Reform Plan for Pensions Has Critics

Thursday, March 25, 2010

The remarkably swift reform of the state’s pension plans, thrust through Wednesday by Mike Madigan, the Illinois house speaker, does virtually nothing to make up a shortfall in funds, some of the state’s leading pension-reform advocates said.

“It’s like a patient is in the hospital bed with a serious case of gangrene in the right leg, and the doctor has chopped off the little toe and wonders if that is a step forward,” said Eden Martin, who has led calls for pension reform as president of the Civic Committee of the Commercial Club of Chicago. “While this was a step in the right direction, it didn’t address the issue at all.”

With no prior warning or public hearings, Mr. Madigan pushed through a measure to increase the retirement age of employees for state pension calculations to 67 from 65. He also capped the maximum salary that would apply in pension calculation at $106,800. Those changes, like the others in the bill, apply only to newly hired state employees.

In the near term, parts of the plan will worsen the $76 billion shortfall in the state’s contributions to five public-employee pension funds — among the worst in the nation.

By allowing the Chicago Public Schools a three-year hiatus in funding its pension obligations, the Madigan plan increases the immediate shortfall in funding teacher pensions by an estimated $1.3 billion. “Not funding pension obligations is exactly what got Illinois into the precarious position it is in,” said Laurence Msall, president of the Civic Federation, which has advocated pension reform.

A decision to pay compounded interest on pensions for lawmakers and judges could become politically potent as unions seek to respond to Mr. Madigan’s reform measure, which was acted upon immediately in an apparent effort to bypass potential union opposition. For a lawmaker who has a $100,000 pension obligation, the state would owe an additional $80,000 after compounding at a conservative 4 percent interest rate over 15 years.

The Madigan measures, and other potential reform initiatives, may be vastly underestimating the size of the state’s pension problem, said Joshua Rauh, a finance professor at Northwestern’s Kellogg School of Management who has studied the crisis in pension finances nationwide.

Illinois estimates its $76 billion pension shortfall by assuming the state’s pension funds will earn an 8 percent annual return on their investments. Using a more standard measurement — the rate of return on Treasury securities — Mr. Rauh calculates the shortfall at nearly triple the official estimate: $218 billion. By that measure, each state citizen owes $16,897 to future pensioners, not the $5,844 official figure.

“The reform did not change our numbers at all,” Mr. Rauh said. “In my view, it does not address the gaping hole of liabilities that’s already been earned.”