State pensions worse than numbers show

SPRINGFIELD — Illinois’ pension problems could be worse than the numbers show.

Years of under funding or borrowing to pay the annual pension obligation, coupled with a recent change in how liabilities and assets are calculated, have led to the problems.

A report by U.S. Government Accountability Office released late last week says Illinois could face unforeseen payment hikes because of how the state has handled its public pensions.

In 2009, the General Assembly changed the law dictating how the state calculates liabilities and assets. The new formula bases the pension payments off the average return on investments over the past five years. Previously, it was based on financial market conditions at the time.

The idea was the state would be able to dodge markedly larger pension payments as a result of failing investments by using the average of those investments’ values over the previous five years, which is what happened.

The state shaved $100 million off of its pension payments for the State Employees’ Retirement Systems in 2009, but those savings aren’t real. Rather, the move just delays the inevitable, according to the report.

“This strategy only defers contributions when plan assets experience a loss, as they did in fiscal year 2009. Future contributions will be higher than they would have been previously once the fiscal year 2009 market losses are fully recognized,” the report says.

Shelia Weinberg is founder and chief executive officer for the Institute for Truth in Accounting, a nonprofit, nonpartisan organization that promotes good accounting practices by public bodies.

“The perception of the investments is that everything is better than it really is. The problem is it does not push off the reality,” Weinberg said. “The reality is that those things can only be sold at market value.”

Weinberg said the accounting method hurts the future health of Illinois’ ailing pension system.

“The immediate effect is that the contributions are less than they really need to be,” she said.

It’s news no one wants to hear.

The state already is facing a $1.2 billion jump in its pension payments from the past year to this year. In total, the state will have to kick in $5.3 billion this year to the pension system, compared to $4.1 billion last year. By fiscal 2017, the state will be paying $6.2 billion into its pension funds.

The increases are, in part, meant to chip away at the $83 billion unfunded liability — how much more the state owes current and future retirees compared to assets on hand — the pension funds are facing.

Complicating the problem is the $14.4 billion the state has borrowed since 2002 to make its pension payments.

“Bonds approved by the General Assembly were issued twice under(Gov. Pat) Quinn to make the required payment due to the fact that there was not an appetite in the General Assembly to make the cuts needed to make the required payments,” Kelly Kraft, Quinn’s budget spokeswoman, said in an email.

The state will be making payments on those bonds and ones issued by former Gov. Rod Blagojevich through 2033. Between the current fiscal year and 2033, the state will have to cough up $25.8 billion for those loans, $9.5 billion of which will be interest alone.

“Some pension officials were concerned that the debt service payments on the (pension borrowing) would reduce available funding for future pension contributions,” the report says.

Quinn has assembled a pension working group to outline possible solutions.

“Everything is on the table for our pension working group — historical funding practices, employer contributions, employee contributions, the retirement age and the cost-of-living adjustment,” Quinn said during his budget address last month.

In this case, the employers are state taxpayers and the employees are public-sector workers.

State Rep. Darlene Senger, R-Naperville, is part of Quinn’s working group. She said the group has been meeting to discuss possible changes to heal the sickly pension system, though no panacea has been found.

“That’s our ultimate focus, to have something that will function as it should and not kick the can down the road,” Senger said.

What the changes to the pension system will look like, and whether those changes get implemented this spring session, is unclear. Senger said the group is discussing more transparent accounting practices, changes in how much employees and taxpayers contribute, and other reforms.

“It’s going to be interesting to see where we land at the end of May,” Senger said.

State Sen. Mike Noland, D-Elgin, also is on the working group. He said getting something through the Legislature the end of the spring session in May could be difficult in an election year, though he said something must get done before 2013.

“If we can’t get this done this session the voters will have the opportunity (on Nov. 7) to vote for the candidate who stands for true pension reform,” Noland said. “Or they’re going to vote to kick the can down the road.”

Despite talks of reform, don’t be surprised if in the future the General Assembly continues to rely on accounting gimmicks to mask the true scoop of the problem, Weinberg said.

“When the market gets good again, then the Legislature will go back in and say, ‘Oh, let’s switch it back to market value again,” Weinberg said.