Are Public Sector Pensions Beyond Fixing? ... The Illinois Example ... Simple and Fixable? Yes ... Easily Done? No

A group of  Chicago businessmen has concluded that the Illinois public sector pension plan funding fiasco is beyond repair. Meanwhile, Illinois Governor Quinn has begun a folksy cornpone like public awareness campaign that he hopes will cause Illinois citizens to persuade Illinois politicians to solve the problem.

Unfortunately, awareness isn't the problem. The problem relates to resolve.

The problem isn't unfixable. In fact, it can be fixed. And the problem is a simple one as well. It's just not an easy one. Fixable and simple. But it very well may not be fixed because it's not going to be easy.

So let's not confuse what's fixable with what may not be fixed. Similarly, let's not confuse what's simple with what's easy. That's my assessment anyway.

And lots of states other than Illinois have similar funding versus promises issues. Of course, the elephant in everybody's room involves We the People and the federal government --- future entitlement affordability in such areas as Social Security and Medicare.

But let's limit our discussion herein to the impact of underfunding promised public sector pension benefits in the Land of Lincoln. Illinois the 'Unfixable' has a good summary of the various issues:

"Illinois's pension system is heading for a meltdown and may now be beyond help. That's the forecast from a Chicago business group, which told its members last week that the state's pension crisis "has grown so severe" that it is now "unfixable."

The Commercial Club of Chicago wrote that because the November elections did not bring in lawmakers willing to push real reform, the state's roughly $200 billion debt now threatens education, health care and basic public services. The problem is worsening so fast that the usual menu of reforms won't be enough to keep public pensions from sucking taxpayers and whole cities into its yawning maw.

If you think Illinois lawmakers aren't taking the problems seriously enough, just ask Pat Quinn. On Sunday, the Illinois Governor kicked off a "grass-roots" effort to rally the state around pension reform. The Governor hasn't come up with a plan, but don't despair: He introduced the state's new animated mascot, "Squeezy, the Pension Python," and encouraged voters to talk about the problem over Thanksgiving.

Here's some food for thought. The state estimates its unfunded pension liabilities at around $95 billion. But that rosy scenario is based on the assumption that pension investments earn some 8% a year. In fiscal 2012, the Teachers Retirement System had a 0.76% return, the State Employees Retirement System 0.05%, and the General Assembly Retirement System a negative 0.14%.

In July, Moody's proposed revising how pension funds calculate their discount rates, with the target for fiscal 2012 at a more realistic 4.1%. Under those assumptions, the gap is even wider than Illinois acknowledges. Meanwhile, the state's annual pension liabilities for 2013 are $5.9 billion, up from $1.6 billion a decade ago.

This isn't news to Illinois politicians, who continue to ignore the coming financial calamity even as the state's bond rating has fallen to the worst in the nation. State lawmakers may hope they can delay the train wreck with modest reforms and the kind of tax hikes Governor Jerry Brown recently foisted on California. Mr. Quinn has said getting a progressive income tax in the state is "one of my goals before I stop breathing."

As if he hasn't done enough harm already, but Mr. Quinn's first goal should be waking up Democratic lawmakers to confront their union buddies. "While a number of pension reforms have been proposed in the General Assembly, these are half-measures at best," the Civic Club continues. "Whether they involve token reductions in cost-of-living adjustments, locking in billions of dollars of unfunded retiree health care obligations or other scenarios, these 'reforms' are either insufficient or stand to make our state's fiscal situation even worse."

Although it is "no longer possible to preserve all state pension benefits as currently structured," the Civic Club adds, there are options that would help. The state should immediately end automatic cost-of-living increases, put a cap on how high a salary can be used to calculate a pension and raise the retirement age to 67.

The Civic Club tiptoes around it, but any real plan for the future will also have to include structural changes, including replacing the defined-benefit plans with the kind of defined-contribution plans that are typical in the private economy. More likely is that the politicians keep abdicating and then hit up President Obama for a federal bailout."

SUMMING UP

Let's set aside the federal bailout as a realistic solution for one simple reason. The federal government has no money.

Unless it borrows even more money than the more than trillion dollars it already borrows each year to fund its annual deficts, it simply can't bailout underfunded retirement programs, state or federal.

Besides, the Illinois problem is for Illinoisans to solve. States' rights, remember?

Borrowing more money from the Chinese isn't the answer. We've tried that way and it just makes things worse.

So is the pension problem unfixable?  Of course not. It's very fixable.

But will it be fixed? Therein lies the real problem. Not without dealing with the mess holistically and in a straightforward manner. And that's not the way they like to do things in Illinois politics. Or government generally, for that matter.

That said, Illinois borrowing has about run out of road, and its expertise at can kicking is about to be declared obsolete as well.

Here are some of the ways to fix what has been declared to be unfixable. Mix and match.

Higher employee contributions, higher returns on invested funds, higher taxpayer contributions, reduced retiree benefits, reduced employee salaries, fewer future plan participants due to fewer employees, and later eligibility for retiree benefits are just some of the ways to repair the damage. And adopting a 401(k) plan to supplement or replace the pension plan is a fundamental necessity.

So the problem is fixable. Very much so.

And it undoubtedly will take a mixture of the above and require contributions and compromise from everybody involved.

In simple terms, an 8% return on investment over a long period of time is not an unreasonable assumption for invested funds, whether they be for pensions or 401(k) benefits. But these funds should be invested in stocks. Otherwise, a lower return assumption will be necessary and the plans will remain unfixed.

And employees should contribute more and retire later. And local and state taxpayers may very well have to agree to pay more in taxes, including property taxes. Otherwise, the already promised benefits will probably have to be seriously reduced.

And if most or all of the above enumerated things aren't done, the Illinois pension plan underfunding will remain unfixed.

And so on.

One key is for us to understand and internalize the different meanings of the words 'unfixable and unfixed.'

The plans are fixable. Whether they will be fixed or not is a separate question.

Another key is to understand and internalize the different meanings of the words 'simple and easy.'

Fixing the pension underfunding issues in Illinois and elsewhere will require taking simple measures, albeit painful ones. And not easy ones.

Are the people of Illinois and their elected officials up to it? Are we as a nation?

I'm betting yes. That's my take.

Thanks. Bob.