State can't ignore underfunded pensions

Thursday, September 09, 2010

Every Illinois resident is more than likely tired of hearing bad news about the state budget.

But the bad news keeps coming, and pretending it doesn't exist won't make it go away. The General Assembly has proven that beyond a reasonable doubt.

The latest dose of bad news is that the major Illinois pension funds are selling off core assets to pay benefits. The biggest fund, Teachers' Retirement System, may have to cut $3 billion out of its investments in the next year. That's nearly 10 percent of its total.

The goal of the pension system is to have funds build over time in order to pay employees the retirement they've been promised. The combination of a pension system that is overly generous and the under-funding of the system by the state are forcing the systems to eat into their core savings. If nothing is done and the situation continues, the pension systems could someday run out of money. In a more realistic scenario, it means that the state's taxpayers will be asked to dig even deeper to make up the difference.

Part of the issue is the economy. The Teachers' fund, for example, has posted a 9.2 percent annual return over the past 25 years, according to an editorial in the Chicago Tribune. Over the past decade, however, the same fund has managed a 3.7 percent return.

The result is a perfect storm of problems. There is less money coming into the fund, both in the form of return on investment and money from the state's budget. At the same time, the amount being paid out continues to grow.

The scenario also hides how much money the state actually owes. Two public finance professors, Josua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester wrote in the Tribune that they estimate the state's pension liability as high as $200 billion and growing. They say the state's pension funds could be empty as early as 2018.

As with most of the state's financial problems, politicians created this mess. The state has been reluctant to achieve efficiencies by combining the various pension funds that are used by state employees. While the state has promised to pay current employees their generous retirement benefits, the state needs to enact more realistic retirement benefits for new state employees. The state needs to consistently meet its pension obligations. The state also needs to reject Gov. Pat Quinn's plan for still more billions in pension debt. Basically using one credit card to pay off another one is not the path to fiscal stability.

The state may still have time to avoid a pension fund meltdown, but the solutions need to be enacted soon.