Illinois: Pension Debacle Poster Child

Co-authored with Bill Zettler

There has been much talk regarding the unsustainable fiscal mess most states are mired in. Some are even discussing the creation of legislation that will allow states to declare bankruptcy. The largest component of the mess is the unsustainable pensions for public sector employees. If a contest were held to select the poster child for the pension debacle, Illinois would win hands down.

Today, Illinois’ unfunded pension liability is estimated to be $78 billion. How did we get here? Let’s call it the “Four Rules of Too“ for public employees whose salaries are too high; contributions are too low; plans are too bloated; and retirement is too early. As the following chart regarding the Teachers Retirement System (TRS) shows, over the last decade teacher salaries have risen by 7% per year or 96% compounded and the pension cost (Pension Benefit Obligation) taxpayers are responsible for has gone up 116%.

If we look at the rest of us who are locked into the Social Security system, our salaries increased by an average of 3.65% or 43% compounded, less than one half of the teachers’ increases. Thus although our income has gone up less than half as fast as teacher salaries and pensions, we have had to pay more taxes out of our lesser incomes to fund the promises made by union bosses and politicians. This model could be applied to other state workers as well. For instance, 35% of Illinois State Troopers make more than $100,000 per year with top salaries of $185,000.

And the future doesn’t look any brighter.

Under the “best case” scenario outlined by the Commission on Government Forecasting and Accountability report prepared in September 2009 for the Governor’s Pension Reform Committee, analysis indicates that the $78 billion unfunded liability will increase every year until it reaches $142 billion by 2034. This assumes, what some financial experts would categorize as, an optimistic 8.5% return on investments plus an unconscionable taxpayer contribution of about $230 billion over the same period, while the public employees will pay only $60 billion into the fund–about 25% of what taxpayers pay in. Thus digging a hole that is 85% deeper than we are in today!

This is a recipe for financial disaster that will leave our children and grandchildren with a debt they cannot repay. Also in 2034, taxpayer annual contribution to pensions will equal an impossible 33% of employee payroll. And remember this is “best case”.

The legal theft only gets more maddening when you consider state employees who work a normal 45 year career will retire on more income than when they worked. A state employee who works from age 21 to age 66-like most of us in the private sector-will retire on take home pay 20% or more than when he worked. That’s because he gets 75% of his pay plus Social Security. So if he was making $80,000 and retired after 45 years, he would get a $60,000 state pension and about $24,000 in Social Security, or $84,000 per year. Additionally, upon retirement he does not pay Social Security (7.65%), a pension contribution (4%), or state income tax (3%). Therefore his take home pay goes from $68,000 to $84,000. Yes, his retirement take home pay exceeds his working salary–sweet, if you’re a taxeater that is.

Is there a way out of this mess? While one does exist, we suspect the lust of the patronage armies which have returned and kept Democrats in the majority for almost a decade, will be decidedly unwilling to negotiate “austerity” measures of any kind. If they would like a way out though, here are ten steps to fiscal sanity we would suggest:

1. Increase Employee Pension Contributions to at least the level of private sector employees or 12% (7.65% Social Security plus 4.4% 401K). SAVINGS: $700 million per year; $54 billion over 35 years.
2. Reduce the automatic Pension Cost Of Living Allowance (COLA) to 0% until the budget is balanced and then make it CPI or 1.5%, whichever is less. SAVINGS: $180 million per year; $13 billion over 35 years.
3. Pensions would be taxable for all retirees with income over $50,000 per year. SAVINGS: $125 million per year; $10 billion over 35 years.
4. Eliminate all early retirement plans with their automatic 6% increases and sick leave pension accruals. Extend the average salary for pension calculations to an average of the last 8 years. SAVINGS: $110 million per year; $15 billion over 35 years.
5. Sell state assets if “The Price Is Right.” Including, but not limited to, the Lottery, Toll Way, Thompson Center, and Thomson Correctional Center. Use the proceeds to pay down the unfunded pension liability and payoff the pension bonds. As a bonus, eliminate state employee pensions-a long-term source of corruption, since the taxpayer is responsible for the pension shortfall. Let the state pay for it rather than the innocent taxpayer. SAVINGS: $20-30 billion off of the $80 billion unfunded liability saves at least $900 million per year; $70 billion over 35 years.
6. Consolidate the five pension systems into one to increase transparency, oversight, and administration. SAVINGS: $30 million over 5 years.
7. Make high salary school districts pay their own pension costs. Controlling teacher salaries at the local level is a function unavailable to state taxpayers, and therefore they should not be liable for it. Under the current reverse Robin Hood of “rob the poor and give it to the rich” pension system, taxpayers in poor districts pay state taxes to fund outrageous pensions in another. I am sure progressives would agree that the poor should not pay for the benefits of the rich. SAVINGS: $1.6 billion of 2011’s $5.3 billion pension contribution.
8. Use cash buyouts to lower pension obligations. Offer cash buyouts on terms advantageous to the state for any member eligible for a future pension, not just those at retirement age. This proposal could get rid of a lot of dead weight and decrease the unfunded liability. Any new employee hired would have a pension based upon a new and lower cost plan. SAVINGS: 2,500 buyouts per year would save about $500 million annually.
9. Make public employees pay for 50% of their healthcare premiums, pre- and post-retirement. SAVINGS: $1.1 billion per year in 2011; $65 billion over 35 years.
10. One-half of the current and all future unfunded pension deficits would be paid via reduced pensions until the deficit is paid off. Taxpayers would pay the other half. Why should taxpayers be liable for poor investment performance, increased retiree benefits, and poor mortality estimates? SAVINGS: $2 billion in 2011; $200 billion over 35 years.

This 10-point plan could save the state well over $5 billion a year and, over the next 30 years, will completely pay off the pension deficit. There is no other viable solution available.

Illinois has been steadily losing people, over 750,000 since 2000, making it the 49th worst state for emigration. More are sure to follow if we do not act quickly. As for businesses moving to Illinois, that is in decline as well with a loss of more than 700 manufacturing companies and over 52,000 manufacturing jobs in 2009– “one of its worst declines in nearly a century”. Who in their right mind would move a business to Illinois knowing that without massive reform, $1 trillion will be payable in taxes over the next 35 years to fund retirement for 5% of Illinois’ workers? “Run for the border”, an old Taco Bell slogan, comes to mind.

We’re in a race to the bottom with our spending pal, California. Taxation, regulation, and fees will have to grow; the exodus of both business and those who have the means of mobility will continue; the debt will metastasize unabated; and we will witness, possibly for the first time in our Nation’s history, the bankruptcy of a sovereign state. Let’s hope our leaders can get their head out of the sand before disaster ensues.

Pension research and analysis provided by Bill Zettler. To read more about Illinois’ pension disaster, click here.