State lacks willpower to solve public pension crisis

Rhode Island, California and Michigan point to long-term solutions to multibillion-dollar crisis           

[MAY 28, 2005]  CHICAGO -- Because it has underfunded its state public employee pensions for some 25 years, Illinois faces a pension fund crisis of historic proportions, according to a new study released by the Chicago-based Heartland Institute. According to the study's author, lawmakers have shown little stomach for a showdown with public employee unions and other interest groups to enact a plan that would provide a long-term solution.

According to the study -- which quotes state Sen. Bill Brady, R-Bloomington -- Illinois' unfunded pension liability at the end of fiscal 2004 stood at $35.1 billion, a greater amount than any other state. Total liabilities stood at nearly $90 billion. Fund assets were just 60.9 percent of liabilities, second-worst in the nation. State funding of public employee pensions has gone from about $635 million in 1996 to an estimated $2.6 billion in fiscal 2006 and could reach $14 billion by 2045.

One cause of the problem is that public pension benefits are generous. Illinois public employees who start their careers at age 25 can retire at age 55 with a pension equal to 50 percent of their base salary, and large end-of-career pay raises for teachers and school administrators have resulted in substantial increases in retirement benefits for some individuals.

But the author of the study, Steve Stanek, managing editor of a national monthly newspaper on state budget and tax issues, says the lack of willpower by the state's elected officials is the biggest reason the crisis exists. "Several fixes have been tried over the years," he notes, "and the funding problem has grown worse as elected officials failed to show sufficient willpower to avoid increasing benefits or diverting funds to other budget priorities."

Stanek recommends that legislators follow Michigan's lead in switching from defined benefit plans to defined contribution plans, such as a 401(k) plan, for new state employees, or adopt a reform plan being considered in Rhode Island, which would require that a portion of savings derived from pension reforms be allocated to improving the relative funding ratios of the pension funds. California policy-makers are considering a plan to replace all or part of the state's defined benefit plans with defined contribution plans.

The study was released May 24 at a Springfield news conference.

Stanek's newspaper, Budget & Tax News, is published by The Heartland Institute and sent monthly to approximately 25,000 local, state and national elected officials nationwide. The study is available online free at www.heartland.org, or copies can be ordered for $10 each by calling [phone].

[News release from Sen. Bill Brady]

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