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Earlier this week, the Securities and Exchange Commission charged Illinois with securities fraud. The SEC accused the state of misleading investors by understating the depth of the pension crisis.
The most revealing statement from the SEC:
“The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations — a condition that worsened over time.”
Let’s decode the SEC’s insider speak.
The statutory plan is the current law — also known as the Edgar pension ramp. When the Edgar ramp passed, it was hailed as the bipartisan compromise that would fix the state’s pension problem. By design, the “ramp” backloaded the majority of the state’s pension contributions — the goal being to stabilize the system and reach 90% funding by 2045.
We created the following chart to show what has happened as a result of the Edgar ramp.
The chart highlights the unpredictable nature of defined benefit plans and the failure of the Edgar ramp. Several factors contributed to the growing unfunded pension liability, including missed investment returns, underfunding, worker pay hikes, benefit increases and mistaken actuarial assumptions.
These factors create massive uncertainty for future budgets. For example, when the ramp was created, Illinois’ fiscal year 2014 pension contribution was projected to be $3.7 billion. The actual contribution for fiscal year 2014 will be $6.8 billion — nearly twice as much as what was predicted. Even more disturbing is the fact that taxpayers have pumped $8 billion more into the pension system than the original pension ramp called for.
Unfortunately for workers and taxpayers, lawmakers are looking to repeat the mistakes of the past and replace the Edgar ramp with the Cross-Nekritz ramp. Only this time, lawmakers want taxpayers to guarantee their plan in order to appease union bosses.
Are you willing to guarantee Springfield’s pension fix?
Should workers continue to trust lawmakers to manage their retirement savings?
We don’t believe so, which is why we’ve crafted a plan that actually solves the pension crisis by moving away from the unpredictable, defined benefit model and replacing it with a stable, 401k-style plan. Today, more than 10,000 Illinois government workers participate in a 401(k)-style plan that puts them — not politicians — in charge of their retirement.
Our plan is not only secure, but it also immediately cuts the state’s unfunded liability by nearly half and eliminates the unfunded liability by 2045. What’s more, our plan replaces the irresponsible ramp with level annual payments.
State Reps. Tom Morrison and Jeanne Ives introduced House Bill 3303 modeled after our plan — and it’s beginning to gain traction. We know that passing real reform is a heavy lift, but we believe enough information is coming to light that workers and taxpayers will see the need to shift to 401k-style plans.
Illinois is in crisis. According to official government numbers, Illinois has an unfunded pension liability of $96 billion – the worst in the nation. This heavy debt burden, combined with the state’s culture of out-of-control, wasteful spending, has driven the state into an economic death spiral.
Illinois cannot be economically prosperous until real pension reform is implemented. And without reform, government workers are at risk of not having a retirement at all. Illinois’ largest and most troubled pension system, the Teachers’ Retirement System, is only 40 percent funded. Even the executive director of the fund has said that TRS will run dry by 2029 if reform is not enacted. Meanwhile, taxpayers – who are tapped out – continue to see money meant for core services used by lawmakers to fund retirements.
Over the years, Illinois has enacted a variety of pension “fixes.” Former Illinois Gov. Jim Edgar’s widely hailed pension ramp, which was meant to fund state pensions by 2045, failed within 10 years of its inception. Former Gov. Rod Blagojevich borrowed $10 billion to pay for pensions. His successor, current Illinois Gov. Pat Quinn, borrowed another $7 billion to pay for pensions. These plans all failed to fix pensions because they ignored the root cause of Illinois’ problem: a defined benefit system.
The state must change course. The Illinois Policy Institute’s plan shows lawmakers how.
Reforming pensions is the foundation of pulling Illinois out of its economic death spiral. But pension reform alone isn’t enough. As outlined in this publication, reviving Illinois’ economy will also require implementing a multistep plan that: returns $7 billion to taxpayers by repealing the 2011 income tax hike and implementing spending reforms; pays down the state’s $9.3 billion in unpaid bills by 2016; and improves health care and education to ensure the state’s most needy residents receive the support they deserve.
Paired with the Illinois Policy Institute’s pension reform plan, these measures provide Quinn and the Illinois General Assembly a roadmap to making Illinois first in economic outlook and job creation.
Summary of the problem
Illinois has the worst-funded pension systems in the nation. The unfunded liability currently stands at more than $96 billion according to official government numbers, and that number grows by $21 million every day lawmakers fail to enact reform. The problem at the root of Illinois’ pension crisis is the unmanageable, unsustainable defined benefit system.
Summary of our solution
The only way to end Illinois’ pension crisis is to empower government workers by transitioning benefits for all future work to a defined contribution system. The Illinois Policy Institute’s solution cuts unfunded pension debt in half and includes a defined contribution plan as the main pillar of its reforms while protecting already-earned benefits for government workers.
Summary of why this works
This is the only proposal that ultimately solves Illinois’ pension crisis. This plan also modernizes the state’s retirement system by eliminating political control and giving government workers the secure retirement they deserve. Ultimately, these reforms restore fiscal order to the state by eliminating unsustainable pensions and unfunded liabilities. This paves the way for the economy to flourish, fostering an environment where businesses can thrive and create the jobs Illinoisans need.
Here are the plan’s major outcomes:
- Reduces fiscal year 2014 unfunded liability by $46 billion. This 46 percent reduction brings the unfunded liability down to $55 billion from $101 billion, the government’s fiscal year 2014 projection.
- Reduces fiscal year 2014 state contributions to $4.7 billion, a nearly 30 percent drop from $6.7 billion under current law.
- Protects constitutionally guaranteed benefits already earned by retirees and current workers.
- Empowers current workers to control their retirement savings going forward with 401(k)-style plans modeled after the existing State Universities Retirement System’s 401(a) plan.
- Reduces the state’s annual pension contribution by more than $2 billion in the first year and eliminates the state’s unfunded liability by 2045. Ends the irresponsible repayment ramp and instead moves to level annual payments.
- Freezes cost-of-living adjustments until retirement systems return to healthy funding levels.
- Aligns the retirement age with Social Security’s retirement age while still protecting workers who are nearing retirement under current law.
- Promotes accountability and fiscal responsibility by requiring local governments to pay the employer share of their employees’ retirement savings plans.
- Makes government workers’ retirement savings plans portable, giving workers more flexibility and freedom to move their plan from job to job.
Four years ago, Illinois Gov. Pat Quinn took over a government trapped in a cycle of overspending and financial decline. Quinn had the unique opportunity to provide the fiscally responsible and moral leadership that Illinois so desperately needed.
At that same time, the Illinois Policy Institute introduced its first alternative budget. The Institute’s alternative budget offered Quinn and the General Assembly a plan to balance Illinois’ budget without a tax hike, rein in out-of-control spending and provide better outcomes for Illinoisans.
Fast forward to 2013. Illinois’ leadership failed to capitalize on the opportunity to restore Illinois’ financial stability. The state’s fiscal condition now is worse off than it was four years ago. Illinois’ unpaid bills have more than doubled as a result of yearly budget deficits. Illinois has the worst-funded pension systems in the nation. Lawmakers passed a record income tax increase in January 2011, and state debt continues to soar. Illinois now has the worst credit rating in the nation.
And when it comes to jobs and economic opportunity for the average Illinoisan, the state’s situation is still gloomy. Illinois’ unemployment rate is 1.6 percentage points higher than the average of its neighboring states, more than a million Illinoisans are unemployed and underemployed, and people continue to leave the state at an alarming rate.
All of this could have been avoided if Illinois had made responsible decisions.
The 2011 tax hike is scheduled to sunset in January 2015 and legislators must keep that promise. Illinois’ political leadership needs to discern what government can and should be doing, and return to the basics of good public policy – spend within its means and operate under a balanced budget.
Budget Solutions 2014 is the Institute’s fifth alternative budget proposal. This plan returns $7 billion to taxpayers by repealing the 2011 income tax hike and implementing spending reforms; pays down the state’s $9.3 billion in unpaid bills by 2016; reforms the state’s retirement system; and improves health care and education to ensure the state’s most needy residents receive the support they deserve. Paired with the Illinois Policy Institute’s pension reform plan, these solutions provide Quinn and the General Assembly with the reforms needed to make Illinois prosperous again.
Budget Solutions 2014 calls on lawmakers to:
- Implement the Illinois Policy Institute’s pension reform plan to save an estimated $2.011 billion
- Strengthen Illinois’ balanced budget requirement
- Enact a responsible spending limit
- Establish a competitive grant funding system to save an estimated $180 million
- Reform state retiree health insurance to save an estimated $685 million
- Empower patients with health care choice to save an estimated $1.45 billion
- Eliminate ineffective revenue sharing programs to save an estimated $1.7 billion
- Rededicate General State Aid money for education to save an estimated $750 million
- Improve quality and efficiency in human services to save an estimated $512 million
- Right-size state payroll to save an estimated $318 million
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Don’t wait until you’ve got gray hair to start thinking about Social Security. If you do the right things now, you can maximize the benefits you’ll receive.
While defined benefit pension plans play less of a role in corporate America than they did in the heyday of “The Man In The Gray Flannel Suit”, millions still depend on them for stable retirement income. Unfortunately, corporations are running into headwinds as they try to maintain the viability of their plans.
Treasury and Risk notes that corporate plans are faced with a painful asset-liability squeeze, and plan deficits are rising sharply despite good returns in the equity markets. The article highlights a key finding by Mercer, the prominent financial consulting firm:
It estimates the plans’ aggregate funded ratio has fallen to 70%, down from 75% at the end of 2011 and 81% at the end of 2010.
While pension plan assets are closely tied to market value, plan liabilities are mathematically determined by using an assumed interest rate to discount future cash outlays, and those rates must be reasonably reflective of current interest rates, which are of course at rock-bottom levels as a result of monetary policies designed to fight the recession. As a result, plan liabilities are growing much faster than plan assets, and plan sponsors may be tempted to freeze or terminate their plans.
Not to worry, though- there is always Social Security.
Lavish public safety pensions often add billions of dollars of taxpayer debt to local districts. It’s important that voters pay close attention to the down ticket candidates and find out where they stand on compensation and pensions. Far too often unions are able to influence elections and get their handpicked candidates into office. And taxpayers are getting burned in the process.
California State Senate aide retired in 1969 at age 56 after 22 years of work with a “super escalator” pension from the state. Almost a decade after his death he is awarded $7.7 million in an additional pension payout.
A $500 billion pension liability tsunami, that is!
California is facing a massive $500 billion pension liability tsunami. Governor Jerry Brown is proposing some positive reforms to the state pension system, but his reforms won’t be sufficient to deal with the immediate crisis.
AFP’s California State Director David Spady explains how lifeguards in Newport Beach are making over $200,000 salaries and million-dollar pensions.
Newport Beach lifeguard’s lucrative salaries and pensions costing taxpayers millions each year. It’s time for some common sense.