The Daily Herald took the State Legislature to task today for not proposing a solution to the state's runaway pension problem before they adjourned for summer vacation. This may be the single biggest issue facing the state and certainly has the biggest potential negative impact on our state's fiscal health. I will make pension reform a central part of my time in Springfield as your State Representative.
SPRINGFIELD -- State lawmakers had the incentive and the opportunity to work on the nation's worst pension debt problem, but they left town last month without a new solution -- and with even more money problems because of their inaction.
Here are some questions and answers about the latest on state government pensions.
Q: What is the financial condition of the pension systems today?
A: Pretty sad. The five state systems have a combined debt of about $44 billion, and they only have about 63 percent of the funding they'll eventually need to cover all their obligations to retirees. Those two factors combine to create the worst pension debt problem in the nation.
Q: Will any retirees be shorted this year?
A: No. The systems have enough cash and assets to cover their yearly obligations. State pensions will all be paid.
Q: Then what's the problem?
A: Debt -- costly, costly debt. The entire state budget is $59 billion, so $44 billion in long-term debt to the pension systems is a huge liability. The debt's growth rate is even scarier. The systems essentially are owed 8.5 percent interest every year their full costs aren't covered. That equates to more than $3.6 billion a year in interest -- or $120 a second.
Q: Did lawmakers do anything to deal with the problem this year?
A: Not to this point. Gov. Rod Blagojevich's administration and Senate Democrats wanted to issue $16 billion worth of pension bonds to pay down the debt. That would then free up money destined for pensions to be spent on other state budget needs: education, health care, etc.
Q: How would this pension bond work?
A: The governor and lawmakers did the same thing in 2003, only with $10 billion. The idea is to put that borrowed money into the pension systems to cut their debt and reduce interest costs. The Blagojevich administration hopes the bond debt would have an interest rate of less than 6 percent, compared to 8.5 percent for the pension debt, so the state would come out ahead.
Advocates say paying down the debt quickly and spending less in debt payments each year will save Illinois a whopping $55 billion by 2045. And they estimate it would cut this year's required payment to the pension systems from $800 million down to $300 million. The "leftover" $500 million would be directed to other spending needs.
Q: What happened with this idea?
A: The Senate approved it with only Democrat votes. Democratic Speaker Michael Madigan never called it for a vote in the House, where it needs some Republican votes to pass.
Q: What's behind the opposition?
A: Critics point to several problems. They say it's unwise to borrow more money to pay off existing debt, particularly when it means converting pension debt that can be paid off any time into bond debt with a strict payment schedule.
They argue it could be risky to invest such a large amount of money at a time when the stock market and economy is shaky. If the investments don't cover the costs of the extra borrowing, the pension debt problem would grow worse. They also protest spending the "leftover" $500 million on other needs when the pension systems are woefully underfunded.
Q: How long has this been a problem?
A: For decades. Lawmakers failed to put aside enough pension money for years. That added up over time, leading to the massive debt problem.
Q: What is the state doing about it?
A: There's a payment schedule that began in 1995 and is supposed to get the systems up to 90 percent funding over 50 years. But it was structured to require small payments in the early years and increasingly large payments later. As a result, the state is finding it harder and harder to make the required payments and has skipped them in some years.
Q: Where does all this leave the budget for the coming year?
A: Under state law, the pension systems automatically get an additional $800 million. But legislators approved a budget that assumes the pension bonds will be issued, cutting the payment. Since the bond plan failed, the budget will have a $500 million hole -- part of a deficit that, according to the governor's estimates, totals $2 billion.
Q: What will happen next?
A: Blagojevich could bring lawmakers back to town this summer to try to pass the pension bond and make other budget changes. Or the pension bond could be discussed again after the fall elections during the veto session.
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