Illinois Business Journal

Illinois state pension funding gap nears $46 billion, parties differ on remedy

Monday, June 07, 2010

Although Illinois Democrats claim the state's pension systems today are more secure than they were three years ago when Gov. Rod Blagojevich took office, Republicans argue the future of the pension systems - and the increasing liability of the state taxpayer - is becoming less secure with each passing fiscal year.
What neither political party will dispute is the vast complexity of the system itself. There are 658,000 members of the state government-administered system, which is actually comprised of five separate and distinct systems: the state employees' retirement system, the judges' retirement system, the General Assembly's retirement system, the teachers' retirement system and the state universities' retirement system. Of the five, the teachers' is by far the largest, comprising 49 percent of the whole pension system, followed by the universities' at 28 percent and the state employees' at 23 percent.
From 1990 to 1996, the state's pension systems were funded at levels between 50 and 60 percent. In 2000, the systems were funded at 75 percent, according to state records, dropping significantly to 63 percent by 2001 and 54 percent in 2002 when the recession hit.
In terms of how Illinois compares to the other 49 states, educators and legislators say the state's five pension systems rank at the bottom as the most poorly funded. Several states' systems are 100 percent funded. Compared to the national average of state pension system funding ratios, in 2004 when Illinois' systems were funded at 61 percent, the national average was 83 percent. Currently Illinois' pension systems' overall liabilities exceed assets by approximately $38.6 billion. The system is now funded at a level of about 60 percent. Under Illinois law, earned pension benefits are constitutionally guaranteed.
The goal of Illinois legislators and the governor's office is to raise that 60 percent funding level to 90 percent by the year 2045.
The means to that end is what's causing major division along party lines, according to State Sen. David Luechtefeld, a Republican from Okawville and assistant minority leader in the Illinois Senate.
Luechtefeld says Blagojevich should have adhered to the pension law legislators established in 1995 - one that former Govs. Jim Edgar and George Ryan followed - that mandated specified annual contributions into the five pension systems from the state as a means of bringing the funding imbalance back on track. Prior to 1995, Luechtefeld said, there wasn't any law requiring how much the state would contribute to the pension systems; contributions before that time, he said, were discretionary, and were often insufficient to maintain the long-term health of the system.
According to Becky Carroll, spokeswoman for the Office of Management and Budget, a total of $5.4 billion was contributed to the pension systems during Edgars' two terms from 1992 through 1999. During Ryan's term from 2000-2003, $5.8 billion went into the pension systems.
"Illinois is now 50th out of 50 states as far as being poorly funded is concerned," said Luechtefeld. "Over the years, legislators have abused the pension fund. Even Republican administrations have. But in 1995, the General Assembly passed a law and governors since that time - until Gov. Blagojevich - have followed it. The governor and those who support him will tell you they've got a better plan and that they're reforming the system, but take a look at what we will really owe in the coming years in order to pay it back. Illinois' unfunded pension liabilities will be greater than annual state revenues for the next three decades."
What Luechtefeld is referring to is Blagojevich's strategy that is taking the place of adhering to the 1995 pensions law, a law which the governor and Democrats say is structurally flawed. In FY 2003, the year Blagojevich took office, legislators voted to borrow $10 billion in bonds, routing $7.3 billion of that into the pension systems in lieu of following a formulaic amount dictated by the pensions law.
And in FY 2006 and 2007, the governor and Democratic legislators voted to alter the 1995 funding formula to under-fund the pensions systems by $2.3 billion.
Luechtefeld said the legislature's vote in 2003 to abandon the 1995 pension funding law and its formula fell clearly along party lines. "I understand why people (Democrats) who voted for this would defend it, but common sense would tell you that if you put less money into the pensions, they won't be in better financial shape," he said.
State Rep. Jay Hoffman, a Democrat from Collinsville, says neglect of the pensions system dates back to the early 1980s when the legislature regularly skipped annual payments.
"The inaction of many previous administrations leaves us where we are today," Hoffman said. "Although the intention of the 1995 law was sincere, the issue really is the structure and integrity of the system itself."
Since the 1995 pensions funding law was passed, Hoffman said, the total in unfunded liabilities has more than doubled from $19 billion to more than $43 billion in 2003.
"We passed (in 2003) the largest pension obligation bond bill that used historically low interest rates to infuse $10 billion into the system and reduce that $43 billion to $38 billion and generate an additional return of $1.2 billion," Hoffman added. "When Gov. Blagojevich took office, the pensions system was funded at 48 percent. Today it's funded at 60 percent. This year alone, we put $1.4 billion into the pension system and have made more structural changes to it. The people who still say the 1995 law is sacrosanct aren't being realistic."
Critics of the governor, including Luechtefeld, argue that borrowing the $10 billion more than doubled the state's bond debt. Pension bonding, according to Luechtefeld, is merely trading one debt for another.
"It's arbitrage play," he said. "They've sold the bonds at 5 percent and now they must earn 7.5 percent over the next 30 years. One thing that has helped minimize that indebtedness, however," the state senator said, "was the fact that the stock market performed well over the past several years since that bond issue took place in 2003. But the down side is that all the assumed 'savings' from the arbitrage play has been used up front and they've severely back-loaded the debt repayment schedule. It's a gamble. If the pension investments earn 7.5 percent over the next three decades, the whole scheme is a wash," Luechtefeld added. "And as far as borrowing the $10 billion is concerned, if they're willing to borrow on margin with the people's money, why aren't they willing to do the same with their own money? We still owe the $10 billion."
Republican critics say taxpayers will have to pay more than $20 billion back in principal and interest on these bonds - and on higher pension costs - in future years.
The $10 billion bond issue was a wise one, according to Hoffman, and one that "leading business people of the state" endorsed.
"I believe we borrowed at about 5 percent interest and, as opposed to previous years, it makes this a hard obligation of the state - one that cannot be skipped," said Hoffman. "It was a good financial decision. Leading business people from in the state told us that. In addition to infusing this money into the pension system, we created a team of experts to begin to look at the long-term problems and address them."
Hoffman said pension funding could get a noticeable boost from dedicating revenue from the pending sale of Illinois' 10th riverboat casino license - as much as $500 million, he said. "Would that take care of it? No, but it would show the pensioneers that we're serious about addressing the situation and moving toward the goal of 90 percent funding by 2045," said Hoffman.
Luechtefeld said he is doubtful that revenue ideas including the riverboat license, the sales of surplus property and more are viable remedies to the massive pension funding dilemma.
"The 10th license is ensnarled in a dozen separate lawsuits, and there certainly won't be any money from a sale in FY 2007 or even FY 2008," said Luechtefeld, "or maybe ever. Even if a sale were closed, the latest estimate is a net of $350 million to the state. And that just covers one-third of this year's raid of the pension system alone."
president/ceo: Kerry Smith