The manufactured crisis over Illinois pensions

25 Apr

Practically everyone knows that Illinois’ public pension systems are only about 45 percent funded. But not everyone knows that 45 percent is actually an improvement over the 40 percent funding of the past.

The historical record of Illinois’ 1970 Constitutional Convention shows the state’s unfunded pension liability wasn’t considered a crisis when delegates included a clause to protect pension rights. Today, one person who participated in the convention says the modern hysteria over Illinois’ pension systems is unrealistic and unhelpful.

�“It’s absolutely a manufactured crisis,” says Ann Lousin, a professor of law at The John Marshall Law School in Chicago. Lousin was a research assistant at the 1970 convention. She told Illinois Times in a recent interview that in the 1970s, there wasn’t a consensus that the ongoing unfunded liability was a crisis.

The state’s unfunded pension liability – which measures how much money the state needs to collect in order to pay all current and future pensions – was $2.5 billion in 1970, according to the constitutional convention transcript. As of 1970, the unfunded liability had grown from $359 million 22 years earlier. During that time, the state’s pension systems were collectively funded at about 40 percent, Lousin says.

She says unfunded liability is an unrealistic measure of a pension fund’s health because it assumes that every employee could retire at the same time.

“When I have asked the experts if that could ever happen, i.e. that absolutely everybody eligible would retire at once, they say, ‘Of course it wouldn’t happen,’” Lousin said.

She says it would be more realistic to estimate pension liabilities with public employees retiring more slowly instead of all at once.

“Sometimes pension experts say to me, ‘Yes, that’s the best way to do it, but we don’t do it that way,’” Lousin said.

However, other states fund their pension systems at around 70 to 100 percent, making Illinois look bad by comparison in the eyes of credit ratings agencies.

For fiscal year 2014, Illinois must pay $6.8 billion total into the five public pension systems because of a state law enacted in the mid-1990s. If followed, the law purports to fund the state pension system at 90 percent by 2045. However, the ballooning contributions required by the current law put significant pressure on other parts of the state budget – particularly social services.

Despite the Illinois Constitution’s pension protection clause, which makes public pensions a contractual right that cannot be “diminished or impaired,” Illinois lawmakers today are attempting to cut the state’s future pension contributions by reducing the retirement benefits of state employment in ways they hope won’t be struck down in court.

During debate on the pension protection amendment at the 1970 convention, delegate James C. Parkhurst, an attorney and former state representative from Peoria, said Illinois had no history of “welching”on pension benefits when they come due.

�“If we are going to get to the point in the state of Illinois where we can’t pay the pensions, we’re down the drain anyway; and anything you put in this constitution is not going to change that one bit,” Parkhurst said in 1970.

�Currently, Illinois’ five pension systems can pay out benefits to existing retirees. The Teachers’ Retirement System, for example, is the largest public pension system in Illinois and, despite carrying an unfunded liability since 1953, TRS has always paid its retirees on time.

“The truth is TRS will have enough money on hand to pay pensions well into the future,” wrote TRS executive director Richard Ingram in a 2011 letter to Illinois Times.

Ronald Smith, a professor of law at The John Marshall Law School in Chicago, was a delegate at the 1970 Con Con. He told Illinois Times in a recent interview that the convention started at a time when many businesses began reneging on pension promises made to workers in the private sector. The fear that the problem could spread to public pensions set the stage for the debate over the pension protection clause, Smith said.

The “home rule” powers newly included in the 1970 constitution allowed local governments to levy taxes, issue bonds, pass regulations and more, but police and firefighters worried that local governments might use home rule powers to back out of pension promises.� �

During debate at the 1970 convention, delegate Henry Green, a businessman from Urbana, said the Illinois General Assembly was failing to make required pension contributions – as they would continue to do repeatedly over the course of the next 40 years – and public employees were “beginning to lose faith in the ability of the state and its political subdivisions to meet these benefit payments.”

As a result of the General Assembly’s inconsistent pension contributions and public perception that unfunded pension liability is a crisis, lawmakers are now searching for ways to cut future contribution costs. Most of the proposed solutions involve giving public employees a choice of which existing benefits get cut, and it’s certain that unions will challenge in court the constitutionality of any such solution. Ironically, Illinois’ solutions may end up hurting the very same groups who pushed for pension protections more than 40 years ago.

via The manufactured crisis over Illinois pensions.

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