The warning signs can be heard loud and clear, from New York state to California, from major magazines to small-town newspapers.
The danger? Brazen raids upon the nearly $900 billion in public pension funds that are supposed to provide a modest retirement for some 16 million Americans.
The reason? Tough fiscal times have made these pension assets — many already severely underfunded and others facing increasingly grim demographics — juicy targets for states struggling to balance their budgets and to stimulate their economies.
Over the past three years, "hostile takeovers" of state pensions systems — either through deliberately delayed contributions or outright seizures — have taken place in one-third of the states.
In California last year, Gov. Pete Wilson, facing a $14 billion budget shortfall, seized $1.9 billion from the state's $63 billion public employee retirement system. Wilson's maneuver, which opponents contend violates contractual obligations with state employees and hides "the real cost of government," was recently upheld by the U.S. Supreme Court.
In New York, Gov. Mario Cuomo, for years frustrated in his attempts to use the state's $100 billion pension fund as an investment tool to rebuild the state's infrastructure, ultimately settled on deferring state contributions to the retirement system and using the "savings" to build roads and bridges and to reduce the state deficit.
Illinois has been noteworthy on two pension fronts: its outright failure to adhere to pension funding levels established in legislation (Senate Bill 95) which I sponsored as a state senator in 1989, and Gov. Edgar's transfer last year of $21 million from a fund earmarked for state employee pensions into the General Revenue Fund.
I have opposed Edgar's transfer from the beginning.
In November, 1991, I was invited to address a joint Congressional committee that was investigating the use of public pension funds. I testified: "My concern is for the future health of our state retirement systems and for the deferral of obligations to future generations. Underappropriated pension contributions are like unpaid credit card bills. The liability does not go away just because you choose not to pay the bill when it is due. You still owe the unpaid balance, plus interest.
"Eventually, the cost of rectifying the problem becomes too great. Our problems might be more understandable if our retirement systems provided extravagant benefits, but they do not. We are having trouble facing our obligations for systems that have some of the lowest benefit levels in the country."
What is happening in Illinois — the outright failure to pay what the state itself calculates it owes its pensions each year — is becoming something of a trend in many states across the country. Another common practice is deliberately overestimating the expected annual returns for pension investments.
February 1993 / Illinois Municipal Review / Page 15
Though these false calculations are often made year to year as part of the smoke and mirrors that balances budgets, over time they can leave a pension fund woefully underfunded.
So why is this trend, which Fortune magazine has dubbed, "The Great Pension Robbery," not a hot topic for political or public debate? For one, the general public cares not whether government employees' pensions are on solid ground (even if the bill is their's to pay). Also, as the 1991 Fortune article pointed out, "actuarial math does not make for vivid public debate."
This explains the lack of political will in Illinois that would be required to meet the goals of SB 95, which was designed to grant the state a seven-year phase-in period in order to minimize its impact on appropriations. But in fiscal 1993, though the state appropriated more than $494 million for the five state pensions, that amount was nearly $295 million below the requirements of SB 95.
The fact is, since 1989 when SB 95 became law, the funding ratios of the state's five pension systems have all dropped. The state pensions are funded at less than a 57 percent ratio of assets to liability, ranging from a 60 percent ratio for state employees to a 42 percent ratio for members of the Illinois General Assembly.
As I told Congress: "The five State-funded retirement systems in Illinois are at a crossroads, and the choices are not very appealing."
These "choices" for taxpayers represent a ticking time bomb that could blow a hole in their wallets if pension costs are ignored indefinitely, and for public employees they could emperil a nest egg that they once viewed as a stable part of employee compensation. •
Page 16 / Illinois Municipal Review / February 1993