The State of Illinois has the most underfunded public pension plans in the
nation, with a funding gap that is now approaching $50 billion. The low balances
in the state's pension accounts have been made worse by the stock market crash,
which has also hit Chicago's and Cook County's employee pension plans.
Here's a look at the dire situation for the retirement plans of state workers
ranging from police to judges to university professors to members of the
Illinois General Assembly. All are counting on generous state pensions, but may
soon wake up to a brutal reality.
A financial war is brewing -- and it's likely to pit these public employees
against Illinois taxpayers who are responsible for paying those generous pension
promises. There simply isn't enough money in all these retirement plans (see
box) to send out the promised checks. If you think Bernie Madoff had a Ponzi
scheme going, wait until the wave of boomer retirement hits the reality of
pension underfunding.
The state pension plans have been underfunded for a long time. But the problem
is going critical because of the stock market crash. Unless you're willing to
bet on a major bull market appearing in the next few years, there are only three
solutions: raise taxes, increase employee contributions, or cut pension
benefits.
Situation critical
The Illinois state-funded pension system is the most underfunded in the nation.
By midsummer 2008, the five state retirement plans showed a $44 billion unfunded
liability. The plans, on average, were at only about 50 percent of the required
funding level. And that was before the stock market crash, which likely
decimated the stock portion of the investment by another third.
You'd think the Illinois General Assembly, which is responsible for
appropriations to fund these plans, would have paid attention to the fact that
their plan is the most underfunded of all.
In March 2007, Gov. Blagojevich proposed new strategies to add money to the
state's pension funds -- all involving questionable financial tactics: leasing
out the state lottery to raise $10 billion; a new $6 billion state tax on
business gross revenues, and a $16 billion bond sale of "pension obligation
bonds" to raise cash.
Going into debt to fund the pensions is a strategy the governor has tried
before. In 2003 ,the government sold $10 billion in bonds to make a required $2
billion pension contribution. The remaining $8 billion was "invested" in the
stock market to earn more than the 5 percent interest being paid to bond buyers.
At the time I questioned the logic behind this, wondering if the state could
earn more than the interest it was paying.
Now the state has even more limited options. Borrowing money through the sale of
municipal bonds will be more difficult and expensive because the state's entire
financial picture is murky.
Illinois has been chronically late paying its bills. And the state has already
reneged on some financial promises. For example, a bonus that was to be paid to
purchasers of state bonds who used the proceeds for college tuition has not been
paid for the last two years. The state found loopholes in the language, enabling
it to simply stop paying the bonus.
What will happen when other future promises, including prepaid tuition and
nursing home reimbursements, collide with fiscal reality?
Most states in trouble
To be sure, Illinois is not alone. The Center for Retirement Research at Boston
College estimates that state pension plans have losses greater than $865
billion, a loss of nearly 40 percent in just the last year.
The National Bureau of Economic Research says the value of pension promises
already made by U.S. state governments will grow to approximately $7.9 trillion
in just 15 years. And the report predicts that as much as $1.75 trillion of
those benefits cannot be paid.
Put in current dollars, to bring those pension funds up to appropriate levels
would cost "almost $2 trillion today."
The Web site www.pension tsunami.com has been tracking these issues as
they arise around the country.
Could the state simply default on its pension obligations when the time comes?
James Spiotto, an attorney with Chapman and Cutler in Chicago, is an expert in
municipal bankruptcies and says the law can be murky.
"There are varying levels of protection, ranging from strict constitutional
rights to general statutory provisions, that might allow for some renegotiation
of benefit levels in light of adverse conditions affecting the pension fund,"
Spiotto said.
In other words, if the state tries to cut back on the promised benefits, there
will be a huge court battle.
When companies go bankrupt, the Pension Benefit Guarantee Corp steps in to cover
most defined-benefit pension promises. But the PBGC does NOT cover municipal or
state retirement plans.
If city, state and local pension promise are to be kept, it will be up to
taxpayers to come up with the money -- either through higher tax levies or lower
service levels.
And that's The Savage Truth.
ONE GOOD PLAN
Is it inevitable that public pension plans are underfunded? Not at all. In fact,
in the midst of all the dismal news about underfunded public pension plans,
there is one bright spot: The Illinois Municipal Retirement Fund. Last year it
was 100 percent, fully funded!
This plan covers the employees of 2,900 local governments - cities, villages,
counties, parks, libraries, and other local districts, outside Chicago. The plan
covers 177,000 active members, and has 85,000 current retirees.
Based on asset size, with $24.2 billion in assets at the start of 2008, the IMRF
is the second-largest public pension in Illinois.
In 2005-07, the IMRF reached 100 percent funding level, an unprecedented
accomplishment for an Illinois pension fund. Certainly, it took a hit in the
market crash of 2008, but IMRF fund executive director Louis Kosiba says: "When
all the numbers come in, we anticipate that IMRF will be better funded than most
pension systems nationwide and statewide."
How have they managed so well since they got started in 1941? "What is unique
about IMRF is that our board of trustees was given authority to set employer
contribution rates, and that we have enforcement authority to COLLECT those
contributions. We've used conservative actuarial principles . . . and we've been
disciplined over the years about collecting the required monies."
In other words, they didn't fool around or play games with the pension plans of
thousands of communities around the state. Those municipal employees covered by
this plan can breathe a lot easier than their counterparts who work for the City
of Chicago or the State of Illinois.
There was no accounting magic involved. The Illinois Municipal Retirement Fund
simply did the right thing!