Medill
Illinois pension funds running out of money, study says
Friday, October 22, 2010
Illinois’ pension funds could run out of money to pay its retired employees in less than 10 years, according to a new report.
The Northwestern University study, co-authored by Joshua Rauh, a professor specializing in pensions at Northwestern University, projects Illinois’ pension fund will run dry by 2018, the earliest of all 50 states.
The numbers could be worse if more public employees retire early, more residents move out of state and drive down tax revenues or if the actual return on the fund is lower than projected, the report says..
One of the chief benefits of public employment is the pension, which are often considered more generous than in private industry, but several studies released this year point to widespread concerns about whether states have the money to pay an expected flood of public retirees.
The inevitable hand-wringing over paying for pensions extends from public employees hoping their pension will be there when they retire to taxpayers wondering if they will end up forking over the dough to pay for it.
Illinois’ problems reflect a national trend of deferring difficult financial decisions, according to report by the Pew Center on the States. The study, released earlier this year, said that nationwide there is a $1 trillion funding gap between what states should have set aside for pensions, and the actual amount on the books.
Only four states carry enough cash to fully fund their state pension programs, compared with 25 states just eight years ago, the study from Pew, an independent nonprofit organization, said.
“This is a real pressure in every state,” said Stephen Fehr, one of the study’s researchers. “The number of people that are eligible to retire are just going up every year."
"They're really squeezed," Fehr said of Illinois' fiscal situation.
Fehr said Illinois has roughly 54 percent of the money needed to finance its pension system on hand. He said pension experts recommend states have 80 percent of the necessary money on hand.
“It's a matter of discipline,” Fehr said. “Illinois lacks discipline.” He said the state did enact some reforms earlier this year, including increasing the retirement age for new state employees and the amount employees pay into their system, but the reforms don’t offer any immediate relief.
Eden Martin, the president of the Civic Committee of the Commercial Club of Chicago, said the state has itself cornered when it comes to pension funding. "At some point Illinois will not be able to continue to borrow," Martin said.
Martin said the difficult situation facing lawmakers essentially leaves three options: cut state and local services; significantly raise taxes; or continue to borrow money to pay down the state pension bills.
"All are painful and unpopular," Martin said. "It's a shared failure, a shared responsibility."
He advocates requiring retirees to pay a portion of their medical expenses and increasing the amount that current employees contribute toward their retirement. Fehr, the Pew researcher, agreed that these measures have helped other states lower their pension burdens.
Meanwhile, the Illinois Senate will convene a special session just two days after the November election to decide whether to borrow more money to pay this year's pension bills.
John Patterson, deputy press secretary for Illinois Senate Majority Leader John Cullerton, said Illinois law mandates the state pay outstanding pension bills annually. The Senate will vote whether to approve borrowing $4 billion to pay into the pension coffers, he said.
"Some would portray it as adding debt, we already owe it," Patterson said. "We're just changing how we go about paying it." Patterson said if the state borrows more money, it would be an eight-year loan with an estimated $1 billion in interest tacked on.
Patterson said Senate Democrats need Republican support to pass the vote to borrow more funds. The state House of Representatives approved borrowing the money in May with bipartisan support, but the Senate couldn’t reach a compromise.
Republican gubernatorial candidate Bill Brady has said he isn’t opposed to borrowing in the short-term to close the pension issues on an immediate basis. But Brady also advocates changing Illinois’ pension system to one self-funded by employees without a guaranteed return, similar to many private sector retirement systems.
Fehr said only three states currently use a similar program, but he said Brady’s idea is part of a larger national movement toward employee-funded pensions.