Illinois Governor Pat Quinn proposed several changes to the state’s pension plan last week designed to shore up the state’s fund that has one of the nation’s largest unfunded liabilities. The Chicago Tribune summarizes the potential changes:
Illinois’ unfunded pension liability has grown to a huge $83 billion after the state skimped on funding for years. In fiscal 2013, which begins July 1, the state’s payment into the pension system will hit $5.2 billion, or 15 percent of general revenue spending – up substantially from 6 percent in 2008, according to the governor’s office.
Quinn, a Democrat, said his plan would leave the system, which covers state, local school, university and community college employees, 100 percent funded by 2042. Without it, he said Illinois will have expected payments totaling nearly $310 billion between 2012 and 2045, when a $32.7 billion unfunded liability would still remain.
“This plan rescues our pension system and allows public employees who have faithfully contributed to the system to continue to receive pension benefits,” he said.
Under the proposal, workers’ pension contributions would increase by 3 percent, while cost-of-living adjustments would be reduced. A retirement age of 67 would also be phased in.
Governor Quinn says that these changes will save state taxpayers between $65 and $85 billion in the next 30 years. The plan would also take steps to try to reduce abuse of the public sector pension system on the part of union employees that the Tribune exposed this fall.
The reforms are designed to bring the Illinois pension fund in line with the practices that the Governmental Accounting Standards Board advocates. While these reforms are marginal improvements toward putting the pension fund on a sustainable trajectory, they do not address the fundamental problem with the GASB standards. Public pensions are guaranteed benefits, so they should be valued at the risk free discount rate and invested in safe assets like US Treasury bonds. The unfunded liability is, in reality, much larger than what GASB standards suggest because they do not require the use of the risk free discount rate.
Furthermore, the reforms would do nothing to ensure that future politicians do not continue the decades of irresponsible practices that have gotten the state’s fund to where it is today. While the plan says that going forward the state will make the required contributions, we know that current legislators cannot tie the hands of future legislators. Future policymakers could easily return to skipping pension fund payments and painting a rosy picture of the funds assets with accounting gimmicks.
As Eileen and Ben point out in their paper “Illinois’s Fiscal Breaking Points,” the state needs larger institutional reforms to achieve fiscal stability and improve its bond rating. These changes could include a constitutional cap on the unfunded liability, or, better, a transition away from defined benefit public pensions to a defined contribution system.