By Jean Lachowicz

Phrases like “ticking time bomb” and “political tsunami” are being used to describe the pension situation for City, County, and State employees, as record-breaking government deficits put longstanding benefits in the cross hairs of budget-cutting proposals.

According to the Civic Federation, Illinois’s pension code allows State and local governments to avoid paying the actuarially required contributions for employees’ retirements. That fundamental flaw has been made worse by staff reductions and early retirement incentives as well as the current recession.

Laurence Msall, president of the Civic Federation, said, “People nationwide are starting to ask why Illinois and Chicago have allowed this fiscal recklessness to happen. That’s not an easy question for politicians to answer. But if we don’t take action soon, we may be beyond the point of fixing these problems.”

One significant issue highlighted in the Civic Federation report is a 75% decrease in the ratio of active to retired City and County workers since 2000, meaning there are fewer workers paying into a system that requires continuously increasing resources.

On Feb. 8, Illinois House Speaker Michael Madigan (D Chicago) outlined many of the decisions the Illinois General Assembly must face during the current legislative session. He warned there likely will be proposals to reduce pension benefits for current State employees.

“We’re all familiar with the inadequate funding of the State pension systems,” Madigan said. “Again, tough decision-making, telling people you’re not going to get everything you thought you were going to get, telling people you may have to pay in more. Not easy stuff. So we all better get ready for it.”

The General Assembly passed a measure in spring 2010 that established a new set of pension benefits for State employees hired after January 1, 2011. New employees now receive reduced benefits and, in most cases, must work until age 67 to collect full retirement benefits. Yet some business groups and many members of the legislature still are looking at the immediate and significant savings that would come only from reducing benefits for those working for the State before last year’s reforms went into effect.

The same day Madigan made his statements, Governor Patrick Quinn’s office confirmed the United States Securities and Exchange Commission (SEC) is conducting an inquiry into the State’s financial disclosures about potential savings expected fromthe pension reforms enacted last spring.

“This is not an investigation, this is an inquiry,” said Kelly Kraft, the governor’s budget spokeswoman. “The SEC has stated this is not an indication of any violation. We feel our disclosures have always been accurate and complete.”

Pension audit

The SEC is examining whether the State was taking projections of future savings and treating them as reductions inthe State’s current pension costs. In response to the SEC inquiry, Representative Dwight Kay (R-112th/Edwardsville) introduced legislation urging the Commission on Government Forecasting and Accountability to conduct an audit of Illinois’s pension systems.

To put the situation in perspective, the Pew Center on States ranks Illinois as having the most underfunded public pension plans in the nation. At the end of the current fiscal year on June 30, 2011, legislative analysts project the five retirement systems for which State government is responsible will need roughly $131 billion to cover benefits already earned by public workers, with only $46 billion in expected assets to cover the costs, or about 35 cents on the dollar. The other $85 billion represents the unfunded liability, an obligation the State must meet but for which no funding source exists.

While House Republicans already have their own bill, which would give current State employees three options on changing their benefits, Senate President John Cullerton (D-Chicago) and many others say they believe reducing benefits to current employees would be unconstitutional.

Article 13, Section 5 (Pension and Retirement Rights) of the Illinois Constitution states, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

While it is believed by most authorities that Illinois State employees currently enrolled in pension plans and Illinois State pension plan recipients (and survivors) cannot have their benefits reduced, based on the Illinois Constitution, legal challenges ultimately could be decided by the Illinois Supreme Court.

Merrill L. Gassman, professor emeritus of biological sciences at the University of Illinois at Chicago (UIC), and president of the UIC Chapter of the State Universities Annuitants Association, said, “From my perspective, this is a public policy issue that has been building for many years and has been ignored for the most part. Now the State is way behind in pension payments, and the magnitude of the problem, coupled by the current economy, has brought the issue up to the front page of public attention.

“For many years, the State has neglected to make contributions to the pension fund and sometimes sold bonds instead of making payments,” Gassman continued. “If the State did not have its own public pension funds and instead had to participate in Social Security, it would not have had the flexibility—payments would have been made. The law requires that benefits be paid but says nothing about putting money into the fund, so the State is not legally compelled to do so.”

Gassman believes public employees have become a scapegoat to the larger problem of focusing on the debt. “When a person makes a decision to enter into public service, one of the considerations is that the wages might be lower than what they would earn in the private sector, but the benefit package compensates for the difference. It is a moral issue when current State employees face such a radical shift in their existing benefits package,” he said.

“State employees are not paying into the Social Security system as private sector employees do. When private companies go bankrupt, the Pension Benefit Guarantee Corporation steps in to cover most defined benefit pension promises. But the PBGC does not fully cover municipal or State retirement plans,” Gassman noted.

The State’s most troubled pension plans (all having less than 50% funding) are: State Universities Retirement System (SURS), Teachers Retirement System (TRS), State Employees’ Retirement System (SERS), Judges Retirement System (JRS), and General Assembly Retirement System(GARS).The healthiest plan is the Illinois Municipal Retirement Fund, which ended 2010 at 100%(fully funded).

City pension funds strapped

The City of Chicago maintains four employee pension funds: Fire, Police, Municipal, and Laborer’s Funds. In April 2010, the City’s Commission to Strengthen Chicago’s Pension Funds (CSCPF) reported the Police and Fire pension funds likely would run out of assets within ten years if nothing was done. The Police and Fire pension funds were only 44% and 37% funded in 2009; funding for the Municipal Fund was 57% and for the Laborers Fund was 79%.

On average, the four funds are less than 50% funded, a lower ratio than for all but one of the 11 largest U.S. cities, according to Pew Charitable Trusts. At 16% of spending last year, Chicago’s deficit easily exceeded NewYork’s shortfall of 8% and Los Angeles’s 11%.

Over the past ten years, the unfunded actuarial accrued liabilities of the four pension funds combined have grown by $10 billion or 418%, from $2.4 billion in 2000 to $12 billion in 2009. This amounts to an increase from $827 to $4,348 per resident of Chicago.

Although the funds have seen improvement in investment returns during 2010, the pension deficit is now so substantial that there is no way the funds can offset it, according to a report in April 2010 by the CSCPF.

Facing a shortfall that has climbed sevenfold in the past four years to $655 million, Mayor Richard M. Daley has depended on municipal asset sales and spending cuts, yet personnel costs have continued to climb faster than the rate of inflation, despite layoffs that have shrunk the City’s labor force by about 9%, to 36,560.

Daley’s successor, Mayor-elect Rahm Emanuel, will have to preside over a solution to the shortfall, which likely will mean tax increases, including expanding the sales tax to services, and sweeping cutbacks in areas long considered vital, such as garbage pickup and fire protection. Even the size of the 50-member City Council may have to shrink. “The bag of tricks is empty,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a union-funded fiscal watchdog group in Chicago.

A City commission on pensions said earlier this year that, to fund municipal pensions fully, the City would have to spend an additional $363 million annually for 50 years, even with “steep cuts” in benefits for all employees. That’s on top of the $456 million contribution in the 2011 budget. If benefits aren’t reduced, the extra cost would be $710 million a year even without factoring in inflation.

“It’s going to be painstaking,” says Dana Levenson, a former chief financial officer for Chicago. “The challenge here, frankly, is everybody knows there is no one silver bullet that is going to fix the structural budget deficit. You basically have to find 25 to 30 different solutions.”

The County faces an almost identical situation. The Cook County Treasurer’s office reports that 15 taxing bodies in Cook County are saddled with debt that is more than four times yearly revenue.

In all, nearly 500 taxing districts report more than $56 billion in debt,whichwould equal a combined tab of $10,730 for every resident in the county.

Create new revenue streams

Instead of focusing on what should be cut from workers’ pensions, Lou Phillips, business manager of Chicago Laborer’s Local 1001, wants to create new streams of revenue to support pensions.

He suggests that casinos be created as joint ventures between the City and pension funds that opt in, creating profits that would help the City, help the pension funds, and boost the rating of the funds.

Another idea is to raise the public employee contribution to pension funds. Third, he advocates a strategy of hiring more people and creating new jobs, thus increasing the number of people contributing to the pension funds.

“We should clean up the unemployment rolls and alleviate the pension fund problems at the same time,” Phillips said. “The pension is a promise, and keeping a promise is simply the right thing to do.”

Philips sees a need for increased education about public employee pensions, since private sector employees have experienced great losses themselves over the past few years and they do not appreciate the fact that public employees have constitutional protections that private sector employees do not have.

“People don’t understand that public employees don’t have Social Security to fall back on,” he said. “People don’t understand that public employees contribute 8-1/2 percent to the pension funds every paycheck, year after year, no matter what. “When we have job cuts, less goes into the pension funds. When we have furlough days, less goes into the pension funds. You can’t just cut cut cut. You’re going to have to feel it somewhere. Put people back to work and the pension funds will recover,” said Phillips.