SPRINGFIELD — Illinois Gov. Pat Quinn will meet with the state’s four legislative leaders next week to work out differences on a pension reform effort that failed to make it out of the General Assembly before its deadline Thursday.
By Jayette Bolinski
SPRINGFIELD — Illinois Gov. Pat Quinn will meet with the state’s four legislative leaders next week to work out differences on a pension reform effort that failed to make it out of the General Assembly before its deadline Thursday.
It is unclear when, exactly, all lawmakers will be called back to Springfield for a special summer session to approve the reform legislation. Quinn said action must be swift, as a possible downgrade of the state’s credit rating is at stake.
“We’ve got to accomplish this mission, and we don’t have a lot of time to do it. It is a race against the clock. I’m going to make that crystal clear to the legislative leaders next week,” said Quinn, who took questions Friday from reporters in Springfield for about 15 minutes. “We must forge an agreement. I think we have the elements, we’re very close, but we’re not there yet.”
Before adjourning from the legislative session — the House late Thursday and the Senate early Friday — lawmakers did approve gambling expansion and a spending plan for next fiscal year. But they failed to reform the state’s failing public pension system — an issue that was supposed to be Job No. 1 for members of both chambers.
Quinn previously referred to gaming expansion as a “shiny object” that lawmakers should ignore, in favor of dealing with the pension crisis.
The major sticking point for lawmakers, which caused a late and unexpected collapse of the pension reform effort Wednesday night, is the issue of whether some pension liability should be shifted to local government, such as school districts, instead of the state picking up those costs.
House Speaker Michael Madigan, a Democrat, was in favor of the cost shift, while Republicans, including House Minority Leader Rep. Tom Cross, objected to the shift, saying it would result in tax increases. Wednesday night, just as the House was preparing to adjourn, Madigan announced he had spoken with Quinn and learned the governor, like many Republicans, was not in favor of shifting the cost, so Madigan turned over sponsorship of the legislation to Cross.
Madigan then refused to support the measure, which caused enough other lawmakers to abandon support the measure could not pass.
Quinn said both parties, in both legislative chambers, agree on the issue of accountability, but the question is how to implement that accountability. Lawmakers have to find common ground between both reform proposals.
“All of us acknowledge the core principle that those units of government cannot be free riders. They must have a stake in the cost of their employees’ retirement. They can’t be able to negotiate the contract and then hand the bill off to someone else,” Quinn said.
“The principle is how do we implement that accountability for those units of government. There’s disagreement on that. I think that can be negotiated. I think folks can come together and come up with a plan.”
Regarding gambling expansion, Quinn would not say if he intends to veto legislation to create five new casinos in Illinois, as well as allow slot machines at horse-racing tracks. Quinn responded only that he wants gaming in Illinois to have ethical oversight, integrity and a lock down on campaign money from gambling interests.
Last year, Quinn threatened to veto similar gambling expansion legislation that passed the General Assembly. Lawmakers, however, did not send the expansion bill to the governor.
“The people of Illinois want to have integrity in their government from top to bottom. That’s why we’re here. We’re here to make sure things are done right and cleaned up. So we’re not going to go in the direction of any other place than integrity,” Quinn said Friday.
Reporter Jayette Bolinski can be reached at jayette.bolinski@franklincenterhq.org.
Pension Reform Urgently Needed
State Legislators recently failed to address our State's problematic pension situation. The recent news in Springfield highlights the challenges at the State level, but the pension issues are pervasive at the City, County AND State level, and each governmental unit needs to appropriately address this challenge. As each day passes, the situation worsens since assets are growing at a slower than expected rate and liabilities are increasing at a faster than expected rate. Compounding never stops.
This growing unfunded liability (pension debt) will create a bigger burden for our children and grandchildren unless action is taken now.
Why are assets growing slower? The financial crisis had a negative impact on recent financial returns. Cook County for example reported returns of 1.2% for 2011, below their 7.5% assumed actuarial return. See page 3a of the 2011 Financial Report – http://www.cookcountypension.com/assets/1/AssetManager/2011%20Cook%20County%20Final%20Financial%20Statements.pdf
The Illinois Municipal Retirement Fund (IMRF) reported a loss of 0.50% in 2011 versus their assumed return of 7.5%.
Although these reported results are only for 1 year, the more important consideration is that the assumed rates of return for all pension funds likely remain too high given the current economic and financial environment. The most egregious example is the Teachers Retirement System (TRS) in Illinois which assumes an 8.5% rate of return. The 8.5% assumed return is one of the highest returns assumed for any public pension fund in our country. The California Teachers Fund for comparision recently lowered their assumed return from 7.75% to 7.5% on February 2, 2012 even though their actuary recommended a 7.0% return assumption.
http://www.calstrs.com/Newsroom/2012/news020212.aspx
Why is the assumed return important? First, a higher return lowers the amount of money that legislators are supposted to contribute, freeing up money to spend on healthcare, education, roads, etc. Superficially this seems like a good idea, spend less money on pensions today, spend more money on projects that voters want, and keep tax increases lower. (increase your chance of getting re-elected) However, the true pension expense doesn't stay hidden, and the true cost doesn't go away. You can't just ignore the issue.
The other reason the assumed return is important is that it's used to discount the future liability. A higher return makes the pension liability smaller. Today the State of Illinois is reported to have about $83-85 BILLION of unfunded STATE pension liabilities or $6,500 per person. BUT the number is even worse. The Teachers Retirement System accounts for about $44 BILLION of that unfunded liability, but that $44 B number is based on an 8.5% return. If that assumed return is lowered to 7.75%, the TRS unfunded liability approaches $50 BILLION, and goes significantly higher if they assumed 7.0%. Generating a 7.0% annual compounded rate of return over the next 10-20 years will be difficult.
So the actual unfunded liability for the State of Illinois is over $90 BILLION and one can easily see $100 BILLION or $7,700 PER PERSON. And again, this excludes City and County unfunded liabilities.
Many people will argue that actuaries look over long time frames and over multiple cycles to justify a higher assumed return. Others will point to the fact that TRS has generated over 9% annualized rates of return over 30 years, and in fact, the IMRF proudly reports that they generated a 9.95% annual return over the last 30 years. What these people don't say is that 30 years ago the 10 year bond peaked at over 15% and today the 10 year bond is now at 1.5%. The pension funds, and all investors, have benefited from one of the biggest bull markets in bonds of all time. This can't and won't happen again over the next 30 years. It's mathematically impossible. (Cash is yielding basically zero percent – look at what your money market or checking account is generating)
At the City of Evanston, the Fire & Police pension funds have lowered their assumed rates of return to 7.0%. Given their investment restrictions this will be increasingly difficult to accomplish. Returns below 7.0% suggest either a growing unfunded liability, or spending more of the budget on pensions. Over the last 5 years the City of Evanston pension contribution for both fire and police has increased from $8 million to $16 million per year.
It should be noted that the massive unfunded liability at the Teachers Retirement System(currently reported at $44 BILLION) and the approximate $150 mm unfunded Evanston Police and Fire pension liability are due to politicians not funding the pension fund each year or underfunding the pension fund each year. However, both the Illinois Municipal Pension Fund has been funded each year and they are experiencing growing pension problems and Cook County has funded its pension fund each year and its pension problems are also growing.
At Cook County, the funded ratio just for pension benefits (excluding retiree healthcare benefits) has fallen from 84.5% in 2006 to 62.5% in 2011 (page 24) One of the Commissioners, Bridget Gainer, recently published a report highlightling the structural budget deficit and mentions the fund will face INSOLVENCY by 2038. (i.e. they won't have money to pay benefits)
http://www.openpensions.org/wp-content/uploads/Gainer-Truth-In-Numbers.pdf
These comments are not meant to be fully inclusive, but are meant to hightlight the serious issues that we're facing in the City of Evanston, Cook County, and State of Illinois. The assumed rate of return is an important assumption which is misunderstood by many people. Importantly, as returns decline, the cost of providing the given level of benefits significantly increases in cost.
Contact your local Alderman, Cook County representative, and State Representative and Senator to get them to address this important issue.
Your children and grandchildren will thank you.