Pension Crisis – The problem is $200 billion not $95 billion

By Jack Roeser and Bill Zettler

As we listen to the endless cries of “We need pension reform” emanating from Springfield it is easy to assume that the proposals being bandied about will actually accomplish the goal. Nothing could be further from the truth. In this article we will attempt to point out the major failings of the current proposals and why they are doomed to failure.

The problem is $200 billion not $95 billion.

You will notice that every politician studiously ignores the experts when it comes to determining the state pension systems real Unfunded Liability (UL). They keep dealing with unreasonable assumptions such as 8% ROI returns for the next 30 years in order to keep the $95 billion UL from toppling into the $200 billion abyss.

Who are those experts that disagree with Illinois politicians? Moodys Investment Services and GASB (Government Accounting Standards Board) both present believable calculations that the UL is $200 billion plus. Moodys is the company that rates Illinois bonds (currently the lowest rated in the country) and GASB is the governing body that determines how public entities must report pension liabilities to the public.

So who are you going to believe: Moodys or Madigan?

There is a very good reason politicians and the Illinois Education Association ignore the $200 billion number: because funding a $200 billion UL is impossible to do and spells certain doom to all five state pension systems. To give you an idea of the magnitude according to Moodys formula the state pension contribution in 2015 would need to be $17 billion, ½ of the state’s general Fund revenue. In other words the political fallout from agreeing to a $200 billion UL is more than any politician can possibly accommodate. If $200 billion becomes the agreed upon number, Democrats are doomed in 2014 and that includes Madigans daughter Lisa’s chance to be governor.

The problem is not going away just because Madigan proclaims “Pension Reform” has been accomplished.

The politicians are desperate to get something done called pension reform so they can claim success and go home. But the $200 billion problem will linger in the background a hulking financial Apocalypse growing larger and more powerful by the day. The day of reckoning cannot be denied only delayed – and only for a short while.

As investment returns lag assumed rates the UL grows like Topsy and more cash must be taken out of investment funds in order to make pension payments leaving fewer investable dollars to earn a ROI on. As an example the TRS (Teachers Retirement System) had $41 billion in assets in 2007 but now has only $36 billion and that number is going to shrink more over time. In addition TRS was paying out $3.1 billion in 2007 and in 2012 paid out $4.6 billion. So TRS is paying out 40% more than in 2007 but has 12% fewer assets to earn interest on. Any 6th grader can see that the pension arithmetic does not work. Perhaps we should put all politicians back in 6th grade math class for a semester before they make any final decisions on pension reform.

Legal corruption is still corruption.

The first thing every person says who is questioned about some outrageous pension or perk is “Everything I did was legal.” Yes it was but that doesn’t mean it was fair, ethical or moral – or not corrupt.

Let’s look at three pension items that just popped up in the last few months to see what we mean.

  1. We have our first $500,000 pension in IL. How can any public employee justify a $500,000 pension?
  2. A former DuPage county high school teacher passed the $400,000 pension mark.
  3. A former Drivers Ed teacher retired in 2012 with a starting pension of $183,000/yr.

    We would argue every one of those is an example of legal corruption i.e. outcomes completely unrelated to the purpose and goals of any retirement system. In fact Eileen Nekritz Democratic representative working on so-called pension reform when advised of the high school teachers $400,000 pension was the result of a complex, esoteric transaction called a “reversionary pension” said “I don’t even know what that is.”

    Well how can you reform something you don’t even understand? And in Ms. Nekritz’s defense NO ONE knows what is buried in the 1,000’s of pages of pension law that has been amended 100’s if not 1,000’s of times over the years.


This is precisely why we recommend that the entire system be jettisoned and replaced by a 401K type system rather than trying to reform something so corrupt, opaque and doomed to failure.

In the end the pensions are not going to be there.

For all the teachers, university employees and state workers who are not retired yet plan on receiving less than you expected. How much less will depend on how long before courageous politicians take a hatchet to the current system and replace it with a retirement system that is durable and beyond the reach of politicians. The current “pretend” reform will start costing current workers’ pension dollars right off the bat. The longer reality is ignored the worse it will be.

For those already retired you will be hit too. Plan on paying state income tax, having your COLA reduced or eliminated and for the ten-thousand or so with $100,000 plus pensions cutbacks or higher taxes. You should also plan on paying a lot more for your health-care too. There will be no place to hide.

The unholy alliance of Democratic politicians (and many Republicans too) and the IEA (Illinois Education Association) has brought Illinois to its knees and it will never stand up