Updated: May 27, 2011 5:36PM
Illinois’ runaway pension system is placing the state’s fiscal health in jeopardy. State contributions to the pension system have already crowded out payments to social service providers. But less focus has been placed on current state workers and teachers, particularly those with retirements more than a decade away. Their outlook is very much at risk, which is why their unions’ opposition to pension reform is contrary to their interests.
Illinois’ pension system is hopelessly insolvent with about $60 billion of assets and $200 billion in “legacy” liabilities (using an appropriate discount rate). Illinois state workers and teachers currently have roughly 9 percent of each paycheck withheld and sent to the pension black hole. The premise is that the funds will be held by the pension system, invested responsibly, and used to make payments to the workers upon retirement. Unfortunately, pension officials are using those contributions from current workers to pay current retirees.
And it gets worse. With respect to the tens of billions of state contributions to the pension system, the pension sieve pays those funds out as fast as they arrive. Pension officials are also liquidating the $60 billion current pension investment portfolio, also to pay current retirees. In the May issue of National Tax Journal, nationally recognized pension expert Professor Joshua Rauh of Northwestern estimates that by 2018, all pension assets will have been liquidated! The cupboard will be bare.
With their contributions gone and assets depleted, state worker pensions would still be safe if the state was required to pay benefits. Recently the Civic Committee of the Commercial Club of Chicago retained the prominent law firm Sidley Austin to assess whether or not Illinois is legally required to pay pension fund obligations in the event the system is broke. Sidley’s opinion was unequivocal; “the state itself is not a guarantor of that obligation.”
What about a taxpayer bailout of the system? Over the past twelve years, Illinois has contributed about $30.5 billion into the pension system, half of that borrowed. According to Illinois Commission on Government Forecasting & Accountability (COGFA), over the next 12 years, pension officials anticipate over $78 billion of required state contributions into the pension system.
Taxpayer funds of $78 billion seem awfully generous in comparison to the $24 billion that COGFA estimates will be contributed by the employees. In light of stagnant wage growth, unrelenting unemployment and a generational bear market in stocks and home values, it is hard to imagine that the 95 percent of Illinois citizens that do not benefit from the pension system will support such generosity from their elected officials. Certainly the state can attempt to continue borrowing from the bond market to fund the pension. Financial markets have closed for sovereign credits like Greece and Ireland; they can close for Illinois as well. This is not just theory; current interest rates indicate Illinois has the highest likelihood to default of any of the 50 states.
Even if the pension funding schedule raises $78 million over the next 12 years, the two principal measurements of pension health — the unfunded liability amount, and ratio of assets to liabilities will further deteriorate anyway. Miraculous taxing and borrowing cannot save the system.
With past contributions and assets spent, and in the absence of a state guaranty, taxpayer support and debt market availability, what is in store for current state workers and teachers in the coming years? Massive reductions in actual benefits. Anticipated employee contributions and realistic state contributions will cover far less than half of the $13.6 billion annual benefit payments (as estimated in Professor Rauh’s piece) due in the years 2019 through 2023.
Fortunately, the General Assembly is considering a bill that will provide state workers and teachers with a better alternative; a defined contribution plan, similar to the 401(k) programs that the vast majority of private sector workers use for their retirement. And rather than seeing 9 percent of their wages go into the insolvent system to bail out retired workers, current workers would have their own segregated accounts. Whether this bill is ultimately passed, this is an approach that serves workers’ own best interests.
Younger state workers and teachers had nothing to do with creating the massive legacy liabilities that are bankrupting the pension system and potentially the state itself. It should not be on their backs to fix it. It is hard to understand why union leaders are opposing the very reforms that will ultimately spare today’s state workers and teachers from devastating benefit cuts in the future.
Marc Levine is a senior fellow of pension and investment policy with the conservative Illinois Policy Institute.