Thursday, July 03, 2008

Deja Vu All Over Again

Sometimes, the more things change, the more they stay the same.

Lately, the talk has increased about the need to restructure our public pension pension systems to one similar to those found in the public sector. The Mayor has a special commission looking at the idea, news outlets are increasing their focus on the issue, and our pension liabilities are looming larger than ever.

An e-mail from a reader yesterday triggered my recollection that I had written something on this subject a few years ago (pre-blog). A little bit of searching, and voila, I found it. Below is a letter that I wrote that was published in Crain's in June, 2005.

June 13, 2005

Dear Editor:

I would like to take this opportunity to applaud the views expressed in the June 6 editorial, “A shameful lack of progress on pension reform”. To draw upon the vernacular favored by Governor Blagojevich, if there were ever a system in need of rocking, it is how we structure Illinois’ public pensions. And the conclusion of our recent legislative session has clearly shown that the time for this change is upon us.

As the recent legislative session drew to a close, I reluctantly joined the majority of my Democratic colleagues in supporting a budget-saving pension plan of last resort. While the bill contains several significant and overdue reforms to our pension systems, it also books over 2 billion dollars of anticipated savings that may never occur. It was a vote that I should not have cast.

A May 2005 Civic Federation report presents facts that we would be foolish to ignore. At the end of FY 2004, Illinois’ unfunded pension liability stood at $35.1 billion, a greater amount than any other state. Total liabilities stood at nearly $90 billion. The funded ratio--the amount of assets needed to cover liabilities--was just 60.9 percent, second-worst in the nation. The report further sets forth that State funding of public employee pensions has gone from approximately $635 million in 1996 to an estimated $2.6 billion in fiscal 2006, and that this number could reach $14 billion by 2045.

The Illinois General Assembly has shown a historic inability to exert the necessary discipline to resist the ever-growing demand for increased retirement funds for future state retirees. Compounding this problem is the relative ease with which the legislature has used deferral of mandated pension obligations as an easy way to circumvent budget difficulties. Our current defined benefit pension plan guarantees payments that are tied to years of service and salary. In what may well be the only means of staving off a looming fiscal disaster, the State should take a page from the private sector playbook and seriously consider switching to a defined contribution plan. Without any negative consequence to any current state employee, this significant change in our pension system would not only inure to the benefit of future state employees, it would simultaneously establish a more predictable and responsible benefit system for the stability of the Illinois budget.

Defined contribution programs are akin to a 401(k) retirement account: The ownership and control of the investments remain in the hands of the employee, not the State. The employee invests up to a predefined percentage of their salary, with the state contributing an additional preset amount. And contrary to the old adage, under this scenario, you can take it with you; the retirement funds are portable should the employee leave the State’s employ to go into the private sector. This truly is not a 'Democratic' or 'Republican' idea. Indeed, if properly implemented, such a plan can be beneficial in attracting and satisfying qualified employees while at the same time restoring 'fiscal virility' to Illinois. These are concepts that all of us should readily embrace.

To their credit, six states have taken a cue from the business community and have converted to a defined contribution plan for new hires. (An additional six states offer hybrid plans.) Similarly, the Illinois General Assembly must rise above the mentality of thinking in terms of election cycles and take those steps necessary to preserve the fiscal solvency of our state for future generations.

It's almost as if time has stood still - almost except for the fact that things have gotten worse.


At July 3, 2008 at 1:00 PM, Anonymous Bill said...

Your argument for a defined contribution plan has a very important flaw. State employees covered by the five state plans are not covered by social security so the state is not required to pay the employer portion, about 6.5% of salary to the federal government. If your change was made, Illinois (and the employee) would then be required to pay. The IRS would not allow any "pension holidays" that the legislature has grown so fond of. This payment would be due every quarter, just like any other employer. Add to this whatever employer "match" you are advocating and you find that going to a defined contribution plan would actually cost the state MORE than the current plans. Also, the state would STILL have all of the escalating debt that it has run up over the last 40 years. Add to this the morale problems that would result from a two-tiered system, the added expense of administering this sort of program, etc. and there really is no actual benefit to changing plans. It might sound good to the Chamber, Civic federation, and others with a grudge against public employees but would only make the state's fiscal problems worse.
The problem with the state retirement plans is not the type or amount of benefits which are mediocre, at best, when compared to other states that offer pension plans. It is, as you pointed out in your letter, the failure of the state to live up to its statutory obligation to make its contributions in a timely manner. No employee has ever skipped a payment and not many are getting rich off of their pension benefit, which averages about $28,000 per year, per employee.
The solution is for the state to live up to its obligations, pay the employer portion that it owes every year on time, and make payments on the debt that it has run up over the last 4 decades.
Public employees, present and future, should not have to pay for the problems caused by lack of leadership in Springfield.

At July 3, 2008 at 8:23 PM, Anonymous Anonymous said...

Bill - every private employer faced with the same dilemma has risen to the task. They have been faced with the same issues, and have worked through them.

Why can't the state? Unless of course, you are implying the state is somehow inferior to private enterprise when it comes to running an organization. Is that what you mean?

Time for the state to join the 21st century.


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