“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
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.