Shortfall Threatens Illinois Pension System

Ida Calloway relies on her state pension to make ends meet. i i

After working 24 years as a mental health technician for Illinois, Ida Calloway says she and other state retirees deserve every penny they've earned through their pension. David Schaper/NPR hide caption

itoggle caption David Schaper/NPR
Ida Calloway relies on her state pension to make ends meet.

After working 24 years as a mental health technician for Illinois, Ida Calloway says she and other state retirees deserve every penny they've earned through their pension.

David Schaper/NPR

If states could go bankrupt, Illinois might be the first.

State finances are in such a mess that many experts say the "Land of Lincoln" is on borrowed time and money.

One of the biggest issues is a huge unfunded pension liability. According to the Pew Center on the States, Illinois is worst in the nation when it comes to setting aside enough money for its pensions. Its analysis of states' pension funds in 2008 found Illinois had set aside just 54 percent of the money that's been promised to its state workers and retirees.

Today, the unfunded pension liability in Illinois is much greater than the pension funds' assets, and has ballooned to a staggering $77.8 billion.

"That means every man, woman and child in the state of Illinois is on the hook for $6,031 in pension promises that we don't have the assets for," says Lawrence Msall, president of The Civic Federation, a Chicago-based group that keeps tabs on state and local government finances.

"And that [pension underfunding] has grown dramatically by almost 300 percent to 400 percent over the last decade, because the state has used gimmicks," Msall says. "It has ignored its pension obligations, it has borrowed or had partial pension holidays, and it has just flat out not made the adequate contributions to the pensions."

A History Of Underfunding

Msall and others say for decades, Illinois lawmakers and governors have failed to set aside enough money for pensions. In recent years, they've made matters worse by skipping some pension payments altogether and borrowing money to make others.

This January, Illinois issued $3.5 billion in pension obligation bonds to make this year's payment toward the state's pension funds. The state must begin repaying that debt next year, when the first payment will be $800 million. That leaves the state with $800 million less for schools, roads, heath care and other needs, and it will still have to make next year's payment to the pension funds, which will rise to over $4 billion.

"Basically, the state of Illinois is upside down on its home mortgage and it's maxed out its credit cards, and it's applying for more credit cards," Msall says.

Risky Business: Pension Funds With Less Than Conservative Asset Allocations

When it comes to pension funds, most people hope their future retirement income will be managed in a conservative way. These ten funds top the list of state funds with a "risky" investment strategy, meaning the lion's share of investments are not in fixed income or cash holdings.

Fund name "Risk"
1. Commonwealth of Pennsylvania State Employees' Retirement System
Total assets: $25.6 billion
86.1%
2. Massachusetts Pension Reserves Investment Management Board
Total assets: $41.8 billion
82.9%
3. Teacher Retirement System of Texas
Total assets: $91.4 billion
82.0%
4. Teachers' Retirement System of the State of Illinois
Total assets: $31.3 billion
81.5%
5. Louisiana Teachers' Retirement System
Total assets: $11.8 billion
81.0%
6. Alaska Retirement Management Board
Total assets: $16.5 billion
80.6%
7. Kansas Public Employees Retirement System
Total assets: $11.4 billion
80.0%
8. Illinois State Board of Investment
Total assets: $11.9 billion
78.2%
9. California State Teachers' Retirement System
Total assets: $130.5 billion
78.0%
10. State of Michigan Retirement Systems
Total assets: $50.9 billion
77.7%

Complete List

Notes:

The "risky" investment calculation is based on a formula derived by Northwestern University finance professor Joshua Rauh. It consists of the combined percentages of all investment types listed, except fixed-income and cash.

Illinois' bond rating is now lower than any other state except California, so it pays high interest rates, and if the bond rating is downgraded again the state soon may not be able to borrow at all.

Bolstering Benefits While Underfunding Pensions

At the same time that Illinois lawmakers and governors have been underfunding the pensions, they've been sweetening pension benefits.

"The pensions have become with the passage of time more generous — out of sync with what's going on in the private sector," says R. Eden Martin, President of the Civic Committee of the Commercial Club of Chicago, a civic-minded business group that has issued a report showing Illinois at a tipping point with its underfunded pension funds.

"For example, in Illinois, if you're a state employee, you can retire at either 60 or 55 depending on which pension plan you're in, with a full pension if you have enough years in the pension system," Martin says. "That's pretty early."

State employees can retire at a relatively young age and when they do so their health insurance premium becomes free, Martin says, calling it a "Cadillac-type" plan.

Gaming The System

He and other critics say some state workers have been able to get big promotions just before they retire, gaming the system so their pension is based on a much higher salary from the end of their career. And Martin says Illinois state retirees get automatic 3-percent annual pay increases, regardless of the rate of inflation.

His group and others are pushing Illinois lawmakers to approve reforms to raise the retirement age to 67, and to shift to a defined-contribution retirement plan for future employees, rather than the current defined-benefit pension plan.

Illinois' constitution protects pension benefits already guaranteed to state retirees and workers, so nothing already promised can be taken away. And many of the retired teachers, clerks, and others who live on a state pension now dismiss the notion that their pension benefits are overly generous.

Working Hard For A Future Pension

"I don't know any state retiree who is living high on the hog," says Ida Calloway, 70, a state retiree who lives in a modest, 1,100-square-foot ranch home in Chicago's southern suburbs.

"There's nothing fancy here," Calloway says. "The TV, I've had since 1992; the furniture I've had since 1993, so there's nothing new ... I drive a 13-year-old car."

Calloway gets a pension worth a little more than half of her final salary after working 24 years as a mental health technician in a state home where she bathed, dressed and fed people with developmental disabilities. It comes out to $1,473 a month after taxes for work she describes as extremely difficult.

"There was some who couldn't walk, couldn't feed themselves," Calloway recalls. "I had to learn how to massage food down their throat. It was very challenging. It was hard. You'd get feces thrown on you; you'd get spit on, hit."

Calloway says she and other state retirees deserve every penny they've earned and she doesn't think it's fair to cut benefits or raise the retirement age for current or future employees who do this kind of work. Physically, she says the work had become too demanding when she retired at 62, or she would have worked longer.

The American Federation of State, County, and Municipal Employees (AFSCME) says Illinois pension benefits are actually a bit below average compared to other states. The union adds that in Illinois, employees contribute at least 4 percent of their pretax salary to the pension funds. Some employees also don't pay Social Security and therefore won't get these benefits.

"If the problem was created by underfunding, the solution is funding," says Hank Scheff, AFSCME's director of research and employee benefits.

A Push For Income Tax Increases

AFSCME is one of many groups pushing for a state income tax increase that many believe is long overdue in Illinois. Retired and current state workers are a potent political force in a state in which Democrats control both chambers of the General Assembly and every statewide elected office.

That makes reducing benefits or raising taxes a difficult choice for state lawmakers in this election year.

Legislative leaders already have said a tax hike proposed by Democratic Gov. Patrick Quinn is not likely to pass this session.

But experts say kicking the can down the road one more time puts Illinois' pension funds on the brink of going broke within the next decade.