A warning about the funding shortfall to pensions was part of a report by the Illinois Public Employees Pension Laws Commission to Gov. William Stratton ... in 1959. In the 54 years since that report was issued, the debt of the state’s pension systems has grown exponentially, and mostly for the same reason warned of in 1959 -- inadequate contributions by the government.

“Of principle concern to the Commission is the accumulation of large unfunded accrued liabilities resulting for the most part from the inadequacy of government contributions in prior years to meet increases in costs due to the upward trend in salary rates and large additions to the membership of the funds.”

That could have come from any number of studies in recent years about funding problems facing public employee pension plans in Illinois. But it didn’t. That warning was part of a report by the Illinois Public Employees Pension Laws Commission to Gov. William Stratton ... in 1959.

Even that wasn’t the first warning that benefits promised by public employee pensions were outstripping the money put into the systems to cover those benefits.

But in the 54 years since that report was issued, the debt of the state’s pension systems has grown exponentially, and mostly for the same reason the Pension Laws Commission warned of in 1959 — inadequate contributions by the government.

The reason for those inadequate contributions hasn’t changed either. Putting more money into pension obligations meant funds had to be taken away from something else, such as education or health care. It might have meant cutting the state work force or forcing officials to try to pass an unpopular tax increase.



Short-term perspective

“What has happened is a culture and a willingness by past governors and General Assemblies to take a very short-term perspective on the costs of underfunding the pension systems,” said Laurence Msall, president of the Civic Federation of Chicago.

In short, Msall said, “It was easier to underfund pensions than not fund other programs.”

To be sure, inadequate contributions by the state to the five state-funded pension systems are not the only reason the systems carry a $97 billion unfunded liability and are only funded at 39 percent, the worst in the nation.

According to a recent analysis by the General Assembly’s Commission on Government Forecasting and Accountability, investment returns that fell short of expectations contributed to the problem, as did increases in pension benefits. Even factors like more retirees living longer added to the shortfall.

By far, though, the biggest factor in the debt was what the state failed to contribute to the systems. Of the $87 billion increase in pension debt since July 1, 1984, $41.2 billion is attributed to inadequate state contributions.

** See chart detailing the unfunded liability for all state pension systems (pdf) **

** See charts detailing the liability for individual state pension systems (pdf) **

Gov. Pat Quinn often has stated that Illinois pension underfunding dates back 70 years. Quinn’s budget office provided a copy of a letter prepared by the State Universities Retirement System that urged delegates to the 1970 Constitutional Convention to adopt a provision regarding vesting and funding of public employee pensions.

The letter reported that public employee pensions already were running a debt in 1946. The letter also noted that in 1967, legislators stipulated how much money should be allocated to SURS to prevent the system from falling further in debt.

“Despite this legislative mandate for stabilization of the past service liabilities, the General Assembly refused to appropriate the necessary funds to meet this requirement during the 1969 and 1970 legislative sessions,” the letter said.

Lawmakers also shorted the Teachers’ Retirement System during that time.



Pay-as-you-go

Compounding the problem was that the retirement systems used different methods to determine their costs and future obligations, making it difficult to compare liabilities. A law passed in 1985 required the systems to use a uniform method. Interestingly, the change resulted in total pension debt dropping by more than $1 billion.

It was a temporary reprieve. COGFA’s predecessor, the Illinois Economic and Fiscal Commission, explained the practice common in the 1980s when James Thompson was governor.

“Over the past several years, the state contribution to the retirement systems has been based on the projected benefit payments (payout) for the five systems,” a 1986 report said. It added that Thompson was recommending the state contribute 60 percent of that projected payout in the 1987 budget.

Sandor Goldstein has done actuarial work on state pensions since 1979. He said that instead of basing payments on actuarial standards, in which contributions are made as benefits are earned, the state was basing payments on a “pay as you go” approach.

“You wait until the employee retires and whatever is needed to pay his pension, that’s what you contribute,” Goldstein said. “That was always quite a bit less than the actuarial cost.”

For a while, Goldstein said, the state at least contributed 100 percent of the pay-as-you-go costs.

“Then, during the Thompson administration, they came up with this proposal that they felt they really don’t need to contribute even this 100 percent of payout because there’s been good years of investment return,” Goldstein said. “Because of that, they proposed they would only pay 60 percent of the payout.

The original plan was to pay as you go for only one year, but that stretched into several years. Former Sen. Howard Carroll, D-Chicago, was chairman of the Senate appropriations committee during Thompson’s tenure. He said he tried to put money into the budget for 100 percent of pay-as-you-go costs.

“He (Thompson) finally calls me in,” Carroll said. “He says I need (the lower amount) for one year. The next year he puts it in for 50 percent.”

Didn’t see problem

But Carroll also said “we didn’t really think it was a problem.”

“We never had anyone say to us we were wrong then,” Carroll said. “We didn’t look to unfunded liability because we didn’t think that was a problem.”

In 1988, lawmakers passed a reform bill intended to pay off the pension debt in 40 years. Even then, however, they acknowledged the state couldn’t afford to do so without a tax increase.

Critically, the law didn’t contain a mechanism to force the state to make the full pension payments, and it was basically ignored.

Jim Edgar took over as governor in 1991.

“We spent the first three or four years just getting the budget under control,” said Edgar’s former budget director, Joan Walters. “Finally, by 1994 we were able to focus attention on pensions.”

In 1994, Edgar developed a plan that gradually increased pension payments with a goal to having the five systems achieve a 90 percent funding level by 2045. Unlike the 1988 bill, though, the Edgar plan included a provision that state pension payments would be made automatically, just as state bond payments are made.



Backloaded payments

The plan has come in for criticism because the increased payments were backloaded. The increases started gradually, but then increased sharply.

“We were still coming out of the economic problems of 1990,” said Allen Grosboll, a senior aide to Edgar. “The decision was we needed a plan in place, even if it that means some of it was backloaded.”

The Civic Committee of the Commercial Club said Edgar’s approach “was structurally flawed from the beginning.” Not only was the payment plan backloaded, it wasn’t based on actuarial requirements. Consequently, pension debt continued to balloon.

“When the deal was cut, at the time editorially it was supported, the leaders supported it and the pension systems supported it,” Grosboll said. “I think it’s a little bit unfair to criticize the plan that was put in place based on the information we had at the time.”

Grosboll contends the real damage to the payment plan was done while Rod Blagojevich was governor. During the 2006 and 2007 budget years, which coincided with Blagojevich’s re-election bid, lawmakers shorted payments to the pension systems by $2.3 billion. Right after that, the worldwide recession set in, devastating investment returns just when some of the steepest increases were scheduled in the pension ramp.

Goldstein said he has a point.

“In those two years they just arbitrarily said, ‘we’re going to contribute this much less,’” Goldstein said. “However much less they contributed, that directly increased the unfunded liability.”

At the same time, lawmakers approved some mild pension reforms that were supposed to save money. But Msall said the state actually had to pay more over the long term because of the $2.3 billion shortage.



Debt burden

Even when the state made its pension payments, it sometimes came at a cost. In 2009 and 2010, the state borrowed money to make the payments, a debt that will be repaid over several years.

“It’s $1 billion a year for debt service,” said Dan Long, executive director of COGFA. “That takes all of your revenue growth.”

The state’s long history of shortchanging pensions also has given public employee unions fodder to resist the changes in pension benefits that are part of most reform plans. Employee contributions have been deducted all along from their paychecks, the argument goes, so it is unfair (not to mention illegal, in their opinion) to change benefits because the state didn’t keep up its obligations.

But some lawmakers contend that argument doesn’t take into consideration what would have happened if pensions had been fully funded. Spending for education or state operations might have been cut to pay for pensions, and the impact might well have been felt by public workers.

“I don’t have a lot of sympathy for those folks who claim that we underfunded pension systems,” said Senate President John Cullerton, D-Chicago. “They were in there lobbying for more money for the school aid formula, for paying our contracts that they negotiated with huge benefits, for more money for higher education.”



Doug Finke, a state Capitol reporter for GateHouse News Service, can be reached at (217) 788-1527. Follow him at twitter.com/DougFinkeSJR.

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How much is enough for pensions?

Illinois’ state-funded pension plans have a funding ratio of 39 percent, the amount of pension benefits already earned that are covered by assets held by the systems.

Everyone agrees that isn’t enough. There is a split, however, on just what is the proper funding ratio. Is it 100 percent? 90 percent? Even 80 percent? Setting a lower funding target eases pressure on finances needed to reach that target.

Sen. Daniel Biss, D-Evanston, and Rep. Elaine Nekritz, D-Northbrook, have developed a comprehensive reform plan that is before lawmakers. It sets a goal of 100 percent funding of the pension systems.

Biss said that while a lower funding level wasn’t considered for this plan, it has been in the past as part of pension reform discussions.

“What we found is that it certainly saves some money, but always less than we would have expected,” Biss said.

Biss said two advantages to the higher funding level target are that it pays down the pension debt more quickly, and “that’s what actuaries demand. It’s what the ratings agencies are most desirous of seeing as well.”

In a document produced last year, the American Academy of Actuaries said a 100 percent funding should be the goal of pension plans unless a different goal is clearly identified and the consequences fully understood.

“I think generally it’s pretty well accepted you should aim for 100 percent in the long run,” said Sandor Goldstein, an actuary who has worked on state pension plans since 1979. “Without that, you are not really achieving proper funding.”

When Jim Edgar was governor, the state adopted its current plan to pay off pension debt. It set a goal of 90 percent funding. The Commission on Government Forecasting and Accountability said the target apparently was set because that was the average funding level of public pension systems when the plan was adopted.

In a 2011 report on the Illinois payment plan, COGFA concluded “based on an analysis of national trends ... the commission believes that a target funding ratio of 90 percent remains an appropriate goal.”

However, Civic Federation president Laurence Msall disagrees.

“Any reasonable actuary will tell you the appropriate number to fund your pensions is 100 percent,” Msall said. “The least expensive funding level to maintain is 100 percent.”

In the private sector, Msall said, a pension plan that falls below 90 percent funding invites federal intervention.

But there are those who argue public and private pensions don’t have to be funded at the same level. Having 100 percent funding for a private sector pension makes sense because a company could go out of business and you’d want all pension benefits covered. A state government isn’t going out of business, so there is never a need for 100 percent funding, they say.

“A state government doesn’t go bankrupt like a business,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability. “All these attempts to say it should be like a private sector pension fund are wrong.”

Martire said an 80 percent funding ratio is adequate. Full funding assumes that all workers will retire at one time and the state will have to pay their pension benefits.

“You never have to pay all the benefits promised (at once),” Martire said.

Biss, though, said anything less than 100 percent will cost the state more in the long run. The state essentially will be making interest payments on whatever amount is owed that is less.

Still, he said he’s willing to consider a lower funding ratio for his plan if it still achieves the cost savings necessary.

“In my view, it’s definitely on the table,” Biss said.