At last, Illinois finds pension answer beyond cutting benefits

Not including Chicago, there are 649 local pension plans for police officers and firefighters serving municipalities across Illinois. And while a small minority of these plans are very well funded, when considered together, they have an aggregate "funded ratio" of only 55 percent, meaning they have just over half the financial assets needed to cover the benefits they're obligated to pay. That's problematic, considering that to qualify as "financially healthy," the Congressional Budget Office has determined public pension plans should be at least 80 percent funded.

To date, there've been a paucity of viable proposals introduced to get these 649 police and fire funds fiscally healthy. The reasons for this failure have been primarily twofold. First, elected officials have focused most of their legislative efforts on cutting pension benefit levels for the workers who put their lives on the line to keep us all safe. That was never going to work, given all the data show benefit levels have not been the primary driver of the unfunded liability. Instead, the main culprit has always been a statutory funding scheme that permitted municipalities to underfund the contributions owed to these pension systems for decades.

Meanwhile, in their misdirected fervor to save a little money by cutting pensions for police officers and firefighters, state lawmakers created a "Tier 2" benefit level in 2011 that's so low, it will eventually violate the safe harbor which allows local governments to be exempt from paying into Social Security - but only for so long as the benefits in the exempt plan are at least equal to what a worker would earn under Social Security. That means even though Tier 2 reduces the contributions required of municipalities in the short term, when it blows by the safe harbor in a few years, municipalities will face the huge new cost of either paying for Social Security, or bumping Tier 2 benefits up to at least equal what pertains under Social Security. That of course means today's level of underfunding can be expected to get significantly worse tomorrow.

Which is the perfect segue into the second reason public pensions are so underfunded: political systems have great difficulty dealing with long-term fiscal problems responsibly. Think about it, in the highly partisan and frequently toxic environment in which politics operate, elected officials are rewarded for getting through the current budget year or election cycle. If that short-term political reward comes with a long-term cost so be it. Hence the impetus to underfund pensions - it frees up revenue to spend on current services and defers true pension funding costs into the distant future. In essence, this allows politicians to provide services to constituents, without requiring those constituents to pay the full cost of those services in taxes.

Which is why the legislative compromise recently reached in Springfield that implements key recommendations made by Gov. Pritzker's Pension Consolidation Task Force is such a breath of fresh air: it departs from Illinois' historic, irresponsible practice of reducing current pension contributions to free-up revenue to spend on services. Instead, this legislation is designed to generate improved pension-system asset growth over the long-term, by consolidating the investments of the 649 local police and fire pension funds that exist today, into one large statewide fund for police, and another for fire. Based on anticipated reductions in administrative, asset management, and investment costs, as well as access to a greater variety of investment vehicles, the Illinois Department of Insurance projects this consolidation will enhance pension asset growth by anywhere from $820 million to $2.5 billion more over the next five years than if these funds remained segregated in 649 smaller, local plans.

Sure, there'll be transition and start-up costs to pay that will reduce the benefits of this consolidation in the short-term. But long-term, benefits are projected to outweigh costs. You read that right. The legislation recognizes the need to incur short-term costs to generate long-term gains. How refreshingly un-political.

Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.