Illinois teacher pension fund slams Pritzker’s borrow, delay plan
The Teachers’ Retirement System pension fund board opposed Illinois Gov. J.B. Pritzker’s plan to repeat past mistakes. Here’s why they are right to oppose it.
Leaders of Illinois’ teacher retirement fund oppose Gov. J.B. Pritzker’s plan to tax, borrow, sell and delay to fix their pension, especially as economic downturn warnings increase.
Pritzker plans to address Illinois’ pension problem through increased funds from a progressive income tax hike, selling $2 billion in bond debt, selling state assets, offering pension buyouts and extending the deadline to get the state’s pension funds solvent by seven years. Recently the Teachers’ Retirement System pension fund, or TRS, board unanimously opposed several points of Pritzker’s pension “reform” proposal. “The system is at a growing risk of insolvency in the event of an economic downturn,” the TRS Board of Trustees warned.
Of the five statewide public employee pension funds, TRS holds by far the largest portion of pension debt, over $75 billion in unfunded liability, and is about 40 percent funded. TRS rightly opposes the Pritzker plan to further delay pension payments. Not only are Pritzker’s solutions fiscally unsound, they repeat the mistakes that deepened the pension crisis.
Repeating past mistakes
In their statement, TRS strongly opposes any extension in the target date for 90 percent funding of the pension plans. Under current law, Illinois pension funds need to achieve 90 percent funding by 2045. Pritzker seeks to stretch out the pension payments by another seven years, to 2052.
Pritzker’s plan shorts the pension funds, reducing fiscal year 2020 contributions by over $1 billion. These reductions rely on $878 million from extending payments by seven years, along with a pension buyout expansion – which TRS also opposes. The administration is claiming an additional $125 million reduction from the buyout without specifying how it estimated those savings.
Stretching out payments as Pritzker proposes is especially risky, given Illinois’ current peril from doing just that. Former Gov. Jim Edgar implemented a system known as the “Edgar ramp,” which artificially reduced payments to the pension funds during his term of office and increased them for his successors. That tactic is a direct cause of Illinois’ ballooning pension debt and rapidly growing contributions.
The Governor’s Office of Management and Budget previously estimated the long-run impact of extending the pension payment ramp by 10 or 20 years. Assuming proportionality with those estimates, Pritzker’s seven-year extension would increase liabilities by $105 billion in the long run, not accounting for other pension changes.
Illinois pension debt now stands at $133.7 billion, as estimated by the state. Moody’s Investors Service previously calculated the pension deficit at $250 billion. From fiscal year 2000 to 2019, pension spending has grown more than 677 percent, in large part thanks to the Edgar ramp.
Moreover, Pritzker seeks to borrow money through issuance of pension obligation bonds. Fitch Ratings previously warned against a pension plan that stretches out payments and issues pension obligations. Standard & Poor’s Global Ratings considers the use of pension obligation bonds to be a credit negative – especially worrisome given that Illinois is one notch above “junk” status.
Pension obligation bonds, or POBs, are only beneficial if the interest paid on the bonds is lower than the return on investment in the pension funds. Illinois’ already poor credit rating directly affects the interest the state must offer bond buyers. In addition, three-fourths of economists expect the economy to enter a recession by 2021, hurting the return on pension fund investments. That combination makes POBs a gamble with taxpayer money that could further deepen the pension hole.
Illinois’ last experiment with POBs is likely to leave taxpayers on the hook for billions. According to the most recent projections, the total of $17.2 billion borrowed under former Govs. Pat Quinn and Rod Blagojevich will cost $30.8 billion to repay.
The TRS statement also claims the current state contribution, as required by law, “perpetually locks in underfunding,” and that a “full funding” state contribution would be 64 percent higher than it is now. That is over $3 billion more than the $4.8 billion the state is expected to contribute to TRS for fiscal year 2020.
But pinning the problem on either underfunding or overpromising misunderstands the problem. In reality, one follows from the other.
According to Wirepoints, total pension liabilities, or the present value of current and future promised benefits, have grown 4.5 times faster than Illinoisans’ personal income and six times faster than state revenues since 1987. Underfunding is a result of the fact that required payments were unrealistic to begin with – overpromised. The Edgar ramp significantly exacerbated the problem.
Towards a sustainable pension solution
Pritzker’s proposed budget plan for fiscal year 2020 drew criticism from S&P for its lack of meaningful pension reform. “If the state fails to redeem its longer pension amortization schedule through a practical reduction in liabilities, its credit trajectory could slip,” an S&P report on the budget stated.
The only way to provide a “practical reduction in liabilities” is through a constitutional amendment that protects already-earned pension benefits, while allowing for affordable adjustments to future benefit accruals. Only then can lawmakers reintroduce reforms similar to those passed in 2013 by the Democratic supermajority-controlled General Assembly and signed by a Democratic governor. Lawmakers must move on this crucial first step to make real, lasting pension reform possible.
As outlined in a recent Illinois Policy Institute plan, lawmakers must also realign responsibility for setting benefits with accountability for paying benefits at schools and universities.
Rather than repeating past mistakes – mistakes that caused the problem to begin with – Pritzker should consider these reforms, saving taxpayers $12.2 billion while bolstering the state’s pension funds faster than under current law.