The So-Called Illinois “Pension Crisis”

“…While Illinois has very real challenges, it is not for the reason anti-pension actors claim… Illinois receives a lot of criticism because of the sheer size of its unfunded pension liability. According to some estimates, Illinois’ total unfunded public pension liability may add up to $251 billion. That is a significant amount of money, but an unfunded liability that large doesn’t happen overnight.

“The poor state of Illinois’ public pension plans is the direct result of decades of gross mismanagement by the state government.

“Public pension plans work when they are properly funded. As [the National Public Pension Coalition] discussed in a report last year, making the full pension payment each and every year is the single most important thing a state can do to properly manage its pension system.

“Unfortunately, in Illinois, the state has not fully funded its pension payments in almost eight decades.

“Let that sink in for a minute. For seventy-eight years – the length of the average American life expectancy – Illinois has ignored its obligations to public employees and taxpayers and avoided its responsibility to fully fund its pension promises.

“Illinois’ budgetary and financial problems go beyond public pensions though. The income tax collected by the state is flat and lacks a progressive structure. The state could be collecting millions of dollars more in revenue each year if it adopted a more progressive tax code.

“Voters approved a measure in 2014 calling on the state legislature to collect a 3 percent tax on incomes above $1 million to fund education. Unfortunately, the state legislature failed to pass the millionaires tax. Furthermore, many corporations in Illinois avoid paying their fair share – or paying any tax at all. Illinois’ pension problems are a symptom of, not the cause of, its large financial troubles.

“It is not the nature of defined benefit pensions themselves that are causing Illinois’ problems. Wisconsin, the state’s northern neighbor, has a fully funded public pension system. New York, another large state with multiple public pension plans, has very well-funded pension systems.

“Even within Illinois, the Illinois Municipal Retirement Fund (IMRF) is well-funded. IMRF provides retirement security to employees of towns, villages, park districts, and counties across the state. The participating employers in IMRF are required by law to make their full pension payments each year. For this reason, the IMRF weathered the recession and remains well-funded.

“Illinois does face real challenges with its public pension systems, challenges that will take years to resolve. There is no magical solution to fix the state’s problems. Anyone who says that closing the pension plans and putting new employees in 401(k)-style plans will solve the state’s problems is wrong…

“Illinois’ pension problems are the direct result of years of mismanagement and deliberate underfunding by governors and legislators of both parties. Resolving these problems will take the commitment of lawmakers from both parties to fully fund the state’s pension obligations every year.

“Don’t let the pension critics fool you. When they hold up Illinois as an example and say, ‘see, pensions don’t work’ – don’t believe them. Pensions work when they are properly managed and properly funded.

“Across the nation and even within Illinois, there are examples of well-funded public pension plans. The problem with the other pension plans in Illinois is that they were deliberately underfunded by an irresponsible state government for decades. This is why it is critical that supporters of public pensions remain vigilant to protect pensions from irresponsible politicians and misleading anti-pension critics” (The Pension Crisis Is a Myth, Part Three).

Commentary:

Most Illinois legislators and their benefactors do not care whether teachers and other public employees have contributed responsibly to their pension funds or that teachers will receive [little to] no Social Security when they retire. It is troublesome that they do not care whether retired teachers’ and other public employees’ defined-benefit pension plans are a fundamental source of economic stimulus to communities in Illinois and the only retirement income for hundreds of thousands of people.

Most Illinois legislators and their benefactors do not care that the State of Illinois has not consistently paid its full constitutional and obligatory contributions to the public pension systems throughout the decades, that this money was diverted to other operating expenses and special interests’ groups, that the State of Illinois saved billions of dollars by not paying what actuaries have calculated the Teachers’ Retirement System should have received throughout the years, that this theft also enabled the State of Illinois to provide services for its citizenry without raising taxes during that time, and that this money was deferred-earned income for teachers in Illinois. The aforementioned is not a myth but a reality machinated by past legislative bodies and governors.

It is obvious Illinois legislators do not possess the resolve to take on an inadequate fiscal system that fails to generate enough revenue growth to properly maintain state services and pay state expenditures for health and social services, education, government, transportation, capital outlays, public protection and justice.

Many Illinois citizens are aware that state legislators have not fully funded the public pension systems throughout the decades; that instead of paying into the pension systems, state legislators have misappropriated that money. Thus, without having to pay for services, state legislators have created an enormous pension debt (or unfunded liability) for the public pension systems in Illinois. The pension debt is, indeed, exorbitant.

Approximately one-fifth of the total pension payment each year is for “normal costs” to the system; the other four-fifths of the payment is the interest owed on the debt the state incurred for not fully funding the pension systems.

According to the Center for Tax and Budget Accountability, “the greatest cause of the state’s unfunded liability has been borrowing against the pension systems. This borrowing meant that the state’s contributions were not sufficient to pay for both benefits earned by current employees and interest on the pre-existing unfunded liability. Without sufficient contributions, an unfunded liability annually grows by a retirement system’s investment rate assumption (which ranges from seven percent to eight percent among Illinois’ five state systems).

“The state’s annual contribution to the retirement systems for debt service can be thought of as having two components: one part goes to pay down principal and the other is for interest on the principal. This is similar to paying down a credit card bill or home/car loan.

“The significant debt owed to the pension systems is the core cause of the systems’ cumulative unfunded liability—a situation that did not arise overnight. In fact, Illinois lawmakers essentially borrowed against the pension systems for several decades by not funding what was owed, and instead diverted the revenue that should have gone towards pensions to fund the delivery of current services—like Healthcare, Education, and Public Safety.” 

Be that as it may, state legislators should transform the state’s failing revenue system and unfunded pension liability. They should find ways to generate more revenue instead of incessantly attacking public employees’ and retirees’ pensions. They should restructure the unfunded pension liability. The so-called Pension Ramp is flawed! Most importantly, they should defend the Illinois and U.S. Constitutions above all else.

-Glen Brown