No. 107 – State Lacks Willpower to Solve State’s Public Pension Crisis, Study Says

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CHICAGO, IL — Because it has underfunded its state public employee pensions for some 25 years, Illinois faces a pension fund crisis of historic proportions, according to a new study released by the Chicago-based Heartland Institute. According to the study’s author, lawmakers have shown little stomach for a showdown with public employee unions and other interest groups to enact a plan that would provide a long-term solution.

According to the study, at the end of FY 2004 Illinois’ unfunded pension liability stood at $35.1 billion, a greater amount than any other state. Total liabilities stood at nearly $90 billion. Fund assets were just 60.9 percent of liabilities, second-worst in the nation. State funding of public employee pensions has gone from about $635 million in 1996 to an estimated $2.6 billion in fiscal 2006, and could reach $14 billion by 2045.

One cause of the problem is that public pension benefits are generous. Illinois public employees who start their careers at age 25 can retire at age 55 with a pension equal to 50 percent of their base salary, and large end-of-career pay raises for teachers and school administrators have resulted in substantial increases in retirement benefits for some individuals.

But the author of the study, Steve Stanek, managing editor of a national monthly newspaper on state budget and tax issues, says the lack of willpower by the state’s elected officials is the biggest reason the crisis exists. “Several fixes have been tried over the years,” he notes, “and the funding problem has grown worse as elected officials failed to show sufficient willpower to avoid increasing benefits or diverting funds to other budget priorities.”

Stanek recommends legislators follow Michigan’s lead in switching from defined benefit plans to defined contribution plans (such as a 401(k) plan) for new state employees, or adopt a reform plan being considered in Rhode Island, which would require a portion of savings derived from pension reforms be allocated to improving the relative funding ratios of the pension funds. California policymakers are considering a plan to replace all or part of the state’s defined benefit plans with defined contribution plans.

The study will be released on May 24 at a Springfield news conference. Stanek’s newspaper, Budget & Tax News, is published by Heartland and sent monthly to approximately 25,000 local, state, and national elected officials nationwide. The study is available for free online at Heartland’s Web site, http://www.heartland.org, or can be ordered for $10 a copy by calling 312/377-4000.

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Editor: If you have any questions about this study, please do not hesitate to contact the author, Steve Stanek, at 815/385-5602 or by email at [email protected]. The complete text of the study can be found at http://www.heartland.org. For additional information about The Heartland Institute, call Ralph Conner, public affairs director, at 312/377-4000.

The following individuals have expressed their willingness to comment on pension reform proposals under consideration in their states: