Editorial: Train wreck coming for pension fund

Thursday, June 10, 2010

The state pension fund is quickly running out of money and something needs to be done. Soon.
As a special report in this week's issue shows, the state and many local governments are being pushed to the financial brink as they try to keep up with required payments to the five state pension funds and the two local funds, fire and police pension.
Many experts predict the state pension funds will run out of money within this decade, meaning pension obligations that trump all other state bills would have to come out of general revenues or be financed through additional taxes. And since pension obligations equal about 40 percent of today's state revenues, the state budget would require drastic cuts to other areas such as education and roads.
Through a lethal combination of skipping pension payments, borrowing to make pension payments, declining investment income and generous benefits, the state is being pushed into financial chaos. The pension debt of $15 billion in 1999 swelled to $89 billion at the end of 2009 and is expected to be at least $95 billion at the end of this year.
Things aren't much better on the local front. One town already is paying nearly 20 percent of its budget to pension funds. In another town, voters flatly turned down a referendum request to increase taxes to pay for the local pension debt. In others, staff is being cut to pay for pension obligations.
Public sector employees receive generous pensions. Workers can retire after 30 or so years, often with 65 percent to 75 percent of their salary, based on the last day they worked. Most are not eligible for Social Security or Medicare.
By contrast, many workers in the private sector have nothing close to these benefits as businesses have eliminated pensions. Social Security benefits top out at $29,000 per year; the average public pension can easily double that.
And public pensions automatically increase 3 percent annually, interest that is compounded. Pensioners often wind up making more in retirement than they did while they worked.
Earlier this year the state scaled back the pensions for employees hired after Jan. 1, 2011. Retirement ages increase, increases are linked to COLA and salaries used to compute pensions are topped at the Social Security wage base. That will certainly help the state's future problem. But it won't solve it.
Illinois' labor groups have argued that any reduction in benefits violates the 1971 constitution which states that pensions "cannot be diminished or impaired."
But the reality is the state risks a financial implosion if reforms aren't instituted. The higher the pension debt grows, the worse the state's bond rating will get. Businesses will leave the state like crazy as radical budget cuts and increased taxes are implemented to pay the pension debt.
The Civic Committee of the Commercial Club of Chicago has legal opinions stating that the benefits for current employees can be reduced for years not yet worked. What these employees have earned should be sacrosanct, but what they are eligible to receive needs to be tightened.
A solution to funding the pension fund, at both the state and local levels, needs to come from our politicians fast. Without a solution, our communities' budgets won't survive.