In the time it takes you to read this sentence, Illinois taxpayers will be
another $200 deeper in debt.
The state’s pension debt will exceed $44 billion this summer, increasing at a
rate of about $120 per second, according to Gov. Rod Blagojevich’s
administration. The debt already tops $42 billion — enough to give every one of
Illinois’ 12.8 million residents a check of $3,300 or buy 937,000 Cadillacs at
$45,000 a pop.
The combination of debt in terms of both money and percentage gives Illinois the
infamous distinction of having the nation’s worst pension problem, according to
an Associated Press review of records and interviews with experts. And there’s
no solution in sight.
The staggering debt load for the five pension plans for state employees is a
problem that’s remained largely in the shadows for decades. The $42 billion
“unfunded liability” — the difference between the systems’ assets and what they
owe employees in benefits — also is creating a real problem for state
policymakers.
It’s squeezing out money for other valued needs, such as education and health
care. It means the state has less money for things like child-care aid and
fixing roads and schools, or paying some of the $1 billion it owes to Medicaid
health care providers and others.
“Someday, those costs have to be paid,” said Eden Martin, who heads the civic
committee of the Commercial Club of Chicago, an economic improvement group.
“There is no free lunch anywhere.”
Dating to the 1970s, state lawmakers pushed off the yearly payments they were
supposed to make to cover the “normal costs” of pensions, or how much employees
earned that year in benefits. These so-called holidays added up, and the debt
multiplies over time.
“People didn’t pay attention,” said Rep. Kurt Granberg, a Carlyle Democrat who
helped push for a plan to deal with pension payments. “They saw the pension
obligations 20, 30 years down the road. It was fiscally irresponsible.”
And the problem is getting worse every second.
At $42 billion, the debt grows by $3.6 billion a year — enough to let nearly 1
million people put $70 worth of gas in their vehicles every week for a year.
Enough to cover $1 million ads for 3,600 companies during next year’s Super
Bowl.
Like an out-of-control credit card infatuation, or a house mortgage where only a
fraction of the cost is paid each year, new pension debt gets piled on top of
old.
Here’s what the debt means:
For decades, state employees and teachers have been promised yearly payments
when they retire, based on their salaries and years of experience. The average
monthly benefit ranges from $1,900 to $3,100 per month, according to estimates
from the Illinois Retirement Security Initiative.
The pension funds have invested the cash paid into the systems by employees and
state government to build up the coffers, but the value of those investments
still falls far short of what’s needed to cover all the benefits earned so far.
That’s what causes the $42 billion debt.
Lee Ann Gemmingen, who’s about halfway through her career as a seventh-grade
language arts teacher in Belleville, said she is frustrated that the future is
uncertain even though every year she and thousands of others like her pay what
they’re supposed to contribute toward their retirement.
With no Social Security to fall back on, Gemmingen can’t help but feel uneasy.
“You get that knot in your stomach kind of feeling,” she said. “Am I going to
have a pension left? I don’t have anything else there.”
Overall, the Illinois pension systems have about 63 percent of the funding they
should to meet their obligations. According to the National Association of State
Retirement Administrators, California has an estimated $54 billion debt in its
systems, and several states have funding totals under 63 percent.
But taken together, no other state can match Illinois’ problem.
California’s $54 billion debt is larger, but its pension systems are more than
87 percent funded. And states with worse funding percentages have much smaller
pension funds — Connecticut’s is the largest at about $14 billion, about
one-third of Illinois’ debt.
Experts say the 63 percent funded number is important because many states are at
80 percent or higher; some, such as Florida, are fully funded. The higher the
number, the more confident employees can be that their retirement money is safe
and will be paid to them.
State pensions will be paid whether the systems are 60 percent funded or 90
percent funded, lawmakers say — the funding percentage only matters if all state
employees would retire at once.
“It’s a little bit like saving up for college, except your kid never goes to
college,” said Sen. Don Harmon, D-Oak Park.
“We’re always saving up for retirements in 20 or 30 years.”
And not long ago, Illinois was in even worse shape with pensions. Its funds were
at 48 percent funded until $10 billion in pension borrowing bumped that up to 61
percent.
A 50-year plan adopted in 1995 has the state on track to be up to 90 percent
funding by 2045.
But here’s the rub: The state agreed to pay the pension systems 8.5 percent
interest — the estimated return on investments the systems would expect to get
if they had all the money they were owed — for essentially borrowing money from
the payments they should receive.
That’s 8.5 percent every year. On $20 billion, that’s about $1.8 billion a year.
On $42 billion, it’s $3.6 billion. When you add the actual cost of employees’
benefits each year, the state faces nearly a $5 billion payment just to keep the
debt from getting bigger.
“We’re falling further behind, not even staying constant, and that’s why we know
we’ve passed the point where we have to do something,” said John Filan, Gov. Rod
Blagojevich’s top budget adviser.
Many at the Capitol are concerned nothing significant will be done on pensions
this year or even next. Lawmakers could be tempted to deal first with more
politically popular programs, such as education and health care, and put off
pension reform again.
“You don’t get many kudos for paying pension expenses,” Filan said. “There are
competing choices.”