Blame the 'Pension Ramp' for Illinois'
By Ralph Martire
Center for Tax and Budget
want to believe "unaffordable" pension benefits promised to public
sector workers like teachers and social workers caused Illinois'
outsized, $83 billion unfunded pension liability, stop reading now.
This column will only make your head hurt by disproving that canard
with facts. If you'd rather understand both the true cause of that
underfunding and how it actually strains the state's budget, then
Start with the most important fact:
Illinois' "ginormous" unfunded pension liability wasn't caused by any
inherent aspect of the pension systems. That's right, neither the
benefits promised nor the cost of paying for those benefits is to
blame. Here's proof.
The current unfunded liability totals
$83 billion because Illinois has only $63.6 billion in pension assets
to cover $146.5 billion in pension liabilities. Expressed as a
percentage, that's an aggregate funded ratio of just 43.4 percent. To
be sound, public sector pension systems should be at least 80 to 90
percent funded. That's scary, but here's the eye-opener: If retirement
benefits and salary increases were the only drivers of the unfunded
liability, the state's retirement systems would be about 94 percent
funded today. In other words, there'd be no pension crisis.
What Illinois really has is a debt
crisis. Here's why. For decades, Illinois' poorly designed tax policy
created an ongoing structural deficit. That means, adjusting solely for
inflation and population, tax revenue hasn't grown at a rate sufficient
to cover the increased cost of delivering the same level of services
from one year into the next. This is somewhat amazing, given that
despite having the fifth-largest population of any state, Illinois
annually ranks in the bottom 10 in service spending.
To paper over - without resolving - the
fact that its tax policy is so poor Illinois can't afford to be one of
the lowest-spending states in the nation, decision makers funded public
services by borrowing against what they owed the pension systems. In
effect, the state racked up a ton of debt by using the pension systems
like a credit card to pay for public services for which there was not
enough tax revenue. By 1994, lawmakers had borrowed so much against
pensions that the funded ratio was just 54.5 percent.
This benefited taxpayers in the short
run by allowing them to consume public services without having to pay
the full cost of those services, but the ever-growing debt ultimately
had to be paid. Purportedly to rectify the problem, Public Act 88-0593
was passed in 1995. Known as the "Pension Ramp," it established a
repayment schedule to get the pension systems 90 percent funded by 2045.
Unfortunately the Pension Ramp was
fundamentally flawed, because it continued the practice of borrowing
against pension contributions to fund services for 15 more years,
effectively tripling total pension debt, and was so back loaded that
the installments of debt to be repaid in out years jumped at annual
rates that were unrealistic and unaffordable. For instance last year in
FY2012, the state's pension contribution was $4.1 billion, of which
only $1.6 billion was the cost of funding benefits, while more than
half, $2.5 billion, was repayment of debt. In FY2013 the contribution
jumps by 23 percent to $5.1 billion - with all the increase being debt
repayment under the goofy Pension Ramp.
The implication is clear: The problem
won't be solved by cutting benefits, because benefits aren't the
problem, the Pension Ramp is. Indeed, if the state had incurred this
debt with a bank rather than the retirement systems, Illinois couldn't
even try to make the bank's workers repay the state's debt, and
couldn't have forced the bank to accept an unrealistic, unaffordable
(Ralph Martire, firstname.lastname@example.org , is
executive director of the Center
for Tax and Budget Accountability, a Chicago-based bipartisan
fiscal policy think tank.)
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