Illinois faces second pension battle

By   /   August 5, 2010  /   No Comments

Just months after a fight to reform state pensions, new data show it was not enough. Public employee union leaders say the solution is to increase taxes.

Months after reducing retirement benefits for future employees, another battle is brewing in Illinois over pension costs.


New data from the State Retirement System of Illinois, which oversees three of the state’s five public employee pensions, show the pension’s funding ratio shrinking officially from 43 percent to 38 percent, as projections show liabilities swelling to $29 billion and assets shrinking to $11.1 billion.


Though Gov. Pat Quinn signed a bill earlier this year estimated to save $220 billion over 35 years by raising the retirement age to 67 and capping pensions at $106,800, critics say the law, which only affects employees hired after January 1, does not address the immediate crisis.


The law “was good but not sufficient,” said Sen. Chris Lauzon, who has served on the revenue committee and the appropriations committee in the state senate for 18 years.


“We are insolvent now,” said Lauzon, a former CPA who received his MBA from Harvard. “How can we be “saving billions” when we haven’t hired anyone yet?”


Though many states are struggling to meet retirement costs in the wake of the economic downturn, Illinois ranked dead last in a recent study. The state’s current official unfunded retirement liability easily exceeds $100 billion when health care and other post employment benefits are considered. The actual figure is much higher because Illinois pensions assume risk-free returns on investment as high as 8.5 percent every year.


A recent study by Joshuah Rauh, a finance professor at the Kellog School of Management at Northwestern University, also suggests the crisis is immediate. The study shows already promised benefits exceed $5 trillion nationally and predicts insolvency of some pension funds within a decade.


How Illinois arrived in its predicament is simple, analysts said.


“Illinois has consistently kicked the can down the road in respect to its pensions,” said Kil Huh, Director of Research at the Pew Center on the States. “Its funding levels have declined over time as a result.” 


The levels to which states opt to fund pension benefits seem to depend largely on budgetary convention and the appropriation levels of previous legislatures, experts say.


For example, Wisconsin has a pension system nearly “fully funded” based on last year’s calculations and assuming a high, risk-free rate of return.  


The reason pensions were neglected so long in Illinois is because “There’s a budgetary culture that says pension holidays are okay,” said Lise Valentine, Vice President of The Civic Federation.


Case in point is the $10 billion bond sale Gov. Rod Blagojevich passed in 2003, Valentine said. In that case, the state sold bonds at 5 percent rates and the cash was invested by pensions on the hope investment returns would exceed interest paid to bondholders. They did not.


Valentine said scenarios such as these allow lawmakers to fund projects with tomorrow’s dollars and avoid making tough budget decisions, comparing it to a consumer who keeps running higher and higher debt on a credit card. 


New accounting practices introduced in the early 1990s also revealed the pension funding of previous generations was even worse than previously thought. 


“I don’t think people in the ’70s and ’80s understood the damage they were doing,” said Steve Rauschenberger, former Assistant Republican Leader in the State Senate.


Rauschenberger, first elected in 1992, was on hand when the state overhauled its pension system in 1995.


He said the combination of ambitious politicians, commission-driven brokers increasingly paid on a fee-for-service basis and a lack of public scrutiny create a recipe for deal making not always in the public interest.     


“You have bond rating agencies out there that will say anything if they are paid enough,” Rauschenberger said. “The rules are changing, but under the feet of very slow moving institutions.”


But legal changes are possible, evidenced by the 1995 overhaul; dubbed the 50 year-plan, it increased required contributions and made continuing appropriations mandatory. Records show pension funding levels increased from 58 percent in the early 1990s to over 75 percent by 2001.


The state’s funding ratio again plummeted, however, when Blagojevich suspended contributions and the stock market crashed in 2008.


Those — chronic under funding by the state and the market crash — are the true reasons pensions are hurting, union officials say.


“There is a path to solvency and it’s a simple one. You have a debt that has to be paid,” said Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees.


Lindall said employees who have made regular payments to their pensions should not be punished because lawmakers neglected to fund their obligations. He said taxes should be increased to fund the future costs, noting that Illinois 3 percent tax rate is one of the lowest in the country.


“Public sector workers have been targeted by right wing corporate interests who want to use this recession to advance their own ideological interests,” he said.


Lawmakers say both state parties have a history of under funding pensions, and both are beginning to see changes need to occur.


“It’s not a Democratic or Republican issue. It’s a solvency issue,” Lauzon said.


Lauzon said he’s optimistic lawmakers will reach a bipartisan solution, particularly if Quinn loses to GOP challenger Bill Brady.


Quinn has indicated he believes it would be unconstitutional to adjust future benefits of current employees, and union officials said employees would sue if the state adjusts the future benefits of current workers. 


At issue is Illinois Constitution’s “nondiminishment clause.” While Quinn and others said benefits of current employees cannot be changed, others contend the law guarantees the earned benefits of employees, not future benefits.


Should the state address pension solvency by reducing the future benefits of current employees, a legal battle is almost certain.


“We would expect that to be litigated at some point,” Valentine said. “That will cost everyone more money.”


Should a case come before the court, things will really get interesting, Rauschenberger said.


“You’d have an Illinois court, where an Illinois judge will be deciding a case on an Illinois pension fund he is in,” he said.