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 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.
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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.
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