Illinois pensions need to become more transparent

The history of state government pensions in Illinois is fairly simple. Politicians discover that pension funds are running a deficit. Those same politicians develop a plan to eliminate the deficit, which typically involves Illinois taxpayers putting in more money. Taxpayers pony up the funds. The deficit, somehow, gets worse. In 1994, the five state-run pension...

The history of state government pensions in Illinois is fairly simple.

Politicians discover that pension funds are running a deficit. Those same politicians develop a plan to eliminate the deficit, which typically involves Illinois taxpayers putting in more money. Taxpayers pony up the funds. The deficit, somehow, gets worse.

In 1994, the five state-run pension systems had accumulated $20 billion in unfunded liabilities, an alarming level of debt at the time. The solution agreed to by both parties and the government worker unions was a schedule of gradually increasing payments from the state to the pension funds starting in 1996 – the “ Edgar ramp,” named after former Gov. Jim Edgar.

The payments called for under the ramp were made on schedule, and the plan worked as expected for a while. The state even added highway workers to the pension plan and improved benefits for others. Under the Edgar ramp, unfunded liabilities should have held steady and then declined. But by 2003 unfunded pension liabilities were up to $43 billion, more than twice what they were when the state got on the ramp.

The state responded in 2004 by selling $10 billion of “pension obligation” bonds to help plug the funding shortfall and an additional $7.5 billion in bonds were issued in 2009 and 2010. By 2012 the state had put $8 billion more into pensions than the ramp had called for, but the official unfunded liability total had jumped to nearly $100 billion.

The state and its taxpayers have done all they were asked to do to preserve pensions, yet up to now the pension funds have not even managed to tread water.

Pensions sound complicated, but beneath it all there’s a fairly simple reason why government pensions are underfunded and why it keeps getting worse: the politicians, and the experts they rely on, keep guessing wrong.

Pensions depend on accurate predictions of costs. Government workers are promised benefits in the future. Those benefits have to be funded now. Pensions rely on financial experts, known as actuaries, with very specialized knowledge to project what benefits will need to be paid out, and how much money the pension funds will need to make those payments.

The record shows that Illinois government actuaries keep guessing wrong; and to make matters worse, they keep guessing low. They consistently underestimate how much money the pension funds need, which means the pensions are chronically underfunded.

This is why we recently released a new report calling for much greater transparency in pensions. In particular, we want to allow private actuaries to have access to the same demographic information that the state’s actuaries use to make their estimates. With private, independent actuaries looking over their shoulder, the mistakes that the state actuaries are making should be discovered and corrected. And then Illinois taxpayers will get a much better estimate of how much Illinois government pensions will cost them.

No matter how transparent things get, however, defined benefit pensions will always be unworkable. Employers in the private sector have been moving away from them for decades. The temptation for politicians to sweeten the pension pot to buy support from government workers and unions is too strong. And it is too easy for those same politicians to hide the true cost of pensions from the public.

State lawmakers need to do the right thing by workers and taxpayers, which means moving benefits for all future work to 401(k)-style retirements. But even if they take this step, it will still be important to implement transparency measures for the remaining pension benefits.

We have nothing to fear from pension transparency but the truth – knowing the true price tag for pensions sooner rather than later. Taxpayers, government union officials, politicians and government workers all stand to gain from a more transparent pension system.