When Pension Payouts Exceed 100% of Tax Revenue What Do We Do Then?

Eleven Ways to Avoid Bankrupting the State.

By Bill Zettler

The attached spreadsheet shows the looming fiscal crisis caused by out-of-control retirement benefits to public employees. Total due from taxpayers for each 5-year period going forward are shown. From 2010 thru 2014 taxpayers have to pitch in over $31 billion for pension and health care.

That would be about 20% of the state tax revenue over that time period. It then accelerates growing at 30% plus over each subsequent 5-year period until it reaches an unsustainable $170 billion in 2040 to 2044. At that point public employee retirement benefits would be in excess of 79% of the state tax revenue in effect taking money from every other legitimate public need.

That would certainly be “punishment” to all citizens who are not public employees. And that 79% of revenue assumes a rosy scenario of 2% revenue growth and 8.5% ROI for the next 35 years.

If Return on Investment on pension fund assets only averages 6% instead of the 8.5% assumed by the state then pensions and retiree health care will exceed 100% of state tax revenue in starting in about 2040.

1. Change the constitution to limit pensions.

– Make them a function citizens’ income, say no more than the median Illinois family income ($65,000 as of 2007). That would result in maximum pension payout for a 55 year old retiree of $3 million and a cash 401K value of $1.5 million. Do we really owe ANY public employee more than $1.5 million cash at retirement? Let’s have a referendum on that point and see what the answer is.

2. Legislate maximum annual increases for public employees that match public sector increases, currently about 3%.

– Schools and other public entities could take the 3% and divide it any way they wish. Half the employees could get 6%, the other half 0% or any combination thereof as long as the total payroll for their institution does not increase more than 3%. Let’s make these $400,000/yr superintendents real managers instead of cheerleaders and tax-increase salesmen.

3. Increase employee contributions for pensions and retiree health care.

– The percentages could be adjusted up or down based upon the unfunded balance with employees and employers splitting the amounts 50/50.

– Make the 73,000 SURS employees pay for their pension rather than have the taxpayers pick it up as they have done since 1981. That alone would save $300 million a year.

4. Institute a universal Education Tax Credit of $500.

– This credit could be used for any education cost whether pre-school, K-12 or college. This credit would certainly result in fewer public school students, K-university, and therefore fewer public employees and fewer public pensions.

5. All new public employees go on Social Security and 401K plan. No more open-ended taxpayer guarantees.

– Offer cash buyout to current employees for cash value of pension if they switch to new Social Security and 401K plan.

6. Consolidate school districts to minimize excessive administrator pay.

– Arizona’s top superintendent pay is less than half Illinois top pay although they supervise districts 2-6 times larger than Illinois Districts.

– In fact we have many retired superintendents whose pensions are more than AZ top superintendent’s salary.

7. Outsource as many public functions as possible.

– A good place to start would be driver’s education which could easily be outsourced. That would eliminate ninety-four $100,000 salaries and by adding Art, Music, Food Service and Auto repair we could eliminate another 300 or so $100k salaries.

– Eliminating 400 $100K plus salaries would save $1.6 billion in pension payments in addition to the salaries.

– We could offer classes to ex-public employees to set up their own small business to provide these services to the public. Let’s make entrepreneurs’ out of them.

8. Open all employee contract negotiations to the public.

– Make all payroll/employment contract agreements approved by public referendum.

– Put all public salaries (over $40,000/yr) and calculated benefits on the internet.

9. Add one classroom period a day to all teacher work schedules (K-University).

– This should reduce the number of teachers needed state wide by about 15% reducing not only local real estate taxes but also statewide pension taxes.

– Currently, by contract, teachers teach 5 of 8 or 9 periods per day. College teachers have even lower requirements (3hrs/day) and could easily provide 1 more class a day for their gold-plated retirement benefits.

10. Place pension liability at the district level.

– If schools want to pay Drivers Ed teachers $170,000/yr then let them pay the $3 million pension too.

– As it stands now the poorest district taxpayers fund the pensions for the wealthy districts, Robin Hood in reverse.

– This would be constitutional as long as the state guaranteed payment if district went bankrupt.

– An example of the added district cost: Dist 211, $39 million more in local taxes for 2008.

11. Give em A Million, Save $70 billion.

We could eliminate the state’s entire $70 billion unfunded pension liability completely by handing every retired state worker a $1 million check after 35 years service in lieu of his current pension ($60,000/yr ending salary minimum) using current contribution rates and actuarial assumptions.

Those numbers give you an idea how tilted the playing field is in favor of public employees. The fact that we have these huge deficits is because we are giving public retirees much more than a million dollars when they retire, not counting health care benefits. It is in effect a legal form of corruption, politicians buying public employee votes with high pension payments.

So do not believe Gov. Quinn’s claim that he wants to reform pensions until he admits that taxpayers should not have to make public employees multi-millionaires and institutes real reform to that end.

Until then he’s just another in a long line of Illinois politicians so blinded by generations of political favoritism that they do not recognize the corruption inherent in transferring huge amounts of wealth from one group of citizens to another. It is not only unfair but unsustainable.


 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.