Illinois Business Journal

Lush benefits, fiscal irresponsibility, put Illinois at bottom of pension heap

Friday, August 06, 2010

A combination of extravagant retirement benefits and a lack of fiscal discipline have made Illinois’ pension system the worst in the nation. How much the state needs to contribute to fully fund its obligations ranges from $79 billion to $200 billion, depending on whose math you use.

In the spring, the Illinois General Assembly passed legislation to reform its pension system in the future, raising the retirement age for full benefits to 67, limiting retirement benefits and ending what’s called “double-dipping” - being able to draw multiple pensions from multiple state jobs. But these reforms don’t touch the current crisis, according to State Sen. Dave Luechtefeld, a Republican from Okawville.

“The thing that we actually did doesn’t really change our problem very much,” Luechtefeld said. “It doesn’t solve the present problem at all. Down the road it will make a huge difference on what the pension system will be.”

According to a Sept. 11, 2009 news article printed in the Chicago Sun-Times, almost 4,000 state retirees receive more than $100,000 per year with the highest paid retiree receiving nearly $450,000 per year; 2,200 of them have collected more than $1 million since retiring; more than 14,000 retirees receive more in annual pension payments than their final salaries; and, 11,500 retirees get checks from two or more government pension plans.

And these pensions don’t include additional health insurance benefits, according to R. Eden Martin, president of the Commercial Club of Chicago. The Commercial Club has released several reports on the state’s pension crisis; the last one, entitled Facing Facts 2009, was released in February of last year. These health benefits include 100 percent paid for health insurance up until the retiree is eligible for Medicare and 100 percent paid supplemental insurance from that point on.

Several factors contribute to the excessive pension payments that some retirees get, according to Martin. One is that employees are able to retire at the relatively early age of 55 with a full pension, if they have enough years of service. That contributes to the problem in two ways, says Martin.

“After you retire, you get 3 percent automatic COLA (cost of living allowance) adjustments every year,” Martin said. “That’s true whether there is inflation or not. So, some of these folks, by the time they reach normal retirement age, are collecting pensions which are more than they were making the last year in which they worked. It’s not uncommon. But what typically happens,” Martin adds, “is that people retire at, let’s say, 55 and then go to work in another state or city job. Then you get the ‘double-dipping’ phenomenon, which is you now have a salary on top of the pension, plus you’re running up a new pension benefit in the new job.”

Another cause of the state’s woes is just plain fiscal irresponsibility, according to Martin. The state of Illinois was getting itself into pension funding trouble in the early 1990s and ended up passing a pension reform bill in 1995 that laid out a plan that would balance the pension fund by 2045.

“The problem was that the formula wasn’t right, and at the time nobody pretended that it was right,” Martin said.

“It was based not on actuarial standards, but on what the state thought it could afford, and therefore back-ended the cost recovery. Worse, there were several years in which they didn’t stick with the formula. The formula was bad enough, but in the Blagojevich years we took one year as a whole pension holiday; another year there was a partial year pension holiday. The funding was wrong, the formula was inadequate and there have been years when we have made it worse, and we’ve also made the pensions more generous. So, all in all that adds up to the state’s underfunding of roughly $79 billion projected at the end of the current fiscal year. That’s how that’s gotten so big.”

According to the Pew Center on the States, Illinois ranks 50th among the states in terms of the percentage of total pension liability that is underfunded - about 46 percent. And, according to the Center’s report, The Trillion Dollar Gap, that was released earlier this year, while Illinois is in the worst shape, it’s not alone. Some 18 other states’ pension systems also merit serious concern.

Luechtefeld said that the state’s hands were tied in making more serious reforms because the state constitution prohibits reducing the pensions of current employees. But, Martin points to a legal opinion drafted by the Chicago law firm of Sidley & Austin - and signed onto by four other leading Chicago law firms – that disagrees. According to Sidley, while the state’s hands are tied for benefits earned in the past by current employees, the state is free to reduce the benefits going forward for all employees, both present and future.

Martin estimates that the state would need to devote approximately $8.6 billion per year to the pension funds to start working itself out of the hole. That doesn’t include the additional ongoing costs of the retiree health insurance program.

Together, the state would have to more than double the income tax to raise that much money, assuming cuts aren’t made.

The Commercial Club advocates cutting first, making the changes in the pension system and the health insurance benefits now and going forward for all employees, then raising taxes, if necessary. But, Martin says, this advice is falling on deaf ears.

“The argument in Springfield is not about the merits,” Martin said. “We have been making presentations and giving speeches and talking to newspaper reporters since December of 2006 and I can’t see that it’s made a particle bit of difference.”

The kicker, according to Martin, is that legal scholars believe that the state is not ultimately responsible for the pension payments and pensioners might be left holding the bag.

“Who owes it?” asked Martin. “The answer is, the pension folks owe it, clearly.

Under our constitution, membership in a pension plan is a contractual relationship between the member and the pension plan. It’s reasonably clear that the state is not the guarantor, so a pensioner will have a very good claim against a fund that doesn’t have any money in it. That’s one of the reasons why we are so urgently arguing what needs to be done right now is to reform them now and fund them now.

Because if they ever get so far down the slippery slope that it can’t be retrieved,” he added, “then all of the incentives on the part of the legislature will be to say ‘the hell with it.’”