Lake Zurich Courier

State facing staggering pension debt

Thursday, June 10, 2010

For decades, the state of Illinois has put part of its pension tab on plastic, while charging up earlier and more costly retirements without socking away savings to cover the bill.
Lawmakers put off tough choices by making the minimum payments to fund these pensions artificially low, then skimped and skipped payments while the pension debt grew. A few times, the state even borrowed money just to pay the bare minimum.
"For the average family, that's a surefire recipe for personal bankruptcy," former Gov. Rod Blagojevich said in 2005, when the state's pension debt stood at $35 billion, less than half of what it is now. "But that's exactly what the state has been doing year in and year out."
This year, the Illinois House voted to borrow $3.7 million to make the minimum payment, while the Senate did not agree to the plan before leaving Springfield May 28.
Like a maxed-out credit card binger, the state is now staring at a staggering bill for that political expediency, the sobering consequence of putting aside too little for pensions while promising too much. The state's pension debt is compounding at an alarming speed.
Consider this: It took three decades for the state to accumulate $15 billion in pension debt, just nine more years for that debt to soar to $78 billion. Add what the state has borrowed to prop up the plans, and the figure is really $89 billion and likely to grow to $95 billion this year. That's nearly $7,000 for each resident of the state.
Some experts say that debt is really closer to $166 billion.
The Civic Committee of the Commercial Club of Chicago is leading an Illinois Is Broke campaign to relieve the pressure on the state's budget. The civic committee is trying to persuade lawmakers that pension benefits can and must be scaled back for current school teachers and administrators, state employees, state university employees, legislators and judges.
Earlier this year legislators scaled back pension benefits for eligible employees hired after Jan. 1, 2011.
Illinois' labor groups have long fought any pension reform, arguing persuasively that any reduction in benefits violates a guarantee in the state's 1970s constitution. The clause states that pensions are a contractual right that "cannot be diminished or impaired."
"Teachers and state workers are entitled to reasonable pensions and access to health care; no one is denying that," said Miles White, chairman of the Civic Committee of the Commercial Club of Chicago. "But the fact of the matter is, the private sector reformed its retirement plans in order to survive, and it is time for the public sector to do the same. If we don't reform the system going forward, we risk a financial implosion."
The civic committee contends the state is fast approaching a "tipping point beyond which it will be impossible to reverse the fiscal slide into bankruptcy." The radical cost cutting and huge tax increases that will be needed to make up for the past will drive employers and jobs out of Illinois, they say, setting off a vicious cycle of tax increases and a shrinking tax base.
Moreover, the group says it's unfair to ask Illinois citizens to bankroll a level of benefit that far surpasses what most employees in the private sector receive.
Pubic employees receive "defined benefit" pensions that can be as much as 75 percent of salary for life. Because of early retirement plans, many retirees can expect to draw benefits for as many years as they worked. Pensioners also are guaranteed annual pay raises of 3 percent, compounded.
Teachers and some other state employees don't receive Social Security and fall under state retiree health insurance plans, as they aren't eligible for Medicare.
Teachers' groups say what's unfair is to penalize them for the sins of the legislature.
After all they've dutifully paid their employee contributions from their paychecks (about 9 percent), while the state has shirked its responsibilities.
Teachers contend the state is jeopardizing its future because high-quality teachers -- sorely needed to produce an educated workforce -- will choose to teach in other states or opt for other professions.
Signs of distress
Earlier this year, Illinois' plans were flagged as the worst-funded in the nation by the Pew Center for the States, based on a combined funding ratio of 54 percent in 2008. The market downturn further battered the funds, which ended 2009 with only 38 percent of the assets needed to pay what was promised.
The Teachers' Retirement System, the pension fund for school teachers and administrators outside Chicago, finished last year with just $28 billion in assets after a decade of market volatility and a surge in retirees drawing ever-larger pension checks from the system. In the past five years, the number of retirees with pensions of $150,000 or more soared from 19 to 162; the number of retirees with pensions of $100,000 or more catapulted from 453 to 2041.
Meanwhile, the fund grew by just $4 billion in nine years, despite an infusion of $4.3 billion of borrowed money from a bond issue. At the same time, annual payouts to pensioners soared by more than 160 percent, to $3.6 billion while the number of pensioners grew by 52 percent.
State labor groups still contend the state constitution guarantees their benefits.
But the Civic Committee of the Commercial Club of Chicago has a legal opinion that says benefits can be changed for current employees going forward -- that is, for the years not yet worked. Three other law firms have concurred with that opinion.
Critics say that any legislation testing the constitutionality of a rollback in pension benefits for current employees would be mired in court challenges for years to come.