Legislators will get $55,000 – no wonder they are against pension reform.
By Bill Zettler
The title of this article tells you everything you need to know about Illinois pensions: they cannot be paid, they will not be paid and they should not be paid. Click here to read part 1.
Why the pensions cannot be paid #3: it’s a cash-flow problem.
Think of the $80 billion unfunded pension liability as the taxpayers 30 year “pension mortgage.” That means our monthly payment is $615 million or $7.4 billion/yr. or about the same as the total sales taxes collected by IL. Note that only taxpayers have to pay for the unfunded pension mortgage, while public employees, representing just 5% of the workers in IL, pay zero.
And like you and your mortgage we still have daily pension expenses to pay in addition to our $7.4 billion annual “pension mortgage” payment. Those pension expenses other than the “mortgage” include pension payouts to retirees, salaries and expenses of pension staff and facilities, and broker/investment costs. In 2010 those expenses totaled $7.2 billion and are growing at more than 8%/yr. So our total cash out in 2010 was $14.6 billion.
On the income side we have employee contributions of $1.4 billion, taxpayer contribution of $3.9 billion and an excellent 14% investment return yielding $6.7 billion for a total of $12 billion. Note that in spite of the constant whining by the press and union officials of payment “shortages” by the state, taxpayers are paying 300% more than employees paid in 2010. Also note that employee contributions are only 10% of our cash flow out.
Including an unsustainable 14% ROI we still have a $2.5 billion negative pension cash flow for 2010. This negative cash flow is projected to grow every year and will be, best-case scenario, at least $5 billion in 2020 despite an $8.9 billion payment by IL taxpayers scheduled for 2020.
So under “best-case” scenario we are scheduled to have more than a $35 billion total negative pension cash flow over the next 10 years. This is not a solution it is a recipe for financial disaster.
And, no, the so-called pension reforms enacted by the legislature will have virtually no effect over the next 10 years.
Why the pensions WILL NOT be paid: taxpayers have spoken.
In the last 10 months 17 non-binding referendums on the need to reform pensions have been presented to Illinois voters. By an overwhelming margin of 83 % these referendums have been approved.
Taxpayers want significant reforms not the nibbling at the edges the governor and legislature have given us. Enforce the pension rules in effect when the pension guarantee was made and there would be no pension deficit (see ..What Did We Really Guarantee?). All the bennies and increases handed out like candy to the politically connected over the last 20 years need to be reversed
Those politicians who ignore this issue will be replaced beginning in 2012. This does not bode well for Democrats beholden to public sector unions and their political contributions.
Why the pensions SHOULD NOT be paid: the issue of fairness overwhelms all others.
News outlets report almost daily on the disproportionate compensation advantage public employees have over their peers in the private sector. Pensions are so out of whack that it is not unusual for public retirees to have pension payouts five times that of their peers in the private sector (see public/private Music teacher comparison here).
Quinn’s idea to increase taxes on the $40,000 worker to pay for the $400,000 pensions of the non-worker is not going to fly. Instead let’s have zero $100,000 pensions starting immediately with the politicians.
To reiterate: The 95% of Illinois workers who do not have state pensions are angry and they are not going to take it anymore. Taxpayer pension payments more than double employee payments are more than enough. Any employer in the private sector that contributed 230% of his employees pension would be bankrupt which is exactly what IL is for the very same reason. And most certainly that employer would not have to listen to his employees complain and whine that 230% more was not enough.
Dystopian Future Awaits State Retirees Unless Big Changes Are Made Soon.
Pensions that cannot be paid are going to be cut one way or the other. It would be much better for current retirees and workers to work on compromise than to wait for the inevitable de facto pension bankruptcy. Recently Pritchard, Alabama filed for bankruptcy unable to pay the required pensions and unable to get pensioners to take pension reductions. Now the retirees have nothing (see here).
To speed up compromise the state should withhold pension payments (a la Chris Christy in NJ) until a viable solution is reached and use that money to make payments to other entities that have contracts with the state namely the vendors currently owed about $7 billion. Why are contracts with public employees the only ones deemed sacrosanct?
Based upon current payout ratios the IL state pensions have about 7 years of assets left before they run out of money if the state withholds payments.
The days of the taxpayer paying for decades of back-room political deals and every instance of political malfeasance and nonfeasance are over. We have reached our limit and big changes must be made and soon. Otherwise we will put people in office that will make the needed changes.
SOURCES: General Assembly Actuarial Report June 30, 2010
IL Commission on Government Forecasting and Accountability
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address. Click here to read more by Mr. Zettler.
