Why Should You Care About The Illinois/New Jersey/Connecticut Pension Crisis? A Thanksgiving Dinner Discussion-Starter

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First of all, no one wants to talk about Donald Trump at the dinner table. They don’t want to hear your opinions on how corrupt and deserving-of-impeachment Trump is. They don’t want to hear your opinions on how, just like King Cyrus, he is a nonbeliever nonetheless doing God’s work.

Are they more willing to listen to your opinions on the need for pension reform in your particular woefully-indebted state? That’s your call.

But not long ago I was asked the question, “what would it take to persuade our state legislature that there is a crisis which must be resolved?” And that question has as its corollary, “what would it take to persuade voters of the need to resolve the state’s pension crisis?”

In Illinois, the five pension systems for which the state bears responsibility (suburban/downstate teachers, state employees, university employees, judges and the General Assembly itself) are funded at a ratio of 40.2% as of year-end 2018. In dollar terms, it has a debt of $133.5 billion. Its annual contributions are calculated based on an objective of reaching 90% funding in the year 2045, yet because it attains this target in part due to the effect of lower-benefit Tier 2 workers comprising an increasing share of the workforce, its contributions are not yet sufficient to begin reducing that debt, which is forecast to climb to a peak of $145.9 billion in 2028 before it gradually declines. At the same time, state pension contributions (and associated costs such as payments on past Pension Obligation Bonds) now total 27% of the state budget, even though the state will not reach the end of its funding “ramp” until 2022. How does the state balance its budget in light of such high pension expenditures? By relying on an assortment of budget gimmicks, for one — Gov. Pritzker announces that, unlike his predecessor, his budget comes by its balance honestly, but that’s by building in expectations of high income due to one-time licensing and other fees for expanded gambling and legalized weed.

The funded ratio in New Jersey is even worse, at 38.4%. Its unfunded liabilities total $130.4 billion. Its annual contributions are only 70% of the actuaries’ recommendations. What’s more, its actuarial valuations do not even follow appropriate actuarial standards of practice; the applicable accounting standards for public pension plans require that the valuation interest rate be set based on the expected long-term investment return, but New Jersey Gov. Phil Murphy intervened to set the asset return higher to tamp down liabilities. As of last February, the governor was making headlines for his proposals to transfer assets into the pension fund (not unlike Illinois’ Gov. Pritzker), though the lack of recent reports suggests this may have failed as an idea.

And in Connecticut, which rounds out the top three most-indebted states according to Truth in Accounting, the total magnitude of debt is lower, but funded status is just as bad: 38% for the State Employees Retirement System, with unfunded liabilities of $21.2 billion, a significant worsening from as recently as 2011, when the plan was 48% funded with a debt of $11.0 billion. What’s more, in Illinois, for instance, the state legislature makes its decisions about pension funding independently of the union bargaining process. In Connecticut, the low funding levels have been a direct result of union bargaining. In a story that deserves a more extensive recounting, the state first set out to fully-fund its pensions beginning in the 70s, but with a gradual build-up to making its full contribution. In the late 80s, the state began making these full contributions — but in the 1990s, the union itself negotiated a lower contribution. And, again this past summer, the news out of that state was a further negotiation between the union and the state. Rather than holding the state’s feet to the fire and insisting that their pensions be well-funded, the State Employees Bargaining Agent Coalition agreed with the state to “re-amortize” the pension debt, that is, to abandon the contribution schedule targeted at full funding in 2032, and postpone that funded level to 2047 instead — producing a short-term “savings” (that is, deferred contributions) of $9.1 billion at the cost of $27.2 billion in increased contributions in the later part of the deal.

This is all bad news.

But the challenge is this: these are not pension systems which have fallen on recent hard times. These are systems which have never been funded, or whether, at any rate, the pension fund has been de facto little more than a reserve fund. Indeed, here in Illinois, our governor and state officials still speak as if they perceive of the system as functionally pay-as-you-go.

And for years, indeed, generations, no one has particularly cared, or at least, not cared enough for politicians to feel any pressure to do anything about it. Again, locally, when asked, Gov. Pritzker says, of a pension reform state constitutional amendment, paraphrased, “people won’t vote for it, so why should anyone expend their political capital on it?”

And that, dear readers, is the fundamental problem. Our parents were perfectly content pushing pension funding onto their children and grandchildren. Same with our grandparents and our great-grandparents. (Recall that my brief Chicago Teachers case study demonstrates the degree to which these plans were pay-as-you-go from the very beginning.) How do we get our legislators to solve the issue if they (likely rightly) perceive there is no public pressure to do so, if they conclude that so long as they avoid insolvency and avoid rating-agency downgrades (the prospect of which has at least deterred Pritzker and Chicago’s Mayor Lightfoot from re-setting their funding targets) they can bumble along indefinitely, pushing pension expenses onto our own children and grandchildren? I had hoped that the need to reform Illinois’ Tier 2 benefits, which were cut too sharply, would produce wider reform, but we now know that the state is willing to boost these benefits without regard for the wider impact. Detroit should be a cautionary tale, what with its bankruptcy and the pension cuts which were forced on city workers and retirees, which themselves would have been much worse but for the Grand Bargain and the role of foundations. But no one wants to believe their state or city is at risk of being “the next Detroit” and everyone believes that their state or city is, instead, destined for a future of greatness which the next generation can easily manage these costs.

So I had hoped to have presented readers with a roadmap for making the case for reform and overcoming indifference. Instead, readers, I’ll ask you to do your best brainstorming and tell me what you think in the comments.

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