Tuesday, August 14, 2012

“Unrealistic Schedule for Repayment of Debt Owed to the Pension Systems Continues to Strain Fiscal Resources” (from Center for Tax and Budget Accountability)

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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