Big Pensions Just Tiny Part Of Big Pension Mess
This story was published with Crain's Chicago Business.
Illinois’ budget mess is the stepchild of Illinois’ pension mess, and for that perhaps nothing incites more steam-coming-out-of-the-ears fury from critics than the volume of six figure annual retirement payouts—topped by one at $581,000—pledged to former public workers.
Yet a BGA analysis of 2017 data from major pension funds for state and municipal employees vividly illustrates the disconnect between high-rolling pensions, legally protected but irksome as they may be, and the deep financial plight experienced by many of those funds.
Simply put, the state’s 17 major pension funds are slated to pay out more than $17.3 billion in benefits to some 483,000 retirees and survivors this year, totals that underscore the broad reach of pension checks for former public employees. Those payments do not come direct from tax money, though there is an indirect correlation that can render the public confused and budget makers dyspeptic.
Just four percent of all beneficiaries this year are in line for pension paydays exceeding $100,000, with the biggest checks largely going to once high-paid former school administrators as well as doctors and dentists at public teaching hospitals. Payments for the overwhelming majority of pensioners, most of whom don’t qualify for Social Security, are far more modest.
The median pension in 2017 for retired suburban and Downstate teachers stands at $52,016, the analysis shows, while the median for general state workers is $28,946. For university workers, the median pension stands at $26,101, while for non-public safety municipal workers outside of Chicago it is $9,064.
The median represents the midpoint of all individual pensions paid out by a retirement system. It is different from an average, which can be skewed by those outsized, six-figure payouts.
The Illinois Constitution includes a strong prohibition against pension benefits, once granted, ever being “diminished or impaired.” But if the size of all pensions could magically be capped at $100,000, the savings at those major funds would amount to $450 million this year, only 2.6 percent of the total.
The analysis from the watchdog group, the latest in a series of annual pension updates dating to 2012, was made with data obtained through the Freedom of Information Act.
It examined pension records for funds covering public school teachers and university employees, state, Chicago, and Cook County employees, and tens of thousands of other public workers in the suburbs and Downstate. Excluded from the analysis were records from hundreds of smaller, municipally operated pension funds covering police and firefighters outside of Chicago.
The raw pension data for 2017 is now posted under the tools and data section of the BGA website.
The financial perils faced by Illinois pension funds are both real and ripe for misunderstanding and political demagoguery. The aim with any public pension fund is to make it financially self-sustaining so that it can pay obligations to pensioners well into the future without stressing government budgets.
In a perfect world, a pension fund would thrive on earnings from investment of its assets, as well as regular payments from workers and government employers to cover only the cost of retirement benefits as they are earned.
That decidedly has not been the case with many of the largest pension funds in Illinois, where government officials have spent decades skimping on money they owed to cover the employer share of retirement benefits for public workers. The result is those public bodies have rung up enormous interest debt on woefully past due pension bills and are now forced to play catch-up, in the process squeezing resources available for schools, public safety and other crucial functions of government.
Just five of the 17 pension funds—those managed by the state for public university workers, suburban and Downstate teachers, general state employees, judges and legislators--collectively face an unfunded liability of $130 billion.
A recent analysis by the legislature’s economic forecasting arm, a bipartisan body akin to the Congressional Budget Office, vividly illustrates the central role played by the state’s chronic failure to meet its pension funding obligations in the explosion of debt at those five state funds.
From fiscal 1996 to 2016, unfunded liabilities at those funds grew by nearly $108 billion, or 675 percent, despite a long-term commitment to ramp up annual pension investments and to improve financial soundness at the retirement funds, according to the Commission on Government Forecasting and Accountability.
The commission attributed the largest share of that debt growth, $44.6 billion, to the shortfall in employer pension contributions from the state. Bookkeeping changes that lowered predictions of future investment returns accounted for another $31 billion in debt growth, while lackluster investment returns grew the debt by $14.7 billion.
Meanwhile, employee salary and benefit increases collectively grew the debt by $1.7 billion, or just 1.3 percent, the commission reported.
As a rule of thumb, pension experts generally consider a pension fund healthy if it has on hand at least 80 percent of the financial resources it needs to cover future obligations to retirees. There are some exceptions, but most big pension funds in Illinois are nowhere close to meeting that benchmark, with many in the sub 40 percent category.
And that’s where the analysis often gets hijacked by misunderstanding or worse. Those financially ailing funds still have resources to cover pension obligations, but could in theory fall short years from now without governments making good on those expensive, late payment interest charges they owe.
Early this decade, confusion over the complexities of pension fund finance led some Chicago media to highlight what turned out to be badly flawed projections from a Northwestern University public finance specialist. He claimed that by 2018 many Illinois pension funds would begin running out of cash to pay retirees.
The 2018 fiscal year is just weeks away, beginning on July 1, and that doomsday scenario is not close to panning out. Pension funds in Illinois, while far from in the pink, appear to have ample resources to cover pension obligations for years to come.
The real problem is the mound of make-up payments those government employers are now being forced to come up with because of all those years where they didn’t appropriately pay into pension funds.
Dave Urbanek, a spokesman for the large Teacher’s Retirement System, the school teacher pension fund, said the shortchanging predates World War II. “Since 1939, TRS has never once received an annual state contribution that an actuary would say meets the ‘full funding’ standard,” said Urbanek.
TRS, the largest of the state’s pension funds, possessed more than $45 billion in assets to cover its pension obligations in fiscal 2016, according to data from the legislative commission. Even so, the commission pegged the cost of long term pension obligations at the fund at more than $118 billion, resulting in a funding ratio of just 37 percent.
In fiscal 2016 alone, the state obligation to TRS and the other four employee pension funds it maintained was $6.8 billion, according to Ralph Martire, executive director of the Center for Tax and Budget Accountability.
But Martire said only $1.6 billion of that amount, less than 24 percent, was needed to cover the so-called normal cost of pensions, benefits actually earned by employees in 2016. The other $5.2 billion amounted to late payment charges.
“The real problem is a debt-service problem and a tax-policy problem,” said Martire, whose Chicago-based think tank contends Illinois finances are being crippled by insufficient taxes.
The pension debt, combined with low tax revenue, has been a strong influence on Illinois receiving some of the lowest credit ratings among the states, a dubious distinction that drives up the cost of borrowing.
The idea of better funding was admirable, but the methodology was flawed, according to Martire. The state borrowed money against pension contributions to fund services, and buried taxpayers under a mountain of unfunded liabilities.
“To me, the biggest obstacle ahead is what it has always been – the ability of the state to pay the contributions that they should pay,” said Tim Blair, executive secretary of SERS.
“The whole reason they were in that position in 1995 was they were borrowing against what they owed the pension system,” Martire said. “They passed this repayment plan and they didn’t pass a nickel of revenue to fund it.”