CTBA’s pension plan doesn’t fix the problem

Back in January, Ralph Martire of the union-backed Center for Tax and Budget Accountability proposedwhat he called a “solution” for Illinois’ pension crisis. This plan has been getting more attention lately. But before embracing it, lawmakers should ask: does this plan really solve the problem? After all, Martire’s plan is to leave the broken pension system untouched –...

Back in January, Ralph Martire of the union-backed Center for Tax and Budget Accountability proposedwhat he called a “solution” for Illinois’ pension crisis. This plan has been getting more attention lately. But before embracing it, lawmakers should ask: does this plan really solve the problem?

After all, Martire’s plan is to leave the broken pension system untouched – the only change is how we pay for pensions. Here’s how he described it:

Simply re-amortizing $85 billion of the unfunded liability into flat, annual debt payments of around $6.9 billion each through 2057 does the trick.

There’s a lot going on here, so let’s break it down piece by piece.

First, he wants to extend the repayment schedule, also known as the amortization period, to 2057. But, according to the Governmental Accounting Standards Board, “the maximum acceptable amortization period is 30 years.” Extending the repayment schedule to nearly 45 years would obviously violate standard accounting practices. The actuaries of all five state pension systems explain that the current repayment schedule, which only lasts through 2045, falls outside generally accepted actuarial standards. Illinois’ state actuary plainly agrees, concluding that “under generally accepted actuarial standards, the funding method should be based as a minimum on achieving 100 percent funding within 30 years.” Indeed, the 30-year repayment schedule is at the outer range of acceptable repayment schedules. Moody’s Investors Service new accounting rules, for example, shorten the repayment schedule to 20 years for purposes of measuring state and local governments’ credit risks.

Second, even after extending the repayment schedule, Martire’s plan only pays down $85 billion of the state’s $97 billion unfunded liability. This, too, violates generally accepted actuarial standards. Under standard accounting practices, the funding target would be 100 percent. The state actuary, the actuaries of all five pension systems and the Governmental Accounting Standards Board all recommend a 100 percent funding target.

Third, Martire’s contribution math is off. He says he wants to make “flat, annual debt payments of around $6.9 billion.” But the state’s annual pension costs include more than just debt repayment. Those costs also include the “normal cost” of workers accruing new benefits. When you add the state’s annual normal cost to Martire’s $6.9 billion debt repayment contribution, the state would be on the hook for more than $8.6 billion in fiscal year 2014. For comparison, the state’s pension contribution was nearly $5.9 billion in fiscal year 2013. Pumping more money into a broken pension system isn’t a “solution.”

Finally, Martire’s plan would keep in place the broken defined benefit system, meaning that the unfunded pension liability will continue to spiral out of control even if the state were able to afford his proposed payments. The majority of the state’s pension debt comes from problems of the defined benefit structure, like missed investment targets, mistaken actuarial assumptions and benefit increases. His plan does nothing to shield taxpayers from these risks. So even if it were reasonable to extend the repayment schedule, pay down just $85 billion of the state’s $97 billion unfunded liability and hike the state’s annual pension contribution by billions of dollars, his plan would only work if the pension systems were perfect. We know that they are not.

That’s not to say that the idea of paying down the debt on a level-dollar basis is a bad one. That’s how most of us pay off our mortgages. It also prevents the reckless “pension ramp” that increases the state’s costs year after year. That’s why our plan to get Illinois out of the pension crisis pays down the remaining unfunded liability on a level-dollar basis.

But we couple this with real, substantive reforms. We get politicians out of the pension business altogether, giving government workers real control over their retirement dollars for all future work. Our plan cuts the unfunded liability in half and gets the systems fully funded in about 30 years. And our annual contribution is reduced $4.7 billion, about the same as we paid in fiscal year 2012.

We need real reforms, not just a new repayment plan.