Forbes post, “Does Gov. Pritzker Truly Want To Solve The Illinois Pension Crisis?”

Originally published at Forbes.com on November 20, 2019.

 

Or does he just want to do whatever minimum is necessary to keep the bond rating agencies off his back?

Here’s the story: yesterday, Illinois Governor JB Prizker spoke to the Economic Club of Chicago about, among other topics, pensions. (There’s YouTube video available to view, and I’ve transcribed his full comments at the bottom of the article, to )

His introductory comments were a story that he appears to tell repeatedly: Illinois is “a state on the rise,” and a “leading force for talent,” with a growing economy and fiscal problems which are unpleasant but solvable, especially once Illinois has more tax revenue in its so-called “fair tax,” that is, the graduated income tax that he hopes to pass after a constitutional amendment change which he likewise hopes voters will approve in 2020.

When the moderator raised the question, “Why wouldn’t we ask for shared sacrifice across the board by also asking for a pension constitutional amendment?” Pritzker’s reply was defeatist: people wouldn’t vote for it, so it’s not worth trying. The possibility that Pritzker could advocate for it, change minds, explain the importance of it – all of which he intends to do with respect to his “fair tax” – he doesn’t even take into consideration.

Then he launched into a series of dubious claims about the state pensions and reform possibilities.

On the COLA: “First, what we’re talking about, what everybody is really talking about, is there’s a 3 percent COLA cost of living adjustments on pension in the state of Illinois, 3%, and everybody knows that our inflation rate is lower than 3 percent. So what would this pension amendment do? It would essentially take it from 3 percent to whatever the inflation rate is for that year. [With an amendment, if actual inflation were CPI] you would save essentially 1.3% in the cost of living.”

To begin with, Pritzker knows full well that the COLA adjustment is not merely a matter of saving 1.3% due to differences in COLA in any one year. That adjustment compounds from year to year, and this has a far greater effect, because the actuarial liability is not merely what the state pays for pensions in any given year, but what it will pay in the future, as a debt owed to retirees.

What’s more, a constitutional amendment is not merely about that 3% annual adjustment, though that is the most obvious source of savings. Generous early-retirement provisions are another huge contributor of costs: Tier 1 teachers are able to retire without any benefit reduction at age 60 (with 10 years of service) or age 62 (upon vesting at 5 years of service). Teachers with 35 years of service can retire as early as age 55 without reduction. For state employees, benefits are unreduced at the earlier of age 60 with 8 years or upon attaining 85 age + service points (e.g., age 55 and 30 years of service or a similar combination). For university employees, provisions are even more generous: age 55 with 8 years of service or any age with 30 years.

What’s more, Pritzker launched into a long history lesson in which he said that the COLA began in “1968 or 9” at 1% or 1.5%, then increased in increments as inflation increased. What he doesn’t mention is that compounded COLA, in its current form, dates to 1989, and prior to then, COLA adjustments had only been simple and noncompounded.

On the Contracts Clause: Pritzker then defends his unwillingness to support an amendment because any changes would be found unconstitutional due to the “contracts clause” of the U.S. Constitution. An analysis by Mark Glennon at Wirepoints explains that “contracts may be impaired if there is a significant and legitimate public purpose behind the contract adjustment” – a test that surely Illinois pension reform would meet, in its current circumstances when pension contributions, even merely to meet a 90% funding target in 2045, is absorbing such a large portion of state spending.

On the buyouts: Pritzker then touts the two buyout programs currently running in the state (TRS describes these on its website; the other systems offer the same provisions). These two programs allow, in the first place, Tier 1 members to trade their guaranteed 3% adjustments for the non-compounded, half-CPI adjustments offered to Tier 2 members, for a lump sum at a 30% discount; and offere inactive (terminated vested) members to collect a lump sum equal to 60% of the value of their future pension (that is, not actuarially-fair but at a 40% reduction). The TRS website reports paying out $6.1 million to 222 inactive retirees (out of 14,598 in total), to which my reaction is “good! No one has any business forgoing retirement benefits under such terms,” and $72.4 million to 592 new retirees in 2019 (which, quite honestly, makes a little more sense to take, if you suspect your benefit has a chance of having its COLA reduced without any such compensation in the future).

But what does Pritzker claim? He mixes up the two buyouts and says that the offer is a 60% buyout of total pension liability for new retirees, where this is actually only the case for inactives. He claims 20% of new retirees are choosing the buyout (this might be true – TRS on its website says 16% of new retirees are, the others don’t make any claim), but, again, this is only for the buyout of the guaranteed 3%. And he claims that this will produce “potentially $25 billion of savings.” The reality is that the initial implementation is producing liability reductions much, much smaller than this figure – just $13 million in the first year, according to a July 2019 analysis.

Oh, and Prizker says, this “is good for the taxpayers and good for those who are choosing it who get the money up front and get to do whatever they want with that without having to wait.” Yet I suspect that if any private sector offered buyouts on such unfavorable terms, he wouldn’t hesitate to call for the government to step in and shut it down. If the program really were as he describes it – a full buyout of retirees’ pensions, at retirement age, at a 40% reduction, it would be insanity, except for the small number of retirees with terminal illnesses.

On the police and fire consolidation: Pritzker reasonably observes that politicians have observed for 72 years that 650 state and local pension systems make no sense. Why was Prizker able to get this passed? Because he promised free money, that is, increases in investment returns at no cost, without touching the local administration, and because the “pension intercept” law, passed in 2011, which gave the state the authority to finally force municipalities to fund their pensions, created enough pain to generate the political will to solve the problem.

But, not surprisingly, he neglects to inform his audience that this consolidation bill also boosted the pensions of the Tier 2 workers among police and fire employees, without any actuarial analysis of the cost. What’s more, local plans which already were large enough so that they will not see substantial increases in asset returns due to future economies of scale, will nonetheless bear the same burden of the (unknown) future cost increases as the small plans. And, finally, the state and local plans are not even a part of the $134 billion in unfunding on the state’s balance sheet.

Prtizker’s bottom line:

Here’s how Pritzker wraps up his comments on pensions before moving on to other topics:

“I’m focused on it, we’re doing a lot, there are a lot of things that we can do but anybody that thinks there’s a silver bullet in one constitutional amendment, that is not something that you should focus on, you should focus on the entire group of things that we need to do to reduce our pension liability, which I’m doing.”

Readers, after listening to him speaking at length, here’s my conclusion: in his heart, he believes that Illinois systems are rightly pay-as-you-go, with enough of a cushion to placate those who say otherwise. (Yes, I had observed this before.) After all, he was willing to add in another ramp for pension contributions until he got an earful from those ratings agencies and others, and backed off.

Recall that Illinois will sooner or later need to revise its pension legislation due to the too-deep Tier 2 pension cuts, benefits that are so low that Tier 2 teachers are, according to the actuarial valuation itself, not even getting out what they pay in themselves through their employee contributions. But the Tier 2 benefits and the long-term reduction in liabilities as more Tier 2 teachers enter and Tier 1 teachers die, mean that the future funding schedule is dependent as much on the slowing of PBO as is it the boosting of contributions. Assuming all projected assumptions pan out, according to the most recent report (p. 111), it will take until 2030 to bring the plan up from 40% even to the still woeful level of 50%, and until 2036 to restore the plan to the 60% funding level that the plans had as recently as 2007.

Against these numbers, Pritzker cannot reasonably pat himself on the back for a buyout and a consolidation of unrelated pensions, while simultaneously shrugging off true pension reform as too hard. Not, that is, unless he just doesn’t care.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.