New Jersey vs. Illinois Pensions: What Now?


“Illinois must take the prize for the worst-run state-administered pensions in the country.”

State and Local Pensions: What Now? by Alicia H. Munnell of the Brookings Institute p. 117

I disagree.

The book groups public pension systems by state as either Well-Run (with Florida and Delaware as examples), Expensive (California and New York), or Poorly Run (Illinois and New Jersey).  The evidence Ms. Munnell’s offers for Illinois’ place at the bottom of the pile:

  • Illinois got a late start on funding.  Until 1981, employer contributions covered current-year pension benefits, and only employee contributions were set aside for investments.  This system remained in place (with employer contributions at their 1981 levels) until 1995 when the legislature established a funded ratio objective of 90 percent by 2045, with a fifteen-year-phase-in to give the state time to adjust to the higher contribution.
  • To reduce the ever-increasing unfunded pension liability, the legislature authorized a pension obligation bond of almost $10 billion in 2003.
  • The shenanigans on the financing side were matched by repeated expansions of the benefit packages.

All pretty bad, but Ms. Munnell notes on New Jersey:

  • In 1992, the governor, facing a major budget deficit, increased the discount rate to 8.75 percent in order to reduce the pension contribution.
  • In 1994, legislation changed the actuarial method from the enatry-age normal to the projected unit credit, which reduced the normal cost in the short term and set the stage for more rapid accruals in the future.
  • In 1997, legislation did three things.   First, it switched the valuation of plan assets from actuarial to market, which in a rapidly rising stock market produced much higher asset values.  Second, it added $2.7 billion of pension obligation bond proceeds (issued at 7.5 percent) to the asset pile.  And, third, it allowed any excess assets to offset government contributions.
  • In 2001, the benefit factor was increased from 1.67 percent to 1.82 percent of final salary for current employees.  The legislation also increased the retirement benefit for members with thirty-five or more years of service and reduced the age qualification from 60 to 55.  The law also made a comparable percentage increase in the retirement allowances that existing retirees and beneficiaries received.

Worse.  Notice how New Jersey went from tweaking assumptions to issuing POBs to hiking benefits and then to outright refusing to make their contributions with the only significant ‘reform’ being an illegitimate cessation of cost-of-living-adjustments for all retirees while Illinois seems to grasp the issues and looks for real-world solutions.

It’s not where you are (especially when inconsistent and dodgy actuarial assumptions make that location impossible to determine), it’s where you’re going.  Illinois and New Jersey are both in a pension funding purgatory but Illinois is struggling to fight out of it while New Jersey keeps digging.

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6 responses to this post.

  1. Posted by Anonymous on October 1, 2012 at 7:30 pm

    John, do you know how the syestem works in florida. I have a few friends who retired and they get almost 90 percent of their pay, is that possible? And how much could they have contributed? Or is it just because Florida took tax payers money and put it into the pension system instead of stealing it

    Reply

    • Know nothing about Florida’s system. What Alicia Munnell gives as reasons for it bell in the well-run group:

      Florida made it difficult to expand benefits. Since 1976, the state has had a provision that requires any increase in pension benefits to be funded on a sound actuarial basis. Second, in 2000, Florida passed legislation that limited the extent to which surplus funding could be used to reduce contributions.

      Reply

  2. Posted by Tough Love on October 1, 2012 at 9:50 pm

    I took a look at the link … Illinois seems to grasp the issues and “looks for real-world solutions.”

    Seems they made a few changes applicable only to NEW employees. Hardly what I would call “real world solutions” … more like kicking-the-can-down-the-road”.

    The Plans in Ill. & NJ will be the first to implode (I’m betting Ill. goes first … likely their teacher’s Plan).

    Reply

  3. Posted by muni-man on October 2, 2012 at 9:43 am

    The UNCOLA was perfectly legal. Economics is gonna take care of the rest (pensions, Medicare, education-nation malarkey, etc., etc.). The real screaming will officially start Nov.7th with the lame duck session as Act 1, Scene 1 in the sure-to-be-a-smash-hit ‘The Great Gooberment Reset’ begins. Gonna be a very long-running one too.

    Reply

  4. Posted by eatingdogfood on October 2, 2012 at 12:50 pm

    Keep Voting For Lying Thieving Low Life Backstabbing Bloodsucking Double Dealing Tax and Spend Liberal Democrats !!!

    Reply

  5. [...] and switching to market valuation of assets in 1997 to realize investment gains in a bull market. Read his recap and if you agree with Bury or Munnell on which state has had the most badly-run pension [...]

    Reply

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