Tweaking payments won’t solve Illinois’ pension crisis

Changing the repayment plan to one based on flawed assumptions and bad accounting does nothing to shield taxpayers from the risks of an imperfect system.

A union-backed research group has proposed to solve Illinois’ pension crisis by extending the repayment schedule. This idea, from the Center for Tax and Budget Accountability, or CTBA, is gaining more currency among lawmakers, largely because the Illinois Supreme Court called it a “less drastic” alternative to the now-unconstitutional Senate Bill 1.

Here’s how Crain’s Chicago Business explained the plan:

According to Ralph Martire, head of the progressive-leaning Center for Tax and Budget Accountability, the state’s five main pension funds could be filled to meet 76 to 78 percent of their obligations in 30 years if taxpayers contributed a flat $7.4 billion every year.

But is it really an “alternative” at all? This proposal would leave the broken pension system untouched. The only change is how the state pays for those out-of-control costs. Worse yet, the plan is based on bad accounting, bad arithmetic and bad assumptions.

Bad accounting: Extending the repayment plan

Those supporting the new repayment plan want to extend the state’s pension-debt repayment schedule out to 2057. That 42-year payment plan would violate generally accepted actuarial standards. According to the Governmental Accounting Standards Board, “the maximum acceptable amortization period is 30 years.” 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’s new accounting rules, for example, shorten the repayment schedule to 20 years for purposes of measuring state and local governments’ credit risks.

Supporters of the new repayment plan argue it would get the pension systems’ funding ratio to 76 percent by 2045, rather than the 90 percent called for under current law. The CTBA hasn’t released any data supporting these claims, but even if the math were correct, that would leave an unfunded liability of $84 billion three decades from now.

Is that really an improvement? Illinois was facing a pension crisis back in 2011, when the state’s unfunded liability was $83 billion.

Bad arithmetic: Excluding normal cost and higher immediate costs 

The CTBA plan isn’t based just on bad accounting. It’s based on bad arithmetic. If Illinois made a “flat $7.4 billion” pension contribution every year for the next 30 years, the unfunded liability would rise to more than $296 billion by 2045.

What the CTBA does not make clear when pitching this idea is that the “flat $7.4 billion” pension contribution is for debt repayment only. But the state’s annual pension costs include more than just debt repayment. The state’s annual contribution also includes the “normal cost” of workers accruing new benefits. When you add the state’s annual normal cost to the CTBA’s $7.4 billion debt repayment contribution, taxpayers would be on the hook for nearly $9.7 billion in fiscal year 2016.

For comparison, the state’s pension contribution was $6.9 billion in fiscal year 2015. Under the CTBA plan, taxpayers would kick in an extra $11.6 billion during the next decade. But even when you add in those normal costs, Illinois Policy Institute analysis of the plan reveals it would only bring the funding ratio up to 71 percent by 2045, leaving an unfunded liability of nearly $103 billion. The CTBA has never released any of the data needed to verify its claims, so it is impossible to reconcile its assertions with the data provided by each of the five state pension systems.

Even if the plan’s math was correct, the state’s annual pension payment is unaffordable as is. The state needs meaningful reforms that not only reduce the unfunded liability, but also immediately reduce the annual pension payment. Pumping even more money into a broken pension system isn’t a solution.

Bad assumptions: Pretending the pension systems are perfect

Worse yet, the repayment tweak would keep in place the broken defined-benefit system, meaning the unfunded pension liability will continue to spiral out of control even if the state were able to afford the proposed payments. The majority of the state’s pension debt comes from problems with the defined-benefit structure, such as missed investment targets, mistaken actuarial assumptions and benefit increases. Changing the repayment plan does nothing to shield taxpayers from these risks.

Even if it were reasonable to extend the repayment schedule and hike the state’s annual pension contribution by billions of dollars, the plan would only work if the pension systems were perfect.

They are not.

What if the pension systems earned 1 percent less on investments than the state currently predicts? If that were to happen under the CTBA plan, the unfunded liability would jump to $228 billion by 2045 and the pension systems would be just a few years away from insolvency. If the pension systems earned 5 percent returns on average during the next three decades, the state would be facing a whopping $347 billion unfunded liability by 2045. The pension funds would be completely exhausted by 2046.

If the actuaries are wrong about other things – mortality rates, salary increases, severance-pay assumptions, sick leave, etc. – the results could be even more disastrous. After all, the state’s pension system continued to deteriorate under the Edgar repayment plan, despite the fact that taxpayers kicked in over $16 billion more than that repayment plan initially called for.

Illinois is in desperate need of pension reform. A new, flawed repayment plan isn’t the answer.

To download the data used in this analysis, click here.