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Annual Funding Shortfalls, Not Promised Benefits, “Wreak Havoc” on State Budgets

Updated:  December 13, 2019

Issue: In February of 2018, the government watchdog group “Wirepoints” released an analysis of the State of Illinois which concluded that the state’s troubled finances is the result of a dramatic increase between 1988 and 2016 in promised pension benefits to public school teachers and government employees and the high cost of paying for these benefits.

It is an inescapable fact that Illinois state government every year pays a high cost for its pension systems. In fiscal year 2020, which began on July 1, 2019, the state contribution for Illinois public pension systems will be $9.2 billion, or about 23.9 percent of the state’s $38.5 billion general funds budget. By comparison, other state and local governments only spend an average of 4.7 percent of their budgets on their public pension systems.

Wirepoints concluded “…it’s the uncontrolled growth in pension promises that’s actually wreaking havoc on state budgets and taxpayers alike.” Wirepoints crunched state financial statistics and found, “… Promised pension benefits in 2016 were 1,061 percent higher than they were three decades ago… no other measure of Illinois’ economy comes even remotely close to matching the growth in promised benefits.”

Discussion: The Wirepoints’ conclusion is incorrect. The growth in accrued pension benefits between 1988 and 2016 is not the reason the state’s finances are in trouble, nor the reason that Illinois taxpayers will pay $9.2 billion for public pensions in FY 2020 instead of a smaller amount.

The real reason is that since 1939, Illinois officials have never once set aside enough money for pensions that actuaries say would equal “full funding.” As a result, Illinois now carries one of the largest public pension unfunded liability in the nation – $129 billion. In 2016, Illinois had only 37 cents in the bank for every $1 promised through 2045.

What if Illinois had fully paid its pension bills over the last 80 years? The annual cost of pensions would be drastically lower.

In the current fiscal year, 75 percent of the $9.2 billion Illinois is slated to pay for pensions is dedicated to paying off a portion of the unfunded liability, not the actual cost of benefits.

If pensions had been properly funded, the current state appropriation for pensions would not be $9.2 billion, but $2.3 billion, or 6 percent of the state budget. That’s a difference – a savings – of $6.9 billion.

What is actually “wreaking havoc” on Illinois taxpayers and the state budget are decades of bad decisions on funding pensions; not the cost of benefits.

Moreover, the Wirepoints conclusion is drawn from apples-to-oranges comparisons of random economic data calculated in different ways. The group compared the cost of accumulated benefits – which adds each year’s cost to the previous years’ costs – to other historic, year-to-year data that does not add one year to the next. The analysis shows how various economic and demographic indicators increased over 30 years:

  • Promised state pension benefits – 1,061 percent
  • State personal income – 236 percent
  • State general revenues – 176 percent
  • Median household income – 127 percent
  • Inflation – 111 percent
  • Pension membership – 67 percent
  • Resident population – 13 percent.

In a July 31, 2018 letter to the Wall Street Journal, Evan Inglis, FSA, CFA, of Vienna, Virginia, said the Wirepoints analysis is, “…akin to comparing the growth in 401(k) balances to the rate of growth in 401(k) contributions – the concepts aren’t comparable…accrued pension benefits are the accumulation of the amounts earned each year…The accumulation of benefits as employees’ service increases adds a significant element of growth that is not present in the items Wirepoints is comparing.”

In another letter to the Journal, Hank H. Kim, executive director of the National Conference on Public Employee Retirement Systems, said, “The Wirepoints analysis cited is flawed because its comparison of growth in pension liabilities to state gross domestic product growth is illogical and has no theoretical basis.

“GDP growth depends on factors such as investment in education and infrastructure, while growth in pension liabilities is a function of funding policies and practices… It is facile and disingenuous to excuse chronic pension underfunding by some state and local governments while blaming the victims… many states and localities skipped payments when it was inconvenient…”