Illinois’ pension math
When Rhode Island saw the writing on the wall late last year, its legislature did something no one thought it could do. It passed the boldest pension reforms in the nation. A democrat-controlled state, with the second-worst funded pension system in the nation, passed a series of reforms that cut the state’s unfunded liabilities by...
When Rhode Island saw the writing on the wall late last year, its legislature did something no one thought it could do. It passed the boldest pension reforms in the nation.
A democrat-controlled state, with the second-worst funded pension system in the nation, passed a series of reforms that cut the state’s unfunded liabilities by almost 50 percent.
What triggered Rhode Island into action? The math.
A massive jump in the state’s pension debt, based on new and more realistic assumptions, sent legislators an unmistakable message. Without real pension reforms, the programs most dear to them were about to be cut dramatically to make room for ballooning pension payments.
In contrast, Illinois’ dire pension math has yet to trigger any serious reforms. And based on the only proposal being considered in Gov. Quinn’s special session on August 17, real action is still a long way away.
That proposal will cut only a pittance of the state’s total unfunded liabilities. At best, a little more than 3 percent of total retiree debt will be reduced. HB 1447’s “reforms” exclude both the teachers and universities pension systems, meaning that almost 75 percent of the state’s pension problems are off the negotiating table. Illinois legislators just haven’t grasped the severity of the math.
In Rhode Island, legislative leadership ordered a recalculation of the state’s total pension liabilities, requiring honest retirement age assumptions and more realistic investment expectations. When they received the new numbers, they found that the unfunded liability for pensions had jumped by nearly 50 percent.
Legislators moved quickly. They raised the retirement age for future pensioners. They suspended the automatic cost-of-living adjustments (COLAs). Most importantly, they ended their defined benefit structure in favor of a new one, heavily centered on 401(k)s. Bold leadership led to bold action.
Amazingly, only 17 lawmakers, out of 113 total, voted against the pension reform bill. This, in a union-dominated state that has been controlled by Democrats since WWII.
What’s it going to take to convince Illinois legislators to act?
They, too, must focus on the math. The numbers don’t lie.
$83 billion is an understatement
Illinois’ five state retirement systems owe more than $630 billion in earned pension benefits to government retirees over the next 33 years, according to COGFA. To meet those future obligations, and based on expected yearly investment returns of approximately 8 percent, the state should have $146 billion in its investment accounts today.
The problem is the state doesn’t have that amount in its pension coffers. Not even close. The state’s shortfall is more than $83 billion, an amount commonly called the unfunded liability.
Both Moody’s and the General Accounting Standards Board, or GASB, have begun to acknowledge these unfunded liabilities and are now changing their pension reporting rules. GASB will require more realistic investment expectations for pension funds that have funding shortfalls.
For the amounts that pension funds currently have in their coffers, they can continue to use their current investment targets. But for the unfunded amounts, the retirement funds must use much lower, and more reasonable, investment forecasts – as low as 3 to 4 percent. This means that the total liability of the five state pension systems, in today’s dollars, will rise to more than $236 billion.
Taking into account the pension funds’ assets, as well as other GASB rule changes, the state’s total unfunded liability rises to a whopping $183 billion.
That’s a $100 billion more than the number used in previous pension reform discussions.
Don’t forget the other liabilities
Unfortunately, the state has more unfunded liabilities than just the state pensions. And so do local governments throughout Illinois. Here, then, is the list of the state’s reported unfunded amounts that legislators need to address to protect retirees, taxpayers and the state’s crumbling finances.
$83 billion in the above-mentioned state pension liabilities;
$54 billion in unfunded state retiree health care costs;
$15 billion in pension obligation bonds; and,
$50 billion in unfunded liabilities at the local government level.
The total shortfall: $203 billion. That’s more than $41,000 in debt for each and every household in Illinois.
And that’s before GASB and Moody reveal the more realistic liability numbers.
Legislators can’t ignore the math. Only major reforms – those heavily centered on a defined-contribution plan – will move the numbers in the right direction.