Director of Health Policy and Pension Reform
A major component of the Nekritz-Biss pension proposal is a funding guarantee for pension payments. The proposal says:
Beginning July 1, 2013, the State shall be contractually obligated to contribute to the System under Section 2-124 in each State fiscal year an amount not less than the sum of (i) the State's normal cost for that year and (ii) the portion of the unfunded accrued liability assigned to that year by law in accordance with a schedule that distributes payments equitably over a reasonable period of time and in accordance with accepted actuarial practices.
The obligations created under this subsection (c) are contractual obligations protected and enforceable under Article I, Section 16 and Article XIII, Section 5 of the Illinois Constitution.
Notwithstanding any other provision of law, if the State fails to pay in a State fiscal year the amount guaranteed under this subsection, the System may bring a mandamus action in the Circuit Court of Sangamon County to compel the State to make that payment, irrespective of other remedies that may be available to the System. In ordering the State to make the required payment, the court may order a reasonable payment schedule to enable the State to make the required payment without significantly imperiling the public health, safety, or welfare.
But there are many questions that remain unanswered about this provision. Here are just a few:
What happens when the markets take another downturn?
In the 2008-2009 market collapse, the state’s five public pension systems lost a combined $17 billion. What happens if the markets take another nosedive? What if that happens near the end of the payment ramp, which requires 100 percent funding by 2043? What happens if the markets collapse and the five pension systems lose another $17 billion in 2042? Would the state be required to increase its contributions by another $17 billion in a single year, in order to bring it up to full funding?
What kind of priority would the pension payment get at the Comptroller’s office?
Would the court-ordered pension payment go to the front of the line? Would the pension systems have priority over other creditors, including vendors and bondholders?
What happens if the proposed funding schedule is not in accordance with accepted actuarial practices?
After all, the state’s actuaries say the current funding schedule doesn’t comply with accepted actuarial practices. This question is particularly important, as pension accounting standards become more transparent and more realistic during the next few years. If the new funding ramp isn’t based on accepted actuarial practices, what is guaranteed: the funding promised by the ramp or the funding required by accounting practices?
Can the systems change their actuarial assumptions in order to force greater contributions?
The state’s annual pension contribution is based largely on the underlying assumptions the state’s pension systems use. For example, the Teachers’ Retirement System currently assumes it will earn 8 percent returns each and every year. But with the state’s promise to guarantee whatever contributions the systems submit, they would have a strong incentive to lower the discount rate in order to force higher contributions.