By Kevin Solari and Tom Collins
Got a spare $8,600?
That’s how much you and every other man, woman and child in Illinois would have to pay to immediately to fully fund the state’s pension system out of pocket. That’s based on numbers from the Commission on Government Forecasting and Accountability.
Don’t panic: Billing more than 12 million Illinoisans for nearly $9,000 apiece is not one of the proposed solutions to the pension crisis — but it illustrates how far in the hole the funds are and what an $111 billion unfunded liability means to regular people.
Does a $111 billion shortfall sound bad? It’s worse than you think.
“Illinois’ pension system is among the worst-funded in the country,” said Abhijeet Bhattacharya, an economics instructor at Illinois Valley Community College. “The unfunded pension liability is causing the downgrade of Illinois’ credit. It is important for Illinois to restore the business community’s confidence. Far too much revenue goes to meet pension costs.”
And the revenue sucked up by pensions is going to grow. The unfunded liability is not what the pension funds are owed right now. Rather, the liability is how much the state expects to owe in the future — and which the state won’t be able to pay.
Illinois state pensions are structured as defined benefit plans; that means the payout amount is set for the lifetime of the pensioner. It differs from 401k plans in that while a pension plan will make investments, the payout is the same no matter how the investments perform.
Stock market had a down year? That’s OK; you still get your check. Stocks are going gangbusters? That’s good for the fund, but won’t change your benefit.
But state pensions are also funded with tax dollars, not just with employee contributions. That was part of the original deal reached with state workers.
How many pensions are we talking about? On paper, there are hundreds in Illinois; but some are well-funded and most affect a limited number of taxpayers.
The $111 billion (and growing) tab is needed for five state-funded pension funds for which every taxpayer in the state an obligation. These will play an ever-increasing role in Illinois politics and policy.
How We Got Here
The current state of the pension crisis dates back to 1994. That’s when then-Gov. Jim Edgar, a Republican, and Democratic House Speaker Michael Madigan reached a compromise, often called the “pension ramp.”
Like its employees, the state has to pay into the pension funds as well.
Unlike employees, the state has missed payments in the past. It restructured the state’s payments into the pension fund, allowing it to make smaller payments early on while those payments increased as the years went on. At the time, the pension deficit was $15 billion.
The state, however, missed many of those early, small payments. When the ramp was first passed, Edgar said a time bomb set to blow in the early 21st century had been avoided.
Avoided? It wasn’t even delayed.
The pension funds receive revenue from three main sources: employee contributions, state contributions and investments. The current $100 billion shortfall stems from the state making those inconsistent and incomplete payments and from the 2008 recession. Compound them and you have a state that could file for bankruptcy if that were a legal option.
There are five state-funded pension funds: one each for downstate public school teachers and staff, university staff, state employees, legislators and judges. None of the funds is more than 43-percent funded and the general assembly fund, which pays out pensions to former legislators, is just 16-percent funded.
Another statewide pension, the Illinois Municipal Retirement Fund, is funded locally by the municipalities and local government agencies participating. It is in good shape, largely because the participating municipalities are required by law to contribute their share.
State Sen. Sue Rezin (R-Morris) said when she meets with constituents who want to hear what needs to be done to fix the problem going forward, but aren’t much interested in the problems that led to the crisis.
“People say, ‘I don’t care how we got here,’” Rezin said. “Well, you should. The behavior that got us here has to stop.”
Can't We Just Cut Benefits?
No. Cutting benefits is off the table because last year the Illinois Supreme Court rejected a suggested fix that could have saved billions, but also inflicted great pain on union workers.
Gov. Pat Quinn, a Democrat, signed into law a pension fix that would have curtailed future cost-of-living adjustments for workers, raised the age of retirement for some and capped pensions for the highest salaried.
The Supreme Court unanimously overturned it, pointing out the state Constitution ensures that any benefits promised as part of a pension system for public workers “shall not be diminished or impaired.”
“Crisis is not an excuse to abandon the rule of law,” Justice Lloyd A. Karmeier wrote in the court’s opinion. “It is a summons to defend it.”
We Need Cash — Fast
Barring a constitutional amendment giving Springfield authority to cut benefits, the state’s first priority is to come up with $111 billion for both short-term and long-term pension needs.
Democrats have proposed raising Illinois’ comparatively low state income tax. Some proposals call for nearly tripling the income tax rate from 3.75 percent to 9.75 percent. Republicans, many from the anti-tax Chicago suburbs, won’t do that.
Republicans favor spending cuts to help fund pensions. Democrats balk at cutting services and their opposition has set off an ongoing budget stalemate pitting Gov. Bruce Rauner and Democratic lawmakers, chiefly Madigan.
Jerry Long of Streator, Republican nominee for the Illinois House (Frank Mautino’s old seat) said the Legislature needs to be “extremely frugal” with spending.
“The reason why this has gotten out of control is because our politicians didn’t fund the pensions and did not prioritize how we spend our money. Pensions need to be fully funded for those who have already invested. Any solution we come up with needs to be fair and equitable for the employees and the taxpayers, and meet the standards of the court.”
State Rep. Andy Skoog (D-La Salle) was less committed to a single course of action.
“We have a responsibility to honor the contracts that were signed in prior years, which is what the Supreme Court ruling stated,” he said, “and I am committed to working with all stakeholders to ensure that future contracts can be honored in a way that does not put the state into additional financial struggles.”
But Cash Isn't Enough
Coming up with the money is only one piece of the puzzle, however.
Bhattacharya said without restructuring Illinois’ current and future obligations, the pension shortfall will be compounded.
“Unfunded liabilities often grow exponentially,” he explained, “and it is very difficult to fund them even by implementing massive tax hikes.”
But even on the question of how to keep the crisis from getting worse, Democrats and Republicans have divergent opinions.
Republicans generally favor proposals like the ones spelled out by the right-leaning Illinois Policy Institute. The IPI proposes to:
•Eliminate pensions for politicians: As mentioned, it’s only 16-percent funded, anyway.
•Offer 401(k) plans to new hires instead of pensions and offer optional 401(k)s to current employees
•Make cities and employees pay more in contributions and let cities file for bankruptcy to restructure obligations
Rezin acknowledged none of this will come easily, but she insists the state cannot kick the can down the road any longer. By 2045, more than 50 percent of all sales, income and corporate tax revenues would be required to meet the pension obligation payment barring a major policy reversal.
Rezin said the state needs a budget, now. Then, we have to come up with an additional $400 million, right now, to cover this year’s payment. We also need initiatives to protect workers and comply with the Illinois Supreme Court ruling.
“We’re feeling pressure from all over,” she said.
And not least, lawmakers must no longer decide they don’t want to make the payments.
“That’s truly the main reason how we got here. In the past, that’s been the Democrats’ answer: To take a vote to not make a payment. We can’t do that anymore.”