The Economist State pension systems Illinois lawmakers fail to tackle the state’s pension crisis Jan 26th 2013 | CHICAGO | From the print edition OF ALL the states, Illinois seems the most blatant example of state finances gone awry. Its ballooning pension system is to blame. The state’s unfunded pension liabilities are close to $100 billion, and the governor, Pat Quinn, a Democrat, has warned that this figure is now growing by $17m a day. A special report by the state’s Commission on Government Forecasting and Accountability in November put the pension funding ratio (assets to liabilities) at 39%. The governor has been trying for most of the past year to focus legislators’ attention on the problem. Democrats control the Capitol in Springfield. Despite a number of legislative efforts and a public-relations push featuring Squeezy the Pension Python (see overleaf), the General Assembly closed without a deal on January 8th. The pension squeeze in Illinois is the result of years of state underfunding, as well as absurdly optimistic assumptions about investment gains. Every year pension payments swallow a growing proportion of the state budget, which varies between $30 billion and $35 billion. Abdon Pallasch, the assistant budget director, says pension payments for fiscal 2013 will be $5.1 billion and, for fiscal 2014, $6.1 billion. (In 2008 payments were $1.8 billion.) He adds that the pension squeeze has already closed prisons and juvenile detention centres, and has reduced inspections by the state Department of Agriculture. Cuts have also been made in state aid to colleges and universities, student scholarships and pre- kindergarten places. Joshua Rauh, a professor of finance at Stanford University in California, has studied the revenue demands of various public-employee pensions nationwide. He calculates that, for the Illinois system to be fully funded in 30 years, additional revenue equivalent to $1,907 per household would be required (assuming annual returns of 2% above inflation). The sheer size of this figure, says Mr Rauh, suggests that the state may not be able to tax its way out of the problem. Shaky state finances are already deterring businesses from investing in Illinois, and taxes were raised substantially not all that long ago. Technical solutions include reducing or eliminating cost-of-living increases in pensions, increasing the retirement age and bringing in a pensionable salary cap. Unions are naturally opposed to any attempt to water down pension obligations, and point to a promise in the state’s constitution that the benefits of pensions cannot be diminished or impaired. Nonetheless, some feel that a deal of some sort could be done. State workers, for example, currently receive free health-care benefits in retirement, and there is no constitutional right to that. The state’s reluctant lawmakers are also facing pressure from the increasing impatience of ratings agencies. The credit worthiness of Illinois has already been downgraded several times. On January 11th Fitch revised its fiscal outlook to negative. More ominously, it ordered the state to limit, within six months, the impact of rising pension payments on the budget, while bolstering funding for the system. As long as lawmakers do nothing, the state’s problems will become ever more expensive and ever harder to solve.
Posted on: Tue, 21 Jan 2014 01:32:59 +0000