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Thursday, Dec. 1, 2011 02:56 am

Another idea for managing state pension costs

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You may have read the stories about how next year’s mandatory state pension payment will rise by a whopping one billion dollars.

The new numbers show the state’s total pension payment, with debt service, will be more than $7.4 billion next fiscal year. This year’s pension payment was originally set at $6.4 billion back in March, but is now $6.5 billion.

Not including federal money, the state budget is around $30 billion. So one out of every four state tax dollars spent next year will go to the pension funds, and every last penny from January’s “temporary” state income tax increase will be used for that pension payment next year.

Add an expected $450 million increase for Medicaid costs, plus higher costs for state employee and retiree health care and other natural programmatic growth, and the state could be looking at yet another major fiscal crisis next year – not to mention that last May the state pushed over a billion dollars in Medicaid payments into next year in order to “balance” this year’s budget.

Gov. Pat Quinn’s budget office expects state revenues to grow by a billion dollars next fiscal year. The amount of the increased pension payment alone will eat up all of it. There’s no doubt that, without some immediate action, more bigtime budget cuts are on the horizon.

The state’s certified pension payment amount can rise for various reasons. The largest increase this time came from the State University Retirement System, which factored in lower future payroll growth, the recently passed two-tiered pension system for new employees and longer life expectancy.

So, obviously, we need pension reform, right? Make employees pay more of the cost and force the rest of them into “optional” 401(k) programs, even though it’s pretty obvious that the Illinois Constitution forbids a solution like that.

A bill to do just that is sitting in the House awaiting a floor vote. But the proposal, crafted by the Civic Committee of the Commercial Club of Chicago, would also jack up the state’s annual pension payment next fiscal year by more than a billion dollars from where it is right now.

Yes, you read that right. If the Illinois General Assembly does nothing, pension costs will rise a billion dollars next year. If legislators approve the much-touted reform bill, pension costs will rise a billion dollars next year.

The pension reform bill is designed to ease pension payment increases down the road. But in the short term, at least, costs will actually rise at a higher rate, depriving the rest of the budget of badly needed funds.

Most of the money owed next fiscal year, like every year, is due to a decades-long practice of not paying or grossly underfunding pension obligations, plus paying off loans that were taken out so the state could skip some more pension payments.

This underfunding problem is as old as the pension systems themselves. Way back in 1950, for example, the Teachers’ Retirement System had what’s called an “unfunded liability” of 77 percent. Yet, the system is still taking in lots more than it’s paying out and no teacher has ever missed a pension check.

The unfunded liability is the amount the system will owe to every potential retiree over the next 30 years. A state law passed in the 1990s put Illinois on track to reach a goal of 90 percent funding for all the pension systems by 2045. The ramp started slow, but then shot straight up over the past several years. The state’s total annual pension payment has doubled in just the past three years because it’s tied to that 90 percent goal.

Asked whether the governor had given any thought to adjusting the “ramp” and lowering the 90 percent target, a spokesperson said the current law remains the administration’s goal. However, she added, “If legislators want to have discussions about that, they can bring it to the table, but we haven’t had serious discussions about that.”

It may be time to rethink this 90 percent solution. The state definitely needs to have enough cash to make sure checks are cut, plus a cushion. But if the Constitution stops Illinois from changing employee benefits, then maybe we can have a discussion of setting a less lofty goal.  

Rich Miller publishes Capitol Fax, a daily political newsletter, and CapitolFax.com.

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