“The 50-Year
Funding Plan: the state attempted to address its unfunded pension liability in 1994,
pursuant to a change in Illinois law created under Public Act 88-0593, which
became commonly known as the ‘Pension Ramp.’ Intended to force increased
allocations to the pension over time, this reform established a time frame
during which Illinois was required to fund the current pension contribution the
state owed for existing employees (the ‘Normal Cost’), plus make up unpaid
contributions and the return thereon for prior employees, amortized over 50
years with a target of funding 90% of total actuarial liabilities by 2045.
“Given that
the total unfunded liability had grown so large [because of legislators’
incompetence and irresponsibility], the legislation created a framework that
established a 15-year-ramp period, during which the newly mandated
contributions Illinois had to make for current and past employees increased in
gradual increments. Since these makeup payments increased annually, they became
known as the ‘Pension Ramp’; that is, they ‘ramp-up’ over time.
“The ‘Pension
Ramp’ became operative in Fiscal Year 1996. Under the plan, if Illinois
satisfied its obligations under the ‘Pension Ramp,’ the state's pension systems
would have achieved a Funded Ratio of 90% by the year 2045. The initial 15-year
‘ramp-up’ period was designed to allow Illinois to adapt to its increased
financial obligations, because there simply was not enough revenue to move
immediately to the appropriate level percentage of payroll to fund the pensions
systems or to amortize the liability over a shorter period.
“Since it
passed, Illinois funded the ‘Pension Ramp’ as required every year, except
FY2006 through 2007. However, the annual increases in the required
contribution under the intended ‘Pension Ramp’ vastly outpace natural growth in
the state's tax revenue. This reality, coupled with the constitutional
requirement that Illinois balance the budget, meant the state would have to cut
spending significantly on services to fund the ‘Pension Ramp,’ particularly in
out years. The net result, Illinois' fiscal system simply could not accommodate
the significant contribution increases contemplated under the ‘Pension Ramp.’ The
first major threat to the ‘Pension Ramp’ was averted with the sale of $10
billion of pension obligation bonds. Then, reverting to past poor fiscal
practices, the state significantly underfunded pensions in FY2006 and FY2007,
to maintain, and in some cases expand, services” (the Center for Tax and Budget
Accountability).
According to
Amanda Kass, Research and Policy Specialist for Pensions and Local Government
of the Center for Tax and Budget Accountability (April 2012): “the issue is
that Illinois lawmakers designed a system – the way the employer cost is
calculated (what the state pays) – [that is] inconsistent with rules set by the
Government Accounting Standards Board (the rules are non-binding and are for
reporting; public retirement systems can fund themselves however they so
choose).
“The way GASB
specifies that systems should be funded is generally referred to as the ARC
(annual required contribution). According to GASB, the employer’s ARC should be
the normal cost (which is calculated using the cost method) plus an amount to
amortize an unfunded liability over 30 years. The 30-year time period is an
open system: [in other words] those 30 years don’t count down. In systems in
which there is no unfunded liability, the employer’s ARC would just be the
normal cost. [It is important to note that] in Illinois, what the state has
historically paid was less than the employer’s ARC (as calculated according to
GASB rules).
“[To
reiterate,] there were years like 2006 and 2007 in which lawmakers passed
legislation that lowered the contributions for those years to an amount that
was below the pension ramp (those amounts were already less than the employer’s
ARC). In addition to a revenue problem, the pension ramp was
designed in such a way that it’s unfeasible. Even if Illinois’ revenue issue
was addressed, the pension ramp would still likely be an issue” (the Center for
Tax and Budget Accountability).
The current
“Pension Ramp” does not work for the five public pension systems. The “Ramp”
entails larger payments today as
a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions
systems what the state owes. There needs to be a required annual payment
from the state to the pension systems; the debt needs to be amortized for a
longer frame of time (a flat payment) just like a home loan that is amortized;
though the initial payment will be more painful in the beginning, over the long
term it will become a reduced cost and a smaller percentage of the overall
Illinois budget as it is paid off throughout the years.
“Given that the current repayment schedule is a complete legal fiction - a
creature of statute that doesn't have any actuarial basis - making this change
is relatively easy. Simply re-amortizing $85 billion of the unfunded liability
into flat, annual debt payments of around $6.9 billion each through 2057 does
the trick. After inflation, this new, flat, annual payment structure creates a
financial obligation for the state that decreases in real terms over time, in
place of the dramatically increasing structure under current law. Moreover,
because some principal would be front- rather than back-loaded, this
re-amortization would cost taxpayers $35 billion less than current law” (Ralph
Martire, Executive Director of the Center for Tax and Budget Accountability).
The State of
Illinois has a pension debt problem; the State of Illinois also has a revenue
problem. Pension reform will not address either one of these serious problems
prolonged and disseminated by the Illinois General Assembly and its Big
Business partners. Pension reform is an attack
on the Illinois Constitution and the state’s public employees. Pension
reform will also adversely
affect the economy of the entire state and, thus, its citizenry.
Please
also review: “Unrealistic Schedule for Repayment of Debt Owed to the PensionSystems Continues to Strain Fiscal Resources” (from Center for Tax and Budget
Accountability):
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