Selections from the Report:
·
According to the
Governor’s Office of Management and Budget, the state’s FY2012 contribution to
the five state-sponsored pension systems will be $4.14 billion. That
contribution increases to $5.1 billion under the FY2013 Enacted Budget.
·
The proposed
pension contribution for FY2013 will be a little more than 23 percent greater
than in FY2012.
·
It has nothing to
do with increasing benefits for workers, nor any other inherent aspect of the
pension systems themselves. By far and away the main reason the state’s annual
contributions to its pension systems are increasing so much annually is the
unrealistic, heavily back-loaded schedule the legislature set back in 1995 for
repaying the debt the state owes to its pension systems.
·
All of the 23
percent year-to-year growth in the pension contribution from FY2012 into FY2013
is due to the repayment schedule.
·
How did we get
here? For decades, Illinois has had a structural deficit (as identified
previously in this Report). To paper over—without resolving—the fact that the
cost of delivering public services from year-to-year grew at a greater rate
than revenue did—decision makers opted to borrow against what they owed the
pension systems and use that borrowed revenue to fund delivery of public
services. This meant that for decades the pension systems—against their
will—were lending money to the state’s General Fund to subsidize the cost of
delivering current services. This effectively allowed taxpayers to consume
public services for over 40 years without having to pay the full cost of those
services.
·
In FY1995, the
General Assembly passed and Governor Edgar signed P.A. 88-0593, which
established what became known as the “Pension Ramp.” The Pension Ramp mandated
that the state’s annual pension contributions be made pursuant to a continuing
appropriation, and established a repayment schedule for the debt owed to the
pension systems which would result in all five systems having 90 percent funded
ratios by 2045.
·
Even though P.A.
88-0593 was allegedly designed to repay the debt owed to and resolve the
unfunded liability of the pension systems—by law—the legislation continued the
practice of borrowing against contributions owed to the pension systems to
subsidize the cost of delivering public services for 15 years after passage.
·
During this
“15-year phase-in period” the state’s annual contributions were calculated as a
percentage of payrolls significantly below the normal cost of funding benefits
for current workers each year. This effectively increased the unfunded
liabilities of the five pension systems by $24.7 billion.
·
The Blagojevich
Administration paid a portion of the state’s pension contribution for FY2003
and all of its FY2004 contribution with debt proceeds from the sale of $10
billion worth of Pension Obligation Bonds (2003 POB). Under this legislation,
P.A. 93-0002, the state’s annual contributions to the pension systems were
reduced by the annual debt service on the bonds.
·
It would be one
thing if all the $10 billion in debt proceeds from the 2003 POB were paid into
the pension systems to retire pre-existing pension debt. That would have
constituted a refinancing at lower interest rates, something businesses do all
the time to save money. In this instance, however, the state incurred debt to
pay its current obligations—which had to be repaid over time—ultimately
increasing costs to the state, a situation made worse by the reduction in
current annual contributions the bill implemented.
·
In 2010,
legislators took a new approach to reducing the state’s obligation to repay its
debt to the pension systems. Rather than replace the existing Pension Ramp with
a rational, attainable payment schedule, they decided to have future workers
pay for state government’s past sins by creating a second benefit tier under SB
1946 (P.A. 96-0889).
·
This legislation
requires new employees who receive lower pension benefits under Tier II, to
make contributions to the pension systems that cover more than the cost of
their Tier II benefits. In effect, this means new state employees and teachers
are assuming part of the state’s obligation to repay pre-existing pension
debt—out of their wages. This ultimately reduces the employer contributions
required from the state.
·
It is highly unlikely
the state will continue to meet its annual pension contributions, given the
continued growth in both its contribution payment schedule on the one hand, and
the structural deficit on the other.
·
After all the
changes in law passed over the prior few years, the remaining payment schedule
under the now modified pension ramp is still unattainable. To meet the 90
percent funded ratio target by 2045, annual employer contributions will have to
grow by 3 percent every year for the remainder of the funding schedule (FY2013
– FY2045).
·
The debt Illinois
incurred to these systems over time subsidized the cost of service delivery to
taxpayers. Now the bill is coming due to repay that debt—a debt that allowed
all taxpayers to receive core services for decades at a discount. The payment
schedule for repaying that debt is both unrealistic and the cause of the fiscal
strain that threatens funding for services.
These excerpts were from pages
24-29 of the following CTBA report: Click Here.
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