 billion, this time to help make regular pension contributions.

That means during the last eight years, the state has borrowed $17.2 billion to make pension contributions that weren’t even enough to keep the debt from growing, according to the Commission on Government Forecasting and Accountability.

The reason I don’t think the doomsday scenario is a helpful way of thinking about the pension crisis is the same reason that if you put a gun above the mantle in the first act, it better go off by the third. And it doesn’t go off, in part because the state constitution mandates that it can’t. For example, here’s James Strong, Tribune labor editor, in 1976, writing about “A time bomb for taxpayers: pension funds.”

The debt keeps mounting as public officials grant generous increases in pension benefits without risking taxpayers’ wrath by imposing tax increases to cover them.

[snip]

Of the $5.7 billion Illinois debt, more than $2.2 billion in pension benefits are unfunded by Chicago and Cook County governments—the money has not been set aside to pay these benefits.

Ideally, pension funds should be entirely funded to make certain payouts are available. A top Illinois retirement fund authority said pension funds at least should be funded to about two-thirds of their expected future payouts.

Ten years later, the Tribune published an article on “Pension liabilities: a bomb ticking into the future” (well, you have to come up with a different way of saying “time bomb” somehow):

Some fiscal experts argue that several pension systems in Illinois are “tenuous” and governments must begin to reduce the unfunded liability, the amount by which liabilities outstrip assets in the funds, to improve the health of the pension funds covering public employees. The unfunded liability in the five state-funded pension systems–for legislators, judges, teachers, university professors and other public employees–totals nearly $7 billion.

There’s also the fact that the definition of “well-funded” varies considerably, by 20 percent or more:

“I think that`s a little high,” said Warren Burmeister, president of the Civic Federation, which monitors public budgeting in Chicago and Cook County. Burmeister believes that funded ratios “in the low 60s” are more appropriate. Robert Mandeville, director of the state`s Bureau of the Budget, said that 100 percent funding “doesn`t make sense,” in large part because interest earnings on the invested assets more than account for any shortfall in employer contributions.

I don’t think that the “pension doomsday” isn’t something people can’t see—it’s more that they don’t care, and they can be forgiven for not caring, as the “doomsday” scenario never comes. Rather than shocking us into action, it’s a reason to ignore it. And while it could happen far down the line, the more significant problem is its effect on the budget: increased borrowing costs, fewer resources. That’s why I like this formulation better, from state Senator Dan Schoenberg: “For years, it’s been like a fire consuming all the air in the room.”

 

Photograph: mrsdkrebs (CC by 2.0)

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