Jim Dey | State officials put great effort into conning public on pensions

Jim Dey | State officials put great effort into conning public on pensions

British Prime Minister Winston Churchill once characterized the Soviet Union as a "riddle wrapped in a mystery inside an enigma."

That's beautiful phraseology that reflected the outside world's inability to understand the Byzantine maneuvers of the leaders of that closed, authoritarian regime.

The phrasing also lends itself to a description of Illinois' public-pension woes as described by the Legislature's Commission on Government Forecasting and Accountability.

The report outlines how state officials expect to increase the current funding level of public pensions from the current 40 percent to 90 percent by 2045.

Borrowing from Churchill, the report reflects nothing more than a dubious proposition premised on unsupportable suppositions.

"... the projected accrued liabilities of the state retirement systems will increase from $229.3 billion at the end of FY 2019 to $331 billion at the end of FY 2045. At the same time, the projected actuarial value of assets is projected to increase from $92.5 billion to $297.9 billion. Consequently, the projected unfunded liabilities are projected to decrease from $136.8 billion at the end of FY 2019 to $33.1 billion by the end of FY 2045, and the projected funded ratio is expected to increase from 40.3 percent in FY 2019 to 90 percent by the end of FY 2045," states the commission's executive summary.

That's the official word as of late April. Unofficially, it's baloney.

Don't believe a word of it. State officials aren't outright dishonest in their assessments, but they're relying on dishonest premises to hide the dire state of Illinois' five public pension plans.

Here's one example openly cited by the commission, which is made up of a bipartisan group of House and Senate members.

"All of the projected figures ... come from the various systems' actuaries and are predicated on the state making the necessary contributions as required by law," the report states.

So all will be well if the governor and legislators do in the future — make the legally required pension contributions — what they have repeatedly failed to do in the past.

Until Tuesday, Gov. J.B. Pritzker didn't want to make the required contributions in the coming budget year.

He proposed skipping $878 million in required payments, a move that would have pushed the 2045 funding deadline back another seven years to 2052.

But the governor caught a break with reports that April tax payments came in $1.5 billion more than expected, prompting him to cancel the so-called pension holiday.

It's understandable if people are tired of hearing about Illinois' pension woes. After all, it's a problem that seems beyond solving.

But it's not just a pension problem — it represents a broad economic problem for Illinois.

This state needs a strong, growing economy, one carried by its own strengths and not dragged along by a healthy national economy.

But Illinois' pension woes discourage the kind of investments it takes to make a real difference in the state's future.

Multi-billionaire investor Warren Buffett recently said businesses would be wise to avoid states like Illinois.

"In the public sector, you know, it's a disaster. ... If I were relocating into some state that had a huge unfunded pension plan, I'm walking into liabilities," Buffett told CNBC. "And those are big numbers, really big numbers. ... And when you see what they would have to do — I say to myself, 'Why do I want to build a plant there that has to sit there for 30 or 40 years?'"

In other words, he said that businesses expose themselves to huge tax increases needed to pay the pensions.

Pension payments are already consuming tax dollars that would otherwise go to cover core state functions — roads, K-12 and higher public education, law enforcement.

That won't change, because pension underfunding is huge and growing. Prior to theCOFGA report, it was estimated to be $134 billion. COFGA now estimated it will be $136.8 billion by June 30.

Would that it be true. But it's not.

As reported in a recent column, the public pension plans are basing estimates of future asset growth on excessively generous rates of return (also known as discount rates) of 7 percent rather than the more realistic 4 percent used by private pension plans.

Why the difference in numbers? Public pension plans are allowed flexibility in projecting rates of return. A private-pension manager who exercises that kind of flexibility would end up in prison.

The Moody's credit-rating agency recently excoriated the state for its 7 percent estimated rate of return. Using the more realistic 4 percent rate, it estimated Illinois' public pensions are underfunded by $234 billion, not $134 billion.

That $234 billion in underfunding dwarfs the state's $92.5 billion in public-pension assets.

State officials could defend their 7 percent estimated rate of return by contending that their difference with Moody's represents a simple disagreement among experts.

But it's not just Moody's opinion.

The publication "Pensions & Investments" reports that in 2018, the "100 largest U.S. corporate defined benefit plans" employed a 4.25 percent rate of return/discount rate to determine future investment gains.

So about that COFGA report: It's thick, filled with graphs and impressively produced. But when it comes to reliability, it's reliably unreliable.

Its only real value is that of a doorstop.

Jim Dey, a member of The News-Gazette staff, can be reached at jdey@news-gazette.com or 217-351-5369.

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