Illinois’ Pension System: Woefully Underfunded, Scandal-Plagued

Published March 1, 2006

By almost any measure, the Illinois government pension system is the nation’s worst, plagued by debt and scandal.

Recent developments include:

  • The Illinois Teachers’ Retirement System (TRS), which represents 330,000 current and retired teachers outside the city of Chicago, filed a lawsuit in January against three political insiders, including former TRS trustee Stuart Levine. The three men allegedly engaged in a multimillion-dollar kickback and extortion scheme against the pension fund.
  • Chicago attorney Joseph Cari and former TRS counsel Steven Loren, two of the three persons named in the TRS lawsuit, pled guilty in September 2005 to charges related to the pension kickback and extortion scheme. In his plea agreement, Cari said the scheme centered on sham consulting contracts with investment firms desiring to do business with the pension fund. He said much of the money collected through the sham contracts went to the political campaign of a person identified in the plea agreement as “Public Official A.” Several news organizations identified Public Official A as Illinois Gov. Rod Blagojevich (D). Blagojevich denies any involvement in pension fund corruption.
  • Lawmakers in 2005 agreed to divert some $4 billion of scheduled pension fund payments to other spending through 2010, including a combined $2.3 billion in 2005 and this year.
  • Blagojevich appointed the Governor’s Pension Commission in 2004 to study the state’s pension system and recommend improvements. The 13-member commission’s recommendations went largely ignored by the governor and lawmakers.
  • The state issued $10.1 billion in pension obligation bonds in 2003 to reduce unfunded liabilities. The borrowing is a gamble because the state must repay the money with interest over 30 years. To do this without turning to taxpayers, the state will have to earn average annual returns on investments that exceed the 5.05 percent interest rate on the obligation bonds. There is no guarantee that will happen.

Unfunded Liability Is Huge

Despite the infusion of borrowed money, the state’s unfunded pension liability stands at an estimated $38 billion, the largest unfunded liability in the nation, according to State Sen. Bill Brady (R-Bloomington), who served on the Governor’s Pension Commission.

TRS Executive Director Jon Bauman did not return calls for comment.

Decry Fund Diversions

Candidates for governor from both major political parties are slamming Blagojevich and state lawmakers for the pension situation.

“By diverting these billions of dollars from pensions, our governor has put thousands of pensions at risk, and all the state’s taxpayers at risk,” said Edwin Eisendrath, who is hoping to unseat Blagojevich for the Democratic Party nomination. “This is a governor who has awarded hundreds of millions of dollars of investments only days after [the recipients] gave thousands of dollars to his campaign. All this is going to cost us a fortune. We’ve been living well beyond what we can afford, and the day of reckoning is at hand.”

Brady, one of four candidates seeking the Republican nomination for governor, expressed similar views.

“The governor has begun stealing $4 billion from the pensions,” Brady said, “$1.1 billion last year, $1.2 billion this year, and then smaller amounts in the later years. What the governor did is drop the numbers [the amounts for pension funding] now and through 2010. Now instead of putting in 20 percent of payroll over 40 years, we will pay 22 percent over 40 years, which dramatically increases the total cost but gives him short-term monies to do with what he wants.”

In a January 17 statement, businessman Ron Gidwitz, another candidate for the Republican nomination for governor, said, “Not only has [Blagojevich] cast the pensions of our state workers in jeopardy but he also has passed the pension buck to our children, who will have to pay for this reckless move long after he’s left the Mansion. Illinois’s unfunded pension obligations are approaching $39 billion. The governor won’t talk about plans to reduce those liabilities because he’s intent on adding to them.”

General Assembly Agreed

The state’s General Assembly approved the pension funding moves; Blagojevich is a Democrat, and both chambers of the General Assembly are under Democrat control.

The pension fund is cooperating with federal investigators, and federal subpoenas have been served on other agencies under the governor’s control, but those steps are not enough for Eisendrath, even though he is a fellow Democrat. In a January 5 statement, he said,

“Instead of waiting for the U.S. Attorney to do it for us, the governor should take four steps right away:

“1. Investigate and determine how the fund investments and contracts were related to contributions.
“2. Disclose the findings of that investigation.
“3. Discipline those involved.
“4. Return any contributions related to this pay-to-play scandal.”

Spokespersons for the governor did not return calls for comment.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.

For more information …

For more information on pension fund issues in Illinois, see “Illinois’ Public Pension Crisis,” a Heartland Policy Study by Steve Stanek, available online at