Quinn’s crystal ball

After several months of saying that pension reform inaction by the Illinois General Assembly costs taxpayers $17 million a day, Gov. Pat Quinn lowered that number to $5 million per day for fiscal year 2014. That’s surprising, since no pension reform bill was passed in the recent legislative session and the unfunded liability is still almost...

After several months of saying that pension reform inaction by the Illinois General Assembly costs taxpayers $17 million a day, Gov. Pat Quinn lowered that number to $5 million per day for fiscal year 2014.

That’s surprising, since no pension reform bill was passed in the recent legislative session and the unfunded liability is still almost $100 billion.

The chart below shows that no amount of reforms or additional cash from pension obligation bondshas slowed down the growth in unfunded liabilities. The unfunded liabilities are five times larger than when former Gov. Jim Edgar implemented his pension ramp in 1996.

Quinn takes credit for the reduction in unfunded liability costs due to his “honest fiscal policies … making the full statutory payment to the pension systems every year since taking office and enacting pension reform for new employees.”

But Quinn has paid less than the Governmental Accounting Standards Board-recommended annual required contribution. That means the state’s payments make no real dent in the unfunded liability. And Quinn’s 2010 reforms for new Tier 2 employees will have no real impact for years to come.

Quinn calculates his $5 million number “… by taking the projected amount of the growth of the shortfall in a given fiscal year … and dividing that number by 365.”

The same prediction was made last year based on the actuarial projections made in fiscal year 2011. The systems predicted that the unfunded liability would grow by “only” $5.3 billion in fiscal year 2012. Instead, it grew by $11.7 billion. The systems have predicted that the unfunded liability’s growth would slow in other recent years as well, only to see it skyrocket further.

The reality is that Quinn cannot “predict” how much the unfunded liability will grow in the future – the graphic above is evidence enough of that. He has no idea what investment returns will be, how actuarial assumptions may change, or whether government workers will be given more pay and benefits than what’s already been assumed.

That’s what makes a defined benefit plan so unpredictable and unmanageable. It’s why 85 percent of the private sector has abandoned defined benefit plans for 401(k)-style plans.

What Quinn can do, however, is the simple math on how much the underfunding will grow due to the $97 billion shortfall in pension assets. The pension system can’t earn interest on money it doesn’t have. And since the pension funds assume an average rate of return of 8 percent, simple math tells us that the underfunding costs Illinois taxpayers $21 million a day.

Quinn needs to trash his $5 million number. His focus should be on real pension reform that dramatically reduces the unfunded liability and the $21 million a day that it costs taxpayers.

That means moving away from defined benefit plans and embracing 401(k)-style plans going forward.??Illinois must modernize its retirement systems by adopting defined contribution plans, such as the ones found in House Bill 3303 and Senate Bill 2026.