By Andrew Thomason Illinois Statehouse News
SPRINGFIELD — Paying bills from your checking account usually isn’t a big deal, unless you’re the state of Illinois.
The General Assembly approved a plan to pay about $4.5 billion into its various pension systems during the upcoming fiscal year using cash instead of borrowing. It's the first time that has happened in two years.
“This is a message that we’re no longer going to kick the can down the road,” State Sen. Dan Kotowski, D-Park Ridge, said. “It’s going to allow us to keep a commitment we made as Democrats this year that we’re going to fully fund our pension system and that borrowing is no longer going to be an option.”
It wasn’t just Democrats who applauded the idea of using cash on hand to fund the pension system. The plan had the support of most Republicans in the Legislature, too. State Sen. Matt Murphy, R-Palatine, called the move a step in the right direction.
“Our side of the aisle has been very committed to making the pension payment with cash rather than borrowing for years, so I appreciate this effort,” Murphy said.
Legislators said that with the pension payment out of the way, they can go forward on deciding how to divvy up the rest of the state’s general revenue fund.
Illinois sold $3.7 billion in bonds in February and $3.5 billion in bonds in January 2010 to cover this year’s pension payment.
The state’s unfunded pension liabilities — how much the state has promised to pay employees when they retire minus funds that will be available for pensions — stands at $79 billion, according to a recent report from the University of Illinois’s Institute of Government and Public Affairs.
According the Sunshine Review, other estimates put the unfunded liability at more than $190 billion. Taxpayers guarantee benefits whether the state has money to pay them or not.
Politicians in Illinois have a history of neglecting the five state-run pension funds. Gov. Rod Blagojevich would skip paying the funds some years, calling them pension “holidays” and funneling the money to other areas of state government.
J. Fred Giertz, is a professor of economics at the University of Illinois and a member of the Institute of Government and Public affairs. He explained at a recent symposium on Illinois’ pension systemsthat when revenue slows for governments, it’s easier to skirt payments that don’t have an immediate effect.
“If you don’t have enough money, what do you do? Well if you don’t want to raise taxes, you don’t want to make cuts, you simply don’t put all the money into the pension system that’s need that particular year,” Giertz said. “And nothing bad happens right away, but you do that year after year after year and sort of the opposite of compound interest (happens).”
Money not put into the funds is money that can’t be invested and therefore can’t bring in a return.
“One hundred million dollars not put in 20 years ago becomes a $1 billion shortfall today,” Giertz went on to say.
Giertz said that If the state had made all required payments the system would be close to fully funded, though the state would still be facing financial problems if it borrowed to make those payments.
“Pensions are a manifestation, a way we were able to fund a situation where we were spending more than we were taking in year after year, and that has obviously come to a head,” he added.
This “second tier” of employees must wait until they are 67 years old, instead of 60 years old, to retire to get their full benefits. Additionally, the new law limits cost of living adjustments to 3 percent or half of the actual inflation rate, whichever is less. However none of those changes have any impact on what the state already owes employees.
There has been talk of further changes, including possible changes to current employees’ benefits, though the constitutionality of that has come into question and no legislation has been introduced.
