Illinois' pension nightmare: Read this and be glad you're not on THEIR pension plan

Funds for teachers, state workers face a $45.8 billion shortfall

Chicago Tribune, November 3, 2006

By Barbara Rose, Tribune staff reporter.

Tribune staff reporters Ray Long and Crystal Yednak contributed to this report

Illinois' next governor must grapple with a problem 30 years in the making: keeping retirement promises to more than 660,000 active and retired teachers and state workers.

Years of scrimping on pension contributions coupled with benefit increases have turned the state into a poster child for a growing national problem.

Illinois, with an estimated $45.8 billion pension shortfall, has among the worst funding records in the country. From Connecticut to Oklahoma, pension obligations are threatening to overwhelm budgets, pinching states' ability to pay for pressing priorities such as education, transportation and health care.

Staying on track with a long-term plan to fix Illinois' pension problem will require the kind of tough choices that politicians have avoided for years.

Before the next governor's term ends in 2010, the required minimum annual contribution will have more than doubled from the current fiscal year to nearly $4 billion. That's about equal to the current year's projected outlay for state aid for elementary and secondary schools.

"The size of the growing pension contribution needs will swamp all other priorities in a very short time," said Laurence Msall, president of the Civic Federation, a non-partisan watchdog group.

One measure of a retirement system's health is how close it is to 100 percent funding. Illinois' system is projected to be 57.7 percent funded in the current fiscal year, well below the 80 percent benchmark for a healthy fund.

Only three states had worse ratios than Illinois: Rhode Island, Oklahoma and West Virginia, according to a recent report by ratings agency Standard & Poor's based on 2004 data.

The Civic Federation calls for an end to Illinois' "pension holidays," where the state contributes less than the required minimum, and other measures, including trimming the benefits promised to new hires.

Day of reckoning near

So far, attempts to reform the system have met with limited success.

An initiative under former Gov. Jim Edgar in 1995 aimed to whittle the growing shortfall gradually over 50 years, achieving 90 percent funding by 2045. By comparison, Congress' recent reforms for private pensions are far stricter, requiring employers to reach 100 percent funding within seven years.

The 1995 Illinois reform introduced badly needed discipline, but it also pushed pension problems into the future. It allowed the shortfall to continue to grow because it postponed the pain of sharply higher contributions for 15 years, until 2010.

Now that day of reckoning is close.

"The required contribution is going to be higher than it has been, and that's going to put a strain on the budget," said Lance Weiss, senior manager at Deloitte Consulting LLP, a pension adviser to Gov. Rod Blagojevich's administration.

Finding extra money for pensions seldom has been a priority, even when state coffers were flush during the late 1990s economic boom.

Then came the 2001 recession and stock market collapse, which reduced pension funds' value and triggered a budget crisis during Gov. George Ryan's administration. At the same time, a costly early-retirement program increased the pension obligations.

By the time Blagojevich took office in 2003, funding had plunged to its lowest level since the late 1970s and the pension shortfall had more than doubled since the 1995 reform. Blagojevich shouldn't have been surprised: He voted for the payback plan as a lawmaker.

As governor he led the latest reforms, which helped restore funding to nearly 61 percent in fiscal 2004. He borrowed $10 billion to infuse the pension system with $7.3 billion in contributions above the required annual minimum.

While the borrowing did not lower the state's overall obligations, it reduced the cost of the state's interest payments and put the bond money to work earning investment returns to grow the pension pool.

"As an arbitrage it was very effective," said the Civic Federation's Msall. "They had great market timing."

The governor also named two panels to recommend reforms, some of which were adopted. Among the changes: capping the state's share of pension benefits related to teachers' end-of-career raises and ending the practice of sweetening benefits without citing funding sources.

Yet after championing reforms to save billions in future costs, Blagojevich and lawmakers chose to use some of the savings to reduce by $2.3 billion the amounts they were required to contribute in fiscal 2006 and 2007. The Civic Federation opposed the move, calling it a partial pension holiday.

Republican gubernatorial candidate Judy Baar Topinka, the current state treasurer, blasted Blagojevich for "raiding" pension funds--a charge her Democratic opponent rejects--and said she would protect workers' retirements by fully funding the system.

Meanwhile, fund administrators say the investment pools are paying the price. Last year as a result of the partial pension holiday, the Teachers' Retirement System was forced to liquidate $1.2 billion in assets and, rather than reinvest the proceeds, use the money to pay benefits, said TRS spokeswoman Eva Goltermann.

She argues that Blagojevich's borrowing, while initially putting more money into the system, "didn't address the basic funding problems."

Illinois' funding ratio once again is trending down, hitting an estimated 57.7 percent in the current fiscal year, according to the state Commission on Government Forecasting and Accountability.

"This is not a Democratic or Republican problem, this is a systemic problem," said Deloitte's Weiss. "It's very hard to get out from under such a deep hole, and every time you defer more of that payment into the future it gets worse."

Don't count on economy

The next governor can't count on the economy to make the funding easier, forecasters say.

"I do expect the U.S. and Illinois each to continue growing jobs and growing incomes, but at a pace slightly below that we've enjoyed in the past several years," said Richard DeKaser, chief economist at National City Corp., an Ohio-based bank.

Standard & Poor's credit analyst John Kenward said Illinois' pension shortfall is a negative factor in the state's AA credit rating, an average rating. "It's a long-term problem that has a long-term solution," he said.

But unless it's solved, Msall and others warn, taxpayers will be the losers. The state constitution requires that retirement benefits be paid at the level they were promised. While lawmakers can decide to cut school funding, they can't get out from under the pension obligations.

"Pension funding will trump all other contributions over time," Msall said. "It should be at the front of anybody's mind who cares about education, about transportation, because if you don't get the system fixed you're not going to have any money for those in the future."