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A tale of public pension woe

By Barbara Whelehan ·
Friday, January 11, 2013
Posted: 5 pm ET

This week Illinois staged its own "fiscal cliff" drama on a smaller scale and with a different ending.

On Tuesday, Gov. Pat Quinn was hopeful that Illinois lawmakers would pass last-minute pension reform to solve the state's $95 billion pension crisis in a lame-duck session. Sound familiar?

Two competing plans were debated. Both involved reducing benefits for public workers, and one called for increasing employee contributions. A third idea proposed by the governor would have resulted in the appointment of an eight-member bipartisan commission tasked with coming up with solutions by April 30. (Again, sound familiar?) Their recommendations would have become the law of the Land of Lincoln unless the Democratically controlled legislature voted against it within 30 days. But this idea drew a lot of criticism and was squelched before it hit the House for a floor vote.

Outgoing lawmakers adjourned without resolving the crisis. Then on Wednesday, when the new legislature was sworn in, Gov. Quinn, a Democrat, expressed hope that the new lawmakers will fix the state's pension system in the months ahead.

Hope springs eternal.

Magnitude of the 'pension problem'

Roughly half of the pension hole, or $43.5 billion, represents unfunded teacher pension liabilities, according to a report released last month by the National Council on Teacher Quality. From the standpoint of Illinois teachers, this is a serious retirement planning problem since they are not able to claim Social Security benefits; they are depending solely on their pensions and individual savings for their retirement. In fact, nearly half of all state and local workers nationwide face the same situation.

Any solution involving benefit cuts that the state legislature comes up with will certainly face fierce opposition from unions. Public pension benefits are protected by the Illinois constitution. So the state is obligated contractually to deliver the promised benefits. And Illinois' Supreme Court has struck down attempts to curtail benefits in the past.

After speaking to Ralph Martire, executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, I believe the unions have every reason to defend their members' benefits tenaciously.

"Our unfunded liability in Illinois is not due to any inherent aspect of the pension systems themselves," says Martire. "In fact, if you took the amount of the current unfunded liability that is due to the pension systems … Illinois would be over 80 percent funded today. There would be no crisis."

The problem stems from the state's structural deficit in its revenue system, he says. To fix this problem, rather than cut spending or increase revenues, over the years the state borrowed against the contributions that it was supposed to make to the pension systems and used the borrowed money to fund the ongoing costs of government -- mostly to education, health care, social services and public safety.  

Back in 1989, the unfunded pension liability was about $8.7 billion, says Martire. By 1994 it had doubled to $17.5 billion. To solve Illinois' addiction to borrowing from the pensions, a pension law was passed that required a new series of contributions to the pension systems so that by 2045, it would be 90 percent funded, says Martire. The result: Illinois still had a structural deficit on top of a new payment obligation. "And they didn't pass a nickel of revenue to fund it," he says. "That's really not the best fiscal policy. It's going to make your annual structural deficit worse, not better."

On top of that, the state made no allowances for actuarial adjustments. "They created an entirely fictitious amortization of the debt they owed that was so substantially back-loaded that in effect, and this was by design, they codified the practice of borrowing against the pensions for 15 years," he says. "So from 1995 to 2010, by law, they were making a contribution to the pension system that was so low that it was borrowing against what they truly owed to fund current services."

It's enough to make your head spin. The unfunded liability grew by well over 400 percent to nearly $50 billion, and then the 2008 market crash followed by the Great Recession caused the deficit to mushroom to its current level of $95 billion.

"But the cause, to be very clear, is the debt. It's not a pension problem at all. It is a debt problem."

Again, this sounds all too familiar. Martire's Center for Tax and Budget Accountability has a solution, a payment structure that over 45 years would make Illinois' five pension systems whole. Some Senators have expressed interest in his solution.

But I have to wonder if these politicians can be trusted to manage public funds, given their abominable track record, and their penchant to worry more about their own political futures than the higher good of the people they're supposed to represent.

Again, the problem seems all too familiar.

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January 15, 2013 at 3:19 pm

I am a resident of Illinois, and I am going to leave the State. They are going to turn this around on the taxpayers. The State needs to pay back the money that they promised the pensions and the workers. The workers did not break their promises. They continued to work.

City On A shining hill
January 14, 2013 at 12:28 am


Another failure of the party of entitlements, to balance state budgets every year, as all state constitutions require.

All government pensions should be moved to a 401k, as private industry has, where the employee contributes 10% of his or her salary with the government matching 10%. All federal pensions should be this way as well, as well as for the postal employees.

Then, the employee can choose how to invest their contribution, and the pension would grow 3-7% a year, depending on how the stock market/CD, Money market funds are doing, etc.

But, Americans are choosing politicians who promise the world in benefits, using tax dollars. Socialism always brings poverty in the end that choosing a free market, limited government approach would prevent.

Chris Tobe
January 12, 2013 at 10:17 pm

Kentucky's state plan at 27% funded is now worse than any of the Illinois plans. Problems are very similar

January 12, 2013 at 8:31 pm

Jay, the problem already has "gone national," and long before Obama was elected President. It's called the nonexistent "Social Security Trust Fund," whereby politicians used it for other things and never really set aside money to pay SS benefits for the baby boom generation. Illinois is the proverbial canary in the coal mine; basically the same war, between the old and the young, will be fought nationally, starting quite soon, I'm afraid.

January 12, 2013 at 8:33 am

Does anybody see the irony of an 8-member task force to solve this problem? Isn't that why politicians seek office? To solve problems! As a resident of Illinois, it is obvious to me that none of them are doing any kind of job, but we voters keep sending the same people to the capitol to increase our debt. If I could sell our house, I'd love to move to another state. Moral of the story is - don't ever vote for a politician from the state of Illinois for President!!! The problem will just go national.