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Battle brewing over Illinois pensions

FINANCE | Stock market crash leaves state's plans critical just as baby boomers set to retire

January 24, 2009

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.


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!