Column: Helping to explain the pension plan

State Senator and State Represenatives speak out

By: Guest Columnists

Posted: 6/28/05

Over the last week, our offices have received a number of inquiries about the pension plan that was pushed through the Illinois General Assembly by the Democratic leaders of the House and the Senate over the Memorial Day weekend. In fact, there has been so much confusion about what the plan actually does; we are submitting this column in an effort to clear up some of the confusion.

First, what is the plan and who supported it? Basically, money was taken out of our state pension systems in order to help finance current state expenses and subsidize the state's $1.2 billion dollar deficit. Despite this massive deficit, the pension money was also used to finance new state supported social service programs and cover current state expenses. Like Wimpy from the old Popeye cartoon used to say, "I'll gladly pay you Tuesday for a hamburger today," the parties in control of Springfield borrowed against the future to cover current spending.

This plan was an initiative of Governor Blagojevich, House Speaker Michael Madigan (D-Chicago) and Senate President Emil Jones (D-Chicago). For the reasons that follow, we did not support this plan, nor did any Republican vote for it.

Specifically, the legislation borrows $3.5 billion from the pension systems over the next 5 years which is then paid back over 40 years. The estimated pension raid in just the coming year is $1.2 billion - the estimated cost to pay back this money over 40 years is $38.5 billion or over $3000 to every citizen of our state. To help finance this, the Governor is cutting a number of pension benefits to state employees - which, he argues, will help offset the interest cost to repay the loan. However, the net single year savings from his pension cuts is only $30 million, or $12 billion over 40 years. This leaves a net gap of $26.5 billion between the savings and the amount that has to be repaid - money that will have to eventually be paid back.

Governor Blagojevich and Democrat leaders in the General Assembly tell us that this isn't a raid on the pension funds, but rather a "restructuring" of the payments; but as noted above, the savings from these reforms won't come close to covering the enormous interest costs of taking money from the pension funds. A better, but much less flattering analogy would be someone who changes the repayment plan on their mortgage, not to take advantage of better interest rates, but simply to put off current payments. In the end, those payments will be much larger and less affordable. In other words, this is not about a responsible restructuring and savings plan; it's simply an unwillingness to live up to current financial obligations.

The $30 million in savings from the pension changes are mainly to future state employees, state university employees, and downstate teacher's retirement funds. Conveniently, the plan leaves judges, legislators, and Chicago teachers' pension plans untouched! However, there are some changes to current employee's pension systems.

First, the legislation authorizations a new early retirement option for downstate teachers and administrators with increased contributions from both the teacher and the local school district. Secondly, the authority to determine the money purchase option interest rate for SURS participants has been transferred from the SURS system to the Illinois Comptroller - giving the Comptroller the power to determine whether the money purchase option for current SURS employees maintains its current interest rate.

These changes aside, the big worry for all employees (current, future, and retired), as well as the taxpayers, should be the long-term stability of the system and the total cost to repay the pension dollars that were "borrowed." As noted above, the long-term cost to the taxpayers to pay back all this money is astronomical. But don't take our word for it, State Teacher's Retirement System Director Jon Bauman recently noted that the net cost to repay his system will be $13 for every $1 borrowed. In the meantime, by shorting our already under-funded pension systems, the systems are forced to sell off assets to their current expenses.

This brings us to you yet another concern with this plan. When a pension funds asset-to-liability ratio dips below 30% it is considered insolvent. A pension raid of this magnitude will seriously set back their asset-to-liability ratio and force them to immediately sell assets to cover the costs of the shorted money. Our state's pensions are already the most under funded of any state in the nation and this plan will only make it worse. The good news is that they ought to be able to withstand this shortfall without falling below the 30% threshold; however, should the stock market crash, or real estate values plummet, it is hard to see how they could withstand a "double whammy," so to speak, to their portfolio.

Whether you are a state employee or not, it is these last two concerns (total cost to pay back the pensions and the future health of those systems) that we should all be concerned about. The ruling party that brought you this plan has said that it was the only option. That simply is not true. In fact, one of their members, Democrat Rep. Frank Mautino of Spring Valley, on the eve of the pension vote, filed his own revenue plan for the state budget. Yet, it was not discussed. The unions (AFSCME and others) had their own plan, but it was not discussed. Cutting the size and scope of state government was not discussed. Nor were other borrowing options brought forward.

Even if we were to concede the spending side of the Democrats state budget plan (and, frankly, there are some worthwhile initiatives in this budget), there are far cheaper ways to borrow money. The interest cost of borrowing money from the pensions is roughly 8.5% according to Bob Knox who heads the State Employees Retirement System. Yet we could have borrowed from the short term capital markets for half of that - saving the taxpayers, literally, billions of dollars!

Finally, let us not forget that our state got into its current fiscal crisis by spending money that it didn't have. All through the 1970's, 80's, and 90's the state borrowed from the pensions to cover current expenses. Eventually, in the mid-1990's, the pension systems reached the point of insolvency. Then Governor Jim Edgar (R-Charleston) undertook a 50 year plan to repay what was owed and recapitalize those systems. This year's contribution to repay what was taken so long ago was $2.6 billion - our state budget deficit was only $1.2 billion. This illustrates perfectly what happens when you borrow from tomorrow to pay for today.

Rather than stay on track with Gov. Edgar's plan, the Democrats opted instead to place our children's future in hock and return to the old "borrow and spend" practices that landed us in trouble in the first place. We remain opposed to such fiscally irresponsible policies.

State Senator Dale Righter
State Representative Chapin Rose
State Representative Bill Mitchell
State Representative Roger Eddy