Pension crisis: Where do we go from here?
By Robert F. Rich and Thomas F. Conry
Illinois state pension systems are in crisis, yet there is no consensus on how to fix the problems nor action taken to do so for any solution to work.
Two dimensions need to be addressed: (a) rising "normal costs" ( the costs of pensions in any given year) and (b) accumulated liability (the costs of paying out pensions to all "annuitants" who have earned pension benefits). We should note here that 75 percent of the people in the state pension systems are in public education—elementary/secondary and higher education. Weakening public education has serious negative long-term consequences for all citizens of Illinois.
A healthy pension system should have at least 80 percent funding on accumulated liability. Any viable long-term solution to reach this goal needs to be based on the following principles: (a) there are no short-term fixes; it took a long time to reach the crisis level we currently face, and it will take a long time to address the problems the five state pension systems face; (b) the discussion needs to be one part of an overall solution for the Illinois economy as a whole; the problems will not be resolved by "fixing" just the pension system or by focusing on just the Medicaid system; (c) responsibility for addressing the Illinois economy in general and the pension systems in particular needs to be shared by ALL stakeholders (the state of Illinois, public education employers, current employees, and retirees/annuitants) — one of these groups should not bear the burden of reform; and (d) any "reform" needs to be constitutional and not violate the rather strict "non-impairment" clause of the Illinois constitution.
The constitutional convention which produced the 1970 Illinois constitution was very specific and detailed as it related to pension benefits. In short, the legislature may not take any actions which would infringe upon or impair the pension benefits which have been earned by employees in the five-state pension systems.
The constitutional convention also reflected on why it adopted this clause: previously, the state had, on a regular basis, not met its obligations to contribute to the pension systems and the convention wanted to guarantee that pension benefits would be paid out in full. Given this history, it is logical to assume that non-impairment refers to the monthly pension benefit which has been earned and the regular cost-of-living adjustments (COLA). It is pretty clear that the authors of the constitution were not only interested in non-impairment if a "crisis" did not exist; they were interested in articulating a core principle that would withstand challenges, including a so-called crisis.
As a matter of background, it is also important to underscore the fact that the state of Illinois has not met its obligations to contribute to the state pension systems for most of the last 18 years.
Moreover, the state has been borrowing against what it owed the pension systems in order to fund current services. The state should have either cut services or generated new revenue so as not to create the level of debt we currently face. And, had the state met its obligations, Illinois would not have the pension crisis that it currently has and would look more like Wisconsin, Indiana, Iowa and Michigan, which do not have the same pension problems we face.
This is important to point out not because we can change history but, instead, because it reflects on considerations of fairness in developing solutions to the problems faced by the state.
Given this background and the principles just outlined, the building blocks or components of any comprehensive solution should include:
— We need to be focused on the overall problems facing the Illinois economy. Hence, we should be asking where can we be making cuts in overall expenditures and adding new revenue which will focus on building a strong Illinois economy. It is not the fault of annuitants or the pension system that the state is in dire economic shape;
— The foundation for a solution is an iron-clad guarantee that the state will meet its obligations in full every year, which will require fiscal discipline in the executive and legislative branches of state government over many years;
— The problems with the Illinois economy will take 25 to 45 years to address;
— Careful consideration should be given to the proposal made by Ralph Martire in his Jan. 16, 2013, editorial in Crain's Chicago Business: re-amortizing $85 billion of unfunded pension liability "into flat annual debt payments of around 6.9 billion each year through 2057." Martire argues that this approach would cost tax payers $35 billion less than current law;
— Employers and employees should be required to contribute an additional 2 to 3 percent of their annual incomes every year starting in fiscal year 2014;
— To the extent that the state of Illinois has made the "employer" contribution to the relevant public education pension system, this cost should be shifted over a 10-year period to the actual employer (e.g, school districts, universities, community colleges). This shift would also help the overall economy to recover. The cost shift would also place the full cost of hiring decisions where those decisions are made instead of separating salary and pension-benefit decisions as is currently the case;
— Pension benefits for all Illinois taxpayers should become taxable as regular income as they are in many other states. This change might generate as much as $1.8 billion per year;
— Pension benefits for current annuitants should not be changed; instead, a new set of pension benefits could be introduced for new employees; taxation of retirement income represents shared sacrifice for retirees;
— For new employees and current employees who may want to opt into a new pension system, a hybrid approach consisting of a defined benefit and a defined contribution could be attractive and efficient. This hybrid would continue with a defined benefit financed by employers and employees and would also allow employees to purchase a 401k-type of plan.
Not every component outlined above should necessarily be adopted as part of the overall solution. But this menu represents a set of approaches to address the crisis.
In sum, there are two aspects to the issue: (1) find the solution which maximizes fairness, constitutionality and the realities of the need for a long-term solution; and (2) do it soon.
Robert F. Rich, director of the University of Illinois Institute of Government and Public Affairs (retired), is a professor of Law, Medicine, and Political Science (retired). Thomas F. Conry is Professor Emeritus of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana-Champaign (UIUC), and president of the UIUC Chapter of the State Universities Annuitants Association.