In January, George Mason University published a survey of the financial solvency of our country’s 50 states. Illinois came in at 48th place, just in front of Connecticut and New Jersey. The Land of Lincoln caught a bit of a break, it seems. Perhaps the extent of Illinois’s legacy pension and healthcare costs was not fully appreciated by the survey’s author. In the world of overboard promises to public employees, Illinois is quite the outlier.
To understand the extent of the crisis, you need a little background information.
Once upon a time in public life in Illinois, municipal, county, and state employment was a much less lucrative proposition than it is today. Public-employee wages lagged far behind commercial rates. After World War II, governmental bodies began to add health-benefit packages and defined-benefit pension programs to compete with commercial employers. As in the rest of America, overall wages grew rapidly in the 50’s and 60’s, and public wages, too, trended upward. By the 70’s, the United States had begun to deindustrialize in earnest. Because Illinois was an industrial powerhouse, the state was hit especially hard by this trend. Responding to increasing pressure, many commercial employers dropped their defined-benefit pension plans in favor of defined-contribution and private-savings plans. Public employers in Illinois did not follow their lead.
Indeed, despite the economic downturn, public wages and pension benefits continue to grow rapidly here, even to this day.
Postindustrial political economics have not been kind to the state. In recent decades, as the Illinois economy lagged, the state’s politics have shifted hard to the left. Currently, both state houses have veto-proof Democratic majorities, and our governor is a populist. Electoral-map tinkering seems to ensure that the status quo will remain in place for another ten years. The state’s overall population is falling, while the public-aid rolls continue to expand. The agricultural base of Illinois remains healthy, but it is unable to absorb even a fraction of the many private-sector jobs that have been lost. In fact, even ag employment is shrinking a bit because of increased productivity. Recently, the state legislature decided to follow the federal lead and expand Medicaid eligibility for adults without dependents.
With considerable fanfare, late last fall the Illinois legislature passed, and Gov. Pat Quinn signed, a “major” pension-reform package, which had been a couple of years in the making. This measure modestly alters cost-of-living adjustments, lowers salary caps, and raises the retirement age for younger state employees, in addition to making some administrative changes that affect four out of the five public-pension systems on the books. The fifth plan covers the state’s judges. The feeling in the legislature was that it might be wise to leave the judicial system alone because there are, after all, provisions in the Illinois constitution specifically prohibiting the diminishment of pension benefits. Since this new pension package is certainly headed for the courts, the legislature apparently hoped to forestall a conflicted judiciary.
The remaining point of interest here is that the reform bill contained an “actuarially sound funding schedule,” which allows for the reduction of the state’s 2015 annual pension contribution from roughly seven billion dollars to four billion per year.
Using audited data from June 2012, the numbers for the five plans are as follows: Actuarial assets stand at $62 billion, while the present value of future benefits is $157 billion. That leaves a net unfunded balance of $95 billion. Press accounts have estimated that the reform-package savings (as yet untested in the courts) will reduce this unfunded-liability figure (the $95 billion) by $20 billion. In a recent development, changes in public-accounting standards have dramatically altered the present-value calculations. New regulations will most likely lower future annual earnings projections from eight percent on average to five percent—a sharp reduction of overall expectations. It will be interesting to see upcoming 2013 audit reports on these five plans. I expect to learn shortly that the present value of future benefits has grown to somewhere north of $200 billion—creating an unfunded balance in excess of $150 billion.
For comparison, the same George Mason University study estimated New Jersey’s unfunded pension liability at $25 billion.
There remains another chapter to this story, and it is an exclusive for readers of Chronicles. In addition to the five large, widely discussed Illinois state pension plans, there are 12 big public pension plans in operation here—all but one of which are in the same financial straits as the five state plans. These additional plans provide retirement benefits to Chicago and Cook County public employees, as well as to many of the public employees in the hundreds of downstate jurisdictions. The total enrollment in these 12 plans exceeds 450,000 people. The actuarial assets of that group of plans stand at $65 billion, while the present value of future benefits is $107 billion—leaving a net unfunded balance of $52 billion. And those last two numbers are subject to considerable upward revision in light of the new accounting regulations mentioned above.
Illinois’s state budget balancing is a growing concern as well. Income taxes here were boosted 60 percent last year, which has increased the industrial exodus. The total discretionary budget for the state is in the vicinity of $35 billion. State revenue has been drying up, despite the income-tax increase. The recent pension-reform package gives the legislature cover to reduce its annual pension contribution by three billion dollars. Naturally, that is a huge bonanza for the “infrastructure” lobby. There is considerable sentiment afoot for adding a progressive feature to the state’s income tax come fall 2014.
Local governments are also pressed by their future pension obligations. Property tax is the primary source of income for Illinois cities, and real-estate values are falling statewide.
Hope is on the horizon for Illinois citizens, however. The First Family will be returning here in a couple of years. Perhaps then President Obama will be able to provide us with the necessary fiscal leadership. Stay tuned!