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Thursday, Oct. 6, 2011 05:52 am

Democracy isn’t kind to pension funds

The ancient Greek philosopher Socrates despised democracy, considering it weak and inherently corrupt, a governance form driven by the will of the many when, in his view, only an elite few are wise and competent enough to lead.

Today he might say Illinois’ pension system fiasco proves his point.

As the fall veto session nears, debate mounts on SB 512 to address the $86 billion-problem of unfunded pension liability by making public employees pay more into their systems – or get fewer benefits as retirees.

Here is the harsh reality: Educators, who have played by the rules and never missed a Teachers Retirement System payment, will see the generally reasonable terms of their current pension program diminished.

Meanwhile, state support for children in the classroom – especially those most at-risk – as well as for human services, mental health, public health, for seniors and veterans, natural resources and environmental protection and everything else, will be crippled for decades as payments for past pension underfunding drain the state treasury.

All this is a consequence of decisions made annually over many years by pandering policymakers, legislators and governors of both political parties, who turned pension liability into a ravenous, budget-devouring beast.

How did the beast grow?

The $86 billion in unfunded pension liability represents about $6,660 per Illinois citizen. It is nearly triple the entire annual state General Revenue Fund budget. It is a monster.

There are several specific policy decisions that fed the beast. Every year legislators pass, and governors approve, budget bills in which state funding for pension payments is deliberately short. This has been going on since 1953.

What is the accumulated shortfall? According to TRS board member Bob Lyons, the state has saved $14.8 billion by not paying what the actuaries calculated the pension systems should have received. But $14.8 billion is a fraction of the $45 billion in TRS liabilities not currently matched by assets. What caused the other $30 billion in damage?

Largely, it is in lost returns on funds TRS would have invested if the state had paid its statutory share. For example, $300 million not paid in 1981 would dig about a $1.8 billion hole by now, based on lost earnings of just 5.5 percent compounded annually. The state’s consistent diversion of statutorily required pension contributions – so the dollars could be spent on things of higher political value to legislators and governors – is the primary cause of the current fiasco.

Throw the bums out?

It’s too late. Most of the bums long ago retired. Many have expired. Hundreds of legislators consciously voted to short the pensions over the years. Today’s crop is just following tradition.

But it’s not as if they stole the money. It went for worthwhile goals, like keeping school funding at a reasonable level and providing health care for the poor and shelters for battered women. Gov. James Thompson invested in state parks and natural resources. While disgraced former Gov. Rod Blagojevich was slighting the pensions, Illinois became a national leader in support for early childhood education.

Programs and services receiving the funds have been popular, or seen as vital to “vulnerable” constituencies. Funding them could be politically beneficial. But voters tune out talk about the need for public pensions.

Decades of tax-pandering contributed to the problem. Illinois policymakers maintained the nation’s least viable general revenue stream while pretending to be at least adequate providers of basic public services. Yes, pensions became their “credit card.”

What happens now?

Whether or not SB 512 (or anything like it) passes this fall, pension payments will consume a lion’s share of state resources for decades. At $86 billion of unfunded liability, the pain is too great to shift to public employees – and it would be irresponsible to do that anyway. No, the sins of elected officials in the past will be paid for mainly by taxpayers in general and other innocent parties.

How long will that take? Since the recent income tax increase – raising Illinois’ rates from lowest in the nation to about fifth-lowest – shrinks in 2015 and nearly disappears in 2024, it will take until the current target year of 2045 at least. If the voters get a yen for something expensive, it will take longer.

So, Socrates, what do you think?

Jim Broadway of Springfield is  publisher of Illinois School Policy Updates, available by subscription at schoolnewsservice.com. He came to Springfield in 1981 as Capitol bureau chief for the St. Louis Globe-Democrat.
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