State pensions: Fund them now or later?

It took 14 months and 17 days to get S.B. 1470 through the General Assembly. It will cost $130 million, builds nothing and hires no one in any legislator's district. The bill's champions were number crunchers and retired employees.

Still, a few are excited about the bill that would require Illinois to boost its contributions to its five pension systems. "I may be one of half a dozen people in the state who is excited," says James J. Ofcarcik, manager of the Illinois Economic and Fiscal Commission's long-term debt analysis unit. Ofcarcik and the General Assembly's bipartisan commission had been promoting change in the way that Illinois sets aside money for its employees' retirement.

The bill would require Illinois to begin to put aside money for pension benefits as they are earned by employees and to amortize over a 40-year period the debt it has already built up, the unfunded liability. An Economic and Fiscal Commission analysis in February put the unfunded liability of the five state retirement systems at $6.6 billion, based on assets of $10.4 billion and liabilities at $17.0 billion.

As originally introduced on April 10, 1987, S.B. 1470 would have become effective in the 1988 fiscal year. As passed by the General Assembly on June 27 the bill would have been effective in the 1989 (current) fiscal year. As amendatorily vetoed by Gov. James R. Thompson on September 2 the bill will — if the changes are accepted by lawmakers during the November veto session — become effective in the 1990 fiscal year (the year beginning July 1, 1989).

For years the state has funded pensions based on the amount paid out to retirees in any given year. Until 1982 the state contributed to the pension systems the amount that was paid out, a ratio described as 100 percent of payout. That allowed the pension systems to invest the 4 to 11.5 percent of salary contributed by employees to pay future obligations. In 1982 the funding was cut to 70 percent of payout. In 1983 it was trimmed to 60 percent of payout. And in fiscal 1988 the funding dropped to 44 percent of payout. (See Michael D. Klemens, "State pensions' funding," October 1987, pp. 6-7 and Charles N. Wheeler III, "Policy procrastination," February 1988, pp. 4-5.)

The commission has argued that payout is not an appropriate measure of the obligations that a system is incurring. A more accurate reflection, most agree, is a percentage of the payroll. Whichever system one uses, the cuts of 1982, 1983 and 1987 meant actual declines in state contributions for pensions. The reductions in state funding meant that the systems were accruing obligations faster than they were putting aside money to pay them. There was no danger that the systems would go bankrupt and retirees miss their checks because state pensions are constitutionally guaranteed. What would have happened is that in the future larger state spending would be required of future taxpayers. It became a question of paying more now — or paying even more later.

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Ofcarcik says he is relieved that Thompson did not veto the bill outright, since the state clearly lacks the $130 million estimated first year cost. He says some move must come because the outfit that sets standards for keeping governmental books, the Governmental Accounting Standards Board, is moving towards requiring that the unfunded liability of pension systems be listed on the state's financial statements. That could provoke problems with rating agencies and with bond interest costs, he says. And, Ofcarcik says, the $130 million gives Thompson some leverage for a tax increase.

Rep. Woody Bowman (D-4, Evanston), House sponsor of S.B. 1470, sees tax increase in the amendatory veto, too. "We actually ran a surplus last year. He [Thompson] needed to find a way to soak up cash without making the financial health of the state too obvious." For whatever reason the measure was signed, Bowman is thankful. "Essentially we were going into debt secretly. If we didn't take care of this thing, sooner or later it would affect state services," Bowman argues.

Robert L. Mandeville, director of Thompson's Bureau of the Budget, says the pension funding bill was signed at the bureau's recommendation. He says he favors actuarial funding, but points out that the health of the state's five pension systems had been improving under the percent of payout method. If the bill is to be followed, and other laws requiring actuarial funding have not been, lawmakers will face the task of finding the money to do so, he says.

Still, reason for optimism is found by the executive director of the State Universities Retirement System, the second most underfunded state system. Donald Hoffmeister says he is less thrilled by the law itself — since laws already on the books but ignored would provide even more money — than by the attention being given the issue. "Once again the subject's been discussed by the General Assembly that we're not paying part of our operating expenses," he says. And Hoffmeister argues that the system should fund benefits as they are earned. "It's just so unfair to keep pushing off into future generations a debt."

Hoffmeister has read Thompson's veto message that said, "[I]t is important that a funding plan which amortizes the accrued liability be followed when sufficient revenues are available." He reads into that a tax increase. "Where are they going to find the money, unless they cut it out of some department or some agency?"

By his amendatory veto, Thompson declined to kill a bill that got 167 yes votes in the two chambers of the General Assembly this spring. There is little dispute that the funding system is sound. Finding the money to pay for it may be harder, though.□

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