The Big Squeeze
The current unfunded pension liability of five of Illinois’s state run pension systems is $96 billion. The amount is so large that Standard and Poor, the credit rating agency, downgraded the state to A minus, making it more difficult for the them to borrow money in the form of bonds.
Governor Pat Quinn used this week’s State of the State address to once again make a plea for reform but to also point out the effects of the huge unfunded amount. In 2014, just about 20 cents of every state dollar will be spent on servicing the funds. Quinn likens this requirement to costing local government services such as public safety, “$17 million dollars a day.”
In Illinois, as in other places, it pays to pay attention to unfunded pension balances. Your’s may be fine but if enough others are not, the negative effects are pervasive, as Quinn suggests. And, fixing the problems in not easy or painless as it often involves labor contracts, state constitutions and current and former employees. Those in the know cannot even agree on how to value current plan assets.
In December 2012, a bipartisan pension reform bill, HB6258, was introduced in an attempt to make progress. It would effect virtually anyone receiving or expecting to receive a state pension by limiting annual increases, phasing in an increased retirement age and a pensionable salary cap.
A 2012 Harvard/Kennedy School report estimated the total US unfunded pension liability to be several trillion dollars, a not insignificant portion of annual GDP.
The states with the largest unfunded pension liabilities in percent:
New Jersey 51%
The cities with the largest unfunded pension liabilities in percent:
New York 41%
San Francisco 27%
Predictably, The Kennedy School report listed pension padding and DROP programs as being among the biggest sources of ruinous expenditure. The current situation also emphasizes the point that giving municipalities a pass on making “required” pension system payments is never a good idea.
Finally, just about everyone seems to agree that allowing pension systems to claim an 8% return when forecasting worth is an absurd idea.
Credits: NYT, Kennedy School, the Civic Federation