A solution to the Illinois pension funding problem has finally materialized. For decades, the state legislatures and governors have systematically underfunded the pension systems, while continually increasing benefits to state employees and teachers The result is that Illinois pension systems are $45.8 billion underfunded. Each time the state Legislature or governor tries to fix the problem, they make it more of a black hole from which not even light escapes.
In 1995, the state Legislature did recognize that they were heading toward trouble, so they put in place a 50-year funding plan. This plan was designed to bring the states pension funds to a 90 percent-funded ratio by 2045. However, by the time Gov. Rod Blagojevich took office in 2003, the pension shortfall had more than doubled. This was a direct result of the 1995 plan, which systematically underfunded the pension systems. On the other side of the balance sheet, despite the fact that they were fully aware the pension systems were underfunded, the legislatures and governors enhanced pension benefits by more than $5.8 billion. This can only be called unaccountable accounting, and it makes no sense.
During his first campaign, Gov. Blagojevich promised pension reforms. A few reforms have been passed, but other actions have made the problem worse. Yes, the Blagojevich administration has reduced the unfunded pension liability, but they did that by switching $10 billion of the debt to bonds. This is like a person lowering his or her credit card debt by taking out a home equity loan. Yes, theyre better off because the home equity loans interest rate is lower, but this does not take away the fact that the money is still owed. It only changes to whom the money is owed. Many people who do this are actually in worse financial shape because they use some of the home equity loan proceeds for spending sprees. As a result of similar behavior, the state is not any different. Instead of owing the pension system, the state now owes bond holders $10 billion. And the state is actually worse off because more than $2 billion was used to pay the current contributions so general revenue funds would not have to be used, and more money became available to spend on other programs. More than $500 million went toward the cost of issuing the bonds. Since the issuance of the $10 billion, the underfunding of the pension systems has further deteriorated. Recent budgets have called for a partial pension holiday; thus, the pension funds will be shortchanged another $2.3 billion.
In the private sector, many corporations are taking steps to reduce pension benefits owed to their current and future retirees. This is difficult, if not impossible, for the state of Illinois to do because the pension benefits are constitutionally guaranteed. Once benefits have been promised, they just cannot be reduced. Fixing the pension funding crisis will involve some pain and difficult choices that may hurt the incumbents politically. Consequently, it is highly unlikely that the current or future legislatures or governors will work to avoid sure financial disaster.
The recent headlines reveal that U.S. Attorney Patrick Fitzgerald can help save us from this mess. Recall that the state pension board unanimously canceled former Gov. George Ryans $197,000-a-year pension, because of his recent conviction. Even though the state constitution does not allow pension benefits to be reduced, state law does allow pensions to be taken away from someone who has been convicted of a crime. So now it is up to Fitzgerald to solve the $45.8 billion unfunded pension liabilities problem. He just needs to uncover other massive state corruption schemes and convict the majority of current and former state employees and teachers. With the conviction of Ryan and some of his state employees, and the investigation of the current administration, Fitzgerald seems to be well on the way.
Fortunately, the vast majority of our current and former state employees and teachers have been law-abiding, so this is a ridiculous, unrealistic solution. However, something drastic must be done to maintain the financial security of Illinois and its citizens. Instead of continually enhancing benefits and taking pension contribution holidays, lawmakers need to seriously work to solve Illinois financial problems.
Sheila A. Weinberg is the founder and CEO of The Institute for Truth in Accounting in Northbrook, Ill.
From the Dec. 27 2006-Jan. 2, 2007, issue