Taxpayer Pension Contribution for Gov. Quinn in 2011: $140,000 (Part 1)

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.

It is not just Quinn of course but everyone in GARS (General Assembly Retirement System) is receiving 82% of their salary as a pension contribution. That means each state rep and senator will be receiving over $55,000 in pension contributions from the generous Illinois taxpayers on their $67,836 salary. So these part time jobs called state representative and state senator are paying over $120,000/yr. Not bad for government work.

And that puts Quinn at over $300,000/yr – talk about overpaid.

(Click here to see the General Assembly Retirement System information.)

So what would they be getting if they were paid like the average private sector taxpayer? About 11% (6.2% Social Security + 5% 401K matching contribution) meaning Quinn’s employer contribution would be about $14,000 (Social Security stops at $106,800 and Quinn’s salary is $170,000) and legislators about $7,500. So Quinn’s current $140,000 taxpayer pension contribution is about 10 times more than what they would have to pay if he was under Social Security and a 401K-retirement system like most taxpayers.

Why the pensions cannot be paid #1: even the best-case scenario cannot be paid.

Unbelievably the 82% of salary pension contribution is a best-case scenario and is almost certainly too low. I predict right now that without massive pension cuts including to current retirees and current employees, taxpayer contributions for the Governor and other legislators will exceed 100% of their salary by 2015.

All of the pension systems have overestimated revenues and underestimated costs since at least 1996. All six factors used in calculating the $80 billion unfunded since 2001 have been negative i.e. increased the unfunded and thus taxpayer liability. These include salary increases, benefit increases, investment losses and lower mortality rates among others.

Since taxpayers are stuck with paying every pension penny that results from these items their required actuarial payments have sky rocketed to the benefit of no one but the employees

This is evidenced by the fact that the Employer Contributions (better known as taxpayer contributions) have been 230% more than employee contributions since 2000 even as the unfunded pension has increased by 500% from $15 billion to $80 billion.

This proves that the problem is not that taxpayers are not contributing enough it is because the pensions cost too much. The costs must come down; the taxpayers are paying more than their fair share.

Here is a chart of pension contributions since 2000. Note that in every year taxpayers have contributed more than employees including 300% more in 2010.

Why the pensions cannot be paid #2: more conservative regulations are coming in 2012.

As most people know now, every public institution from the smallest school to the US government has underestimated pension costs to the tune of trillions of dollars in total. A public non-profit organization called GASB (Government Accounting Standards Board) is assigned the responsibility to determine what accounting rules should be followed to assure full funding of public pensions and reasonable costs for taxpayers.

GASB has determined that the biggest flaw has been the assumed interest rate being used by public institutions to determine their pension liability. Basically the higher the interest rate assumption, the larger the unfunded liability will be. As you might guess IL has used the highest rate allowed under current rules, 8.5%. This has lead IL to the largest per capita pension liability in the country.

The reason politicians and unions like high interest rate assumptions is that it makes the contribution requirements by both employee and employer look more reasonable i.e. lower. Who doesn’t want lower contribution rates? Taxpayers like them, politicians like them and employees like them. The problem is these estimated contribution rates are “pretend” numbers that deteriorate rapidly when investment returns do not return 8.5%/yr, year after year after year.

And guess who gets stuck with the tab, every single penny, if the “estimators” are wrong? Taxpayers of course which is why we are paying 82% of legislators salaries into their pension accounts and more than 40% into judges retirement accounts and more than 30% into everyone else’s retirement accounts. And remember those percentages are best-case scenarios.

To make a long story short, by 2012 GASB has said it will come up with new rules on interest assumptions and 8.5% will never be seen again. The rate IL will have to use will be somewhere between 5% and 7%. If it is 5% the unfunded liability will jump from $80 billion to $155 billion in an instant. If 7% it will jump to $105 billion.

Since we cannot pay $80 billion how are we going to pay $105 or $155 billion?

GASB is the 800 lb. Gorilla in the room that everyone is ignoring. But come 2012, that gorilla is going to tear the bejebbers out of the room and then everyone will realize what I am saying now: the pensions cannot be paid.

Up next: Part 2.

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.