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posted: 8/21/2012 5:00 AM

Op-ed column: Cost shift would worsen pension problem

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  • Marc Levine

      Marc Levine

 
By Marc Levine

According to the people who run it, Illinois' pension system has promised over $600 billion in future benefits to workers and teachers and has less than $70 billion in assets to pay them. The pension system reports the discounted unfunded liability at $85 billion, while testimony at the Illinois House Pension Investment Committee hearing earlier this week suggested that Moody's rating service calculates the same liability to be as much as $200 billion. This is a staggering deficit, and our leaders now acknowledge that the state pension system is in crisis and jeopardizes all other state services.

What is Gov. Pat Quinn and Speaker Michael Madigan's solution to this massive pension debt? Force Illinois citizens to put their homes up as collateral to pay most of the shortfall. This is terrible policy and fortunately was not adopted in last week's special session.

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Quinn and Madigan were unwilling to implement real cost savings reforms. Instead, their plan shifts future pension costs onto local school districts that are funded predominantly with property taxes. Our citizens are already worried that their own savings are insufficient for retirement. We cannot add to their tax burden in a desperate bailout of the deeply flawed pension system. Under the Quinn-Madigan proposal, what happens if actual investment returns are below the overly optimistic estimates? What if actuaries continue to underestimate how long people will live? What if pension officials change assumptions (as they are certain to do) that trigger increased cost? The answer: Add the tab to your property taxes.

As we know, higher property taxes equal lower home values. And remember, Illinois home values have tumbled over the past few years, greatly reducing the home equity for Illinois citizens. In many cases the reduction in home values that will be caused by the Quinn-Madigan cost shift will actually eliminate all remaining home equity for our citizens.

Supporters of the cost shift argue that local districts drive up pension cost by spiking end-of-career teacher pay. This is correct. But spiking can be eliminated very simply by incorporating a pay cap into the pension formula. The cost shift is unnecessary for this purpose.

The real aim of the cost shift policy is to put off genuine reform. Solving the crisis is politically difficult but straightforward; stop giving unaffordable annual raises to pension recipients and move current workers into a more responsible "defined contribution" 401(k)-type system. These are the reforms that Rhode Island adopted earlier this year on a bipartisan basis, and they will work here.

A DC system is attractive to employees because the investment assets legally belong to them, not some government agency. The reason 90 percent of the private sector use DC plans is these systems create no liabilities. Imagine if Illinois originally had set up its retirement systems as DC instead of the defined benefit structure -- we would not have the half-trillion-dollar shortfall, taxes would be lower, state employees and teachers would not be dependent on politicians to make good on future promises and more funding would be available for essential state services to the needy.

The Quinn-Madigan plan fails in its most basic function -- real reform to reduce cost.  Instead, the inherent problems in the current structure are just shifted to homeowners via higher property taxes.

The state created and mismanaged the current system, and foisting its cost onto the local school districts usurps local authority and is unfair. Our homes cannot be provided to Springfield politicians as collateral to fix their failed pension system. It is time for Gov. Quinn, Speaker Madigan and the rest of our state leadership to stop trying to pass the buck. Only real reform will solve the pension crisis.

• Marc Levine publishes LevineonPolicy.com and is a senior pension adviser to House Minority Leader Tom Cross.

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