The inbox. Ralph Martire in Crain’s. A pension fix.

By: Ralph Martire
January 16, 2013

There was much wailing and gnashing of teeth when the recent lame-duck session in Springfield ended.

Why? No action was taken to address the $95 billion in debt owed to the state’s five pension systems.

This leaves the systems with just 40 percent of the funding they should have currently, which is well below the 80 percent generally deemed healthy for public systems. Good government groups and editorial boards alikelamented the Legislature’s failure to pass yet another proposal to reduce that ginormous obligation — this time by cutting almost $30 billion in benefits earned by current workers and retirees.

But rather than being dismayed, folks should be relieved. Here’s why.

A problem really can’t be solved unless the proposed solution addresses its true cause. And the proposal that failed to pass during the lame-duck session — like every other proposal introduced to date on this subject — focused its solution on benefit cuts and thereby failed to deal with this particular problem’s true cause.

See, three factors have contributed to the creation of this unfunded liability. The first two are items inherent to the pension systems themselves, like benefit levels, salary increases and actuarial assumptions; and investment losses suffered during the Great Recession. But if those were the only factors creating the unfunded liability, the systems would be around 70 percent funded today, meaning no crisis.

The vast majority of the unfunded liability is made up of the third contributing factor: debt. Indeed, for more than 40 years. the state used the pension systems like a credit card, borrowing against what it owed them to cover the cost of providing current services, which effectively allowed constituents to consume public services without having to pay the full cost thereof in taxes.

This irresponsible fiscal practice became such a crutch that it was codified into law in 1994 (P.A. 88-0593). That act implemented such aggressive borrowing against pension contributions to fund services that it grew the unfunded liability by more than 350 percent from 1995 to 2010 — by design. Worse, the repayment schedule it created was so back-loaded that it resembles a ski slope, with payments jumping at annual rates no fiscal system could accommodate. Want proof? This year the total pension payment under the ramp is $5.1 billion — more than $3.5 billion of which is debt service. By 2045, that annual payment is scheduled to exceed $17 billion, with all growth being debt service.

It is this unattainable, unaffordable repayment schedule that is straining the state’s fiscal system — not pension benefits and not losses from the Great Recession. And no matter how much benefits are cut, that debt service will grow at unaffordable rates. Which means decision-makers can’t solve this problem without re-amortizing the debt.

Given that the current repayment schedule is a complete legal fiction — a creature of statute that doesn’t have any actuarial basis — making this change is relatively easy. Simply re-amortizing $85 billion of the unfunded liability into flat, annual debt payments of around $6.9 billion each through 2057 does the trick. After inflation, this new, flat, annual payment structure creates a financial obligation for the state that decreases in real terms over time, in place of the dramatically increasing structure under current law. Moreover, because some principal would be front- rather than back-loaded, this re-amortization would cost taxpayers $35 billion less than current law.

One last thing — it actually solves the problem by dealing with its cause.



8 Replies to “The inbox. Ralph Martire in Crain’s. A pension fix.”

  1. The state can reduce benefits and COLA, continue their bad behavior, and in ten years the problem will be worse. And then it’ll be the employees’ fault AGAIN. Correct the irresponsible behavior of the legislature, have them tax the people to pay their share and make up for their legislature’s profligacy…and all is right with the world. The employees did as they were supposed to.

  2. It has taken Crain’s several years to figure out the lack of funding.

    Today NPR interviewed a tax expert who noted that if people and corporations really paid their taxes according to the current laws…and didn’t hide cash income or cheat on the loopholes…there would be no national deficit….or state funding issues….

  3. How can we get Mr. Martire
    some floor time with the legislators in Springfield? He could illustrate with charts and graphs and speak very slowly so that they will understand. Like he is talking to 6th graders.

  4. Teachers, Martire and the state are lying to you about the numbers. TRS has only 18% of the assets it should have, which Martire and the state will soon have to admit when new rules rules from the governmental accounting standards board and rating agencies force them to abandon phony assumptions they use. That 9% of you paycheck going to TRS is going down a rat hole. You are being duped, and that tragedy will soon be apparent.

    1. Note: Mark has become a frequent source of comments on this blog. He is welcome, of course. Although not particularly entertaining. He is an end-of-the-world-is-coming-and-why-won’t-anybody-listen-to-me libertarian.

  5. Maybe I am missing something, but if a graduated income tax rate structure would reduce the Illinois income tax burden for the vast majority of taxpayers, then it seems like it would be an easy constitutional amendment to pass. The amendment 49 proposal on the November ballot was narrowly defeated and that was in large part due to labor groups (rightfully) opposing it. Think how easy it would be to pass an amendment that all labor groups SUPPORTED – especially if that amendment would result in a tax CUT for nearly all (94%) taxpayers. Legislative sponsors could even adjust the income cut-off still higher so it resulted in a tax cut for 95 – 99 percent of tax payers! Then, simply provide voters with a chart where they could find their income level and see what amount of tax savings that the amendment would bring them. Who doesn’t want to pay less in taxes?! End result: nearly everyone saves money thanks to the tax cuts AND the state of Illinois raises billions more in revenue (estimated to be at least $2.4 billion). That’s a win-win and eminently do-able! The only thing preventing it from getting done would be resistance from certain legislators who are beholden to the 1%. And, if they were at all concerned about their own re-election, it would be difficult for them to oppose something that 99% of their constituents favored.

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