DGreport.com

The state’s unfunded pension debt passed the $85 billion mark this summer.  That unfunded liability is squeezing out money for other valued needs, such as education and health care. It means the state has less money for things like child-care aid and fixing roads and schools, or paying some of the $1 billion it owes to Medicaid health care providers and others.

That gives Illinois the infamous distinction of having the nation’s worst pension problem.  Only it’s not the state’s problem.  In a classic example of effluvium flowing downhill, it’s our problem.

There’s plenty of blame for both political parties; you can’t pin this tail on just a donkey.  “Big Jim” Thompson got the whole ball rolling with his idea of using next year’s revenue receipts to pay for this years spending deficits.  It’s one thing to use future revenues to pay for present day expenses, but you have to have the money now to pay for now.  Talk is cheap, whiskey costs money.  So where did the cash for now come from?  You guessed it, from the pension funds.  It worked great; an untapped, seemingly endless supply of money that could be refilled later so there wouldn’t be any problems.

Except one; once the General Assembly got a taste of endless money, they could not stop spending, and the funds never really got refilled.  Something for this, something for that; money for this voting group, money for that constituency; entitlements here, there, and everywhere.  Edgar slowed the spending frenzy, Ryan kicked it back into gear, Blagojavich put entitlement spending onto a crack-addled overdrive, and wham!  The state is now borrowing money to pay current pension obligations, making taxpayers pay $1.40 for each $1 dollar in pension funding, and state crack-head politicians are asking taxpayers for even more money than that.  For 30 years Illinois has ignored its’ pension obligations.  While municipalities every taxing body with qualifying personnel have been required to make the contributions, state politicians have frittered it away.

Illinois’ unfunded pension liability owed to the state’s five public employee retirement systems (through end of FY2009):

• The State Employee Retirement System (SERS) is 46.1% funded
• The Teachers’ Retirement Systems (TRS) is 56% funded
• The State Universities Retirement System (SURS) is 58.5%
• The Judges Retirement System (JRS) is 42%
• The General Assembly Retirement System (GARS) is 32%
• The Illinois Municipal Retirement Find (IMRF) is 100% funded.*

* The IMRF is managed independent from the state.

These total an unfunded liability of 65 cents on the dollar and is the worst of any state in the nation.  Now the state has delayed paying in for 2010 until 2011, when they will probably borrow the money to make the payment.

The problem isn’t that the pensions are too generous.  Yes, there has been abuse of the system.  D99′s excessive raises to former Superintendent David Eblen resulted in him being ridiculously overpaid making his pension payout spectacular.  Just for that the D99 board should have their budget keys taken away, they obviously don’t value a dollar, and don’t understand the concept of no free lunch.  Or worse, they understand and don’t give a rat’s ass.  At any rate, it’s a sad fact this was not an isolated or unique incident; it happened all over the state and it happened right here.

The reality is most pensions are not over inflated but the state never made the required contributions.  When faced with not enough money to provide services and fund pensions, the state cheaped out on pensions, and kept expanding way past the core services required of a state government.  Politicians get ahead in their world by solving problems, and in their world solving problems requires spending money.

Although Illinois has more government agencies than any other state, we rank 48th in total headcount of state employees, so it’s not the size of state government that is dragging us down.  Now, there’s also township government that is a popular target for waste, but to off that layer of government, it would require a referendum process of huge scope, being fought every inch of the way by those township governments themselves.

Neither are the costs of the system itself too high.  The weighted average of all five Illinois pension systems is about 9.1%.  The national average for state and local  government is 12.5%.  We’re below the national average.

I’ve talked about switching to defined contribution pensions, a 401K type plan for new hires.  Even that has higher costs to administer than defined benefit plans, according to the Center for Tax and Budget Accountability.

According to the Investment Management Institute, the operating expense ratio for defined benefit plans averages 31 basis points (31 cents per $100 of assets); the average for defined contribution plans is three to six times higher, at 96 to 175 basis points. To put that in context of the Illinois pension systems, the administrative costs of a defined contribution system would in all likelihood cost taxpayers anywhere from $275 to $610 million more annually than the state’s current defined benefit systems.

Despite some beginning rumblings of accountability and the need to do something, currently there no solution in sight.  No one from either party in a position of power to do something about it is discussing it as a problem that must be solved, only pushed away for later.  Costs are increasing during down economic times due to bi-partisan cooperation for pension sweeteners authorized by the Illinois General Assembly; that means both sides are to blame, both party’s leadership has failed, and neither is doing anything about it except voting to delay doomsday, increase legalized vice, and blame each other while they sleep in the same bed.

So they want to raise our taxes so much to fix the pensions, right?  Wrong. Pensions are an un-addressed ticking time bomb, and the GA has left that bomb sitting squarely in the lap of every city and village, and every school district in Illinois.  Illinois public pension fund reserves have cratered due to budget raids, and also due to severe losses in market investments, ridiculously high management fees to those politically connected, and the escalating costs imposed by unfunded mandates authorized by the Illinois General  Assembly.

Those sweeteners and mandates have almost doubled the Village’s contributions for employee pensions over the last decade. Public employee contributions are capped at around 10% of their pay by the General Assembly (another sweetener), so the burden to make up the difference falls upon local taxpayers and utility rate-payers (to capture tax exempt property owners).  All the investment losses will start being replenished with the 2009 tax levy, which is collected on your 2010 property tax bill.  And yeah, they’re taking that money, but not paying it into the pensions.

Right from the start, it’s cold comfort but it could be worse for the village.  The State Universities Retirement System saw its assets decline nearly 28 percent in 2008.  The Teachers’ Retirement System, the state’s biggest pension, saw its portfolio drop 30 percent.  That’s a 58 and 99 problem that intrudes hugely into their budget picture over the next 5 years and more.  Let’s just say Martin and Eblen weren’t harbingers of the bad news; neither said word one of understanding a problem existed, as near as the records show.

Back to the village.  As required by State law, all municipal employees (police, fire, and all other personnel) are covered by three separate pension programs: Police pension, Fire Fighters pension, and the Illinois Municipal Retirement Fund (IMRF)

Police. In 2007, the actual contribution to the pension fund was $1,680,424.  At that time it was expected to climb to $2,048,000 in 2010, and up to $2,565,000 in 2013.

The 2010 budget this year revises the Police pension contribution upwards to $2,365,508, 15.5% higher than the estimate made two years ago, and up almost 41% from 2007.  2013 contributions within the 2010 budget are projected to be $2,555,783, lower than the 2013 projections within the 2007 budget.

Are pension obligations declining that the projected contributions are being revised downward?  No they are not, so the projection should likewise be raised upward.

Fire. In 2007, the actual contribution to the pension fund was $2,146,148.  At that time it was expected to climb to $2,437,682 in 2010, and up to $2,789,405 in 2013.

The 2010 budget this year revises the Fire pension contribution upwards to $2,559,952, 5% higher than the estimate made two years ago, and up over 19% from 2007.  2013 contributions within the 2010 budget are projected to be $ 2,728,950, lower than the 2013 projections within the 2007 budget.

Are pension obligations declining that the projected contributions are being revised downward?  No they are not, so the projection should likewise be raised upward.

Expecting pension contributions to drop for both Police and Fire means they expect pension payout demand to drop?  That doesn’t follow; if payroll bodies and/or dollars increase, what does follow is pension payout demands being higher, not lower.

What has changed is the state has lowered required contributions to those pension funds.  It eases some budgeting pinch, but not enough, and simply adds to the underfunding problem.

The mantra used to be that government and public sector workers get good benefits and job security in lieu of high salaries, but since 2004 at the latest that gap between public and private employee paychecks disappeared.  It’s hard to come by perfect comparisons, since government numbers for the private sector include lower-wage industries like retailing, which pull down the averages, but overall, public-sector workers get a pretty good deal. In 2004 average salary for a public worker was $49,275 compared with $34,461 for everyone else, according to the Employee Benefit Research Institute (EBRI). Since then, both pay and benefits have risen without pause, widening that gap.

Readers here at DGreport have been studying the budget.  Outsourcing alone won’t get it done because the three budget busters are personnel salaries, personnel pensions, and payments on bond debt.

We can’t change  pensions, and we’re locked in on paying back money we borrowed, so that leaves payroll.  Can the village cut salaries and take out some of the raise steps?  If we don’t at least reduce the raise steps by 10% minimum we are back at square one in two years of not having enough money to pay for everything.  Did this all happen because every public body went on a protracted effort to raise pay without sacrificing benefits or pensions?  That they had to stay competitive?  I attended plenty of meetings of most taxing bodies where that was exactly the point made, by a revolving cast of presenters over many years.  Well, now we’re competitive, and we’re broke, and not one public taxing body is talking about reducing that pay so we’re not broke.

The village has $8 million a year in debt payments for the next three years, then it drops to $5 million a year in debt payments-unless the village borrows more for contracts to engineering and construction firms for stormwater. For now, that’s the plan.

The village has $77 million in debt and we still haven’t addressed the causes of stormwater flooding; we’re still just fixing the resulting problems.

Fire and Police, and even the Library may have to reduce their budgets.  If it takes one, or two, or ten cycles of zero base line budgeting to accomplish that goal then it’s time to start.  As it is, those three government unit budgets have gone up each year, every year.

Taxes went up last year, and they may increase next year too.  Do local taxing bodies have any other choice?  Not unless they are willing to address payroll, pensions and debt…and they can’t address existing pensions and debt.

So far, the angst is palpable.  Council can raise every tax and fee, and hit the property tax bill, and next year lowered assessments start kicking back.  As assessments go down, tax bills will go up again, and everyone will wonder why.  Schools may be asking for PTELL exemptions to keep up with increases in personnel costs, or start playing the shell game of sloshing funds around and then moving what’s left (like new roofs and building repairs) into backdoor referendums so they can borrow the money now without asking taxpayers for an okay.  Nevermind there’s no sound way to repay $1.40 for every dollar borrowed at some later date.

This is not a problem that will get fixed this year.  Whatever budget gets approved by all local taxing bodies next cycle, it must not be the end of a continuing, continuous budget discussion.  The village comes closest to getting that type of continuous process, but both school boards have been forced to focus on money because of the state late-paying.

The surface has just been scratched  So far Band-Aids have been applied, but the patient needs major surgery, and the doctors still have no suitable set of tools to use.

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