June 2013

Proposed Pension Reform
Although there are proposals that can reduce the state’s unfunded pension liability in a manageable way without diminishing the retirement benefits of state retirees, leaders in the General Assembly as well as the Governor have not supported them. It appears the political solution requires that the state take additional money from those who the state “borrowed” from (misappropriated) and have not repaid. It’s like telling the vendors and companies who are currently owed money by the state to forfeit some of their overdue bills because the state doesn’t have the funds to pay the full amount.

Much of the “crisis” about the unfunded pension liability is related to the formulated method for looking at the state’s books and with the credit ratings given the state by various credit rating firms. The concern of many elected officials seems to be to get a better credit rating so that they can borrow money at lower cost and then spend more money without addressing the funding structure needed.

Although the ratings firms don’t like the state’s financial status, I don’t believe any of them have said that the problem must be solved by diminishing the retirement benefits of existing retirees.

Funding Reform
There clearly is a need to fix the finances of the State of Illinois. This has been, over a long period of time, and continues to be, a problem of the state spending without adequately funding the programs and projects through taxes and fees. These programs and projects have been for the benefit of the citizens (taxpayers) of Illinois and for projects of interest to the Legislators and their constituents.

Research by the Center for Tax and Budget Accountability (CTBA) shows that the five state pension systems would be nearly 80% funded today if the only problems were inherent to the pension systems themselves. For example, the normal cost of providing the annuity payments in fiscal years 2012-2014 is about $1.6B (billion) dollars per year and trending lower over the next 20 years. Because of the elected officials’ decisions to borrow from the retirement funds, the debt service payments required to pay off the debt are rising significantly each year: 2012-$3.2B; 2013-$4.1B; 2014-$5.1B(est) and trending higher over the next 20 years.

The state’s financial problem is not the result of public pensions. Rather, the unfunded pension liability is a symptom of the real problem. That is, over a long period of time, the state’s elected officials have been providing services, most of them needed services, to its citizens and businesses without providing the appropriate funding structure (taxes and fees) to pay for them.

According to the CTBA, about 90% of the state’s general revenue funds are spent on education, healthcare, human services, and public safety. However, the state’s revenue structure (taxes and fees) does not adequately fund the costs of these services.

The pension changes actively being proposed by the Legislative leadership and the Governor will not resolve the state’s financial problem. But it will hurt state retirees and the state’s overall economy by removing spendable income from the retirees.

Over time, the Legislative leaders and the Governors have chosen not to deal with the real problem – the funding structure required to pay for the services that are needed. So, they have been taking the money from the public retirement systems funds to pay for these services.

Illinois has the economy to support a restructured tax system. According to the Bureau of Economic Analysis (U.S. Department of Commerce),in 2011, the Illinois economy ranked 5th highest in the nation with a gross state product in excess of $671B. However, in terms of the state and local taxes as a percent of income, Illinois ranked 42nd lowest in 2010 according to the Federation of Tax Administrators; that is well below Iowa, Michigan, Wisconsin, Indiana, and Ohio.

Retirees did not cause the “unfunded pension liability” budget problem. They provided the service they were asked to provide in return for salaries and retirement benefits they were told they would receive. They contributed financially and timely to their respective retirement systems as required by the laws passed by the Legislators and Governors of the state.

What has been characterized and labeled as a need for “pension reform” would more accurately be described as a need for “funding reform”.