|
 One Chicago-based think tank is claiming an accounting game can
solve Illinois’ worst-in-the-nation pension problem. And Illinois’ incoming
governor may be taking it seriously.
But that plan – pushed by the Center for Tax and Budget Accountability, or CTBA
– fails to reform the system and risks repeating many of the mistakes that got
Illinois into its pension mess to begin with.
The essential components of the CTBA plan are:
Borrow $11.2 billion to make increased payments to the pension funds now
Flatten the state’s payment schedule to reduce the backloaded effect created by
the payment ramp signed into law by former Illinois Gov. Jim Edgar
Reduce the state’s funding target from 90 percent to just 70 percent, by 2045
Gov.-elect J.B. Pritzker is said to be “looking seriously” at this plan as a
means of addressing the state’s $130 billion to $250 billion in unfunded pension
liabilities.
Pritzker should abandon this no-reform pension proposal and instead support
meaningful pension reform that starts with a constitutional amendment to allow
changes to future, unearned benefits. Here’s why:
Four reasons to reject CTBA’s no-reform pension plan
The CTBA plan increases, not decreases, the cost of pensions in the short term
Even if the CTBA plan works as designed – which is unlikely for reasons detailed
below – required contributions would increase for more than a decade compared to
current law. According to CTBA’s projections, total pension costs would have
increased for fiscal years 2019 through 2031 if the plan had been implemented
for this year’s budget.
The requirement to increase rather than decrease pension contributions makes the
CTBA plan an immediately bad deal for taxpayers for two key reasons.
First, total pension-related expenditures already exceed 25 percent of the
state’s general revenue. Pensions as a share of total expenditures have been
rising rapidly for decades, crowding out spending on core government services
such as education and social services.
Illinois’ inability to both deliver essential services and consistently make the
actuarially required pension contributions is a leading cause of its
worst-in-the-nation credit rating.
Second, Pritzker campaigned on increasing spending for numerous government
programs, as well as creating several new programs. Broadly speaking, Pritzker
has promised to spend more for infrastructure, education and social services.
As governor, Pritzker’s ability to fulfill these promises will depend on his
ability to reduce the share of the budget going toward paying for yesterday’s
government in the form of pensions.
According to WTTW, Pritzker has committed to balanced budgets without an income
tax hike for his first two budget years. That is an achievable goal, but not if
Pritzker adopts the CTBA pension plan requiring him to put nearly $2 billion
more toward annual pension costs.
The CTBA plan violates best practices for pension funding according to actuaries
Illinois law currently requires the state to make contributions sufficient to
reach a funding ratio of 90 percent by the year 2045. This standard already
violates best practices set by the Actuarial Standards Board, which publishes
uniform Actuarial Standards of Practice.
The Illinois state actuary, part of the Office of the Auditor General, has
consistently recommended adopting a funding plan in line with generally accepted
actuarial principles. Specifically, the recommendation is for the state to move
toward a repayment schedule that targets 100 percent funding over a period of no
more than 20 years.
The CTBA plan moves in the opposite direction, both by reducing the funding
target and by increasing the timeline for repayment of pension debt well beyond
the acceptable 20-year period.
In other words, CTBA is supporting the same sort of delayed responsibility that
got Illinois into its pension mess. From the Edgar ramp to “asset smoothing,”
Illinois has a long history of asking the next generation to pay the bill. As
pointed out by actuary Elizabeth Bauer in Forbes, the CTBA plan is nothing more
than a plan to keep the system more underfunded for longer.
The CTBA plan requires borrowing money through pension obligation bonds
At a time when borrowing costs are higher than ever as a result of Illinois’
worst-in-the-nation credit rating, the CTBA plan requires selling $11.2 billion
in new bonds.
Pension obligation bonds, or POBs, are a gamble with taxpayer money.
Theoretically, POBs can save money via arbitrage, meaning the return on
investment from pumping the new money into pension funds is higher than the
interest paid on the bonds. In practice, this rarely works out. Citing a history
of failure, credit ratings agency S&P Global Ratings considers the use of POBs
to be a credit negative, according to an article published by OFI Global.
[to top of second column] |
According to the most recent projections of Illinois’ last experiment with POBs,
the total of $17.2 billion in borrowing – racked up under former Govs. Pat Quinn
and Rod Blagojevich – will cost $30.8 billion to repay.
The Government Finance Officers Association, a nonpartisan professional services
organization, has also come out against the use of POBs, citing the risk
involved and history of failure.
Illinois cannot afford to gamble with taxpayer money when the state already has
$7 billion in short-term debt from unpaid bills and a structural deficit next
year of more than $2.7 billion.
The CTBA plan does nothing to change the underlying cause of Illinois’ pension
problem
Public debate around pensions is often backward-facing. Was this problem caused
by underfunding or overpromising? This common question misses a simple truth:
One follows from the other.
If someone took out a $1 million mortgage on a $40,000 annual income, the
monthly mortgage payment would be $3,800 using today’s standard interest rate.
Meanwhile, the borrower’s take-home pay after taxes would be just $2,650 per
month. He would miss his payment every month. When the bank comes to repossess
the home, is it because the borrower overpromised or underfunded his mortgage?
Clearly, both answers hold some degree of truth. But underfunding is a result of
the fact that the required payments were unrealistic given the borrower’s
ability to pay. 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. This means pension benefits are outpacing their funding
source.
Defined-benefit pension systems also have several fundamental structural flaws.
First, the reliance of these systems on predictions about the future – such as
expected rates of investment return, retiree mortality rates, and future salary
and employment levels – make them unpredictable for lawmakers and prone to
fiscal shocks during recessions. It’s exactly this vulnerability to differing
assumptions that explains why Moody’s Investors Service estimates Illinois’
pension debt at $250 billion, nearly double the state’s official number.
Second, the amount an employee receives in retirement benefits is unconnected to
the amount he or she pays in to the system. In fact, most workers contribute
only about 4 to 8 percent of what they receive in retirement benefits – 8 to 16
percent including investment returns – and half will receive pensions worth over
$1 million during the course of their retirement
CTBA’s plan includes absolutely no reforms to reduce the growth in pension
liabilties going forward and no reforms to make the systems more predictable or
sustainable. As a result, the CTBA proposal cannot be called a pension reform
plan at all. It risks a future in which Illinois is in exactly the same position
it’s in today if benefits grow faster than expected, which is not an unlikely
scenario.
A better path for Pritzker to follow
The 2013 effort to reform Illinois pensions provides a better road map for
Pritzker to solve Illinois’ pension crisis and free up revenue for his desired
spending. The plan was passed through a Democrat-controlled General Assembly and
signed by Democratic former Gov. Pat Quinn.
Under the reform bill state lawmakers passed in 2013, no current worker would
have received less than she is currently promised, and no retiree would have
seen her monthly check decrease. The reform concepts – modifying cost-of-living
adjustments, increasing retirement ages for younger workers and capping the
maximum pensionable salary – would have only affected the rate of future benefit
accruals.
While the measure was imperfect, the 2013 reforms would have had dramatic and
positive effects on the state budget.
Unfortunately, the Illinois Supreme Court struck down the reforms in 2015,
citing the state constitution’s restrictive pension clause. Had the reforms
survived, they would have reduced the state’s 2016 pension contribution by $1.2
billion and put the state on a path toward a more sustainable and affordable
pension system.
A recent report from the Illinois Policy Institute lays out a path for building
on and improving the 2013 reform model, starting with a constitutional amendment
to protect earned benefits but allowing changes in the rate of future benefit
accruals.
Without real pension reform, Illinoisans face a future in which state and local
governments ask taxpayers to pay more for less, with continuing calls for tax
hikes amid service cuts to pay for pensions. This is already happening in cities
including Harvey, Peoria, Rockford, Jerome and Chicago, to name a few.
CTBA’s plan does nothing to solve the problem. Pritzker should propose a plan
that effectively addresses the crisis, and disavow the no-reform plan that
leaves a bigger mess for our children and grandchildren.
Click here to respond to the editor about this article |
