It’s the governance, stupid! My recommended resolution for the Illinois state legislature

Last updated on: January 1, 2018 at 1:49 pm by Jane the Actuary

It’s the governance, stupid! My recommended resolution for the Illinois state legislature 2018-01-01T13:49:02-06:00 Jane the Actuary

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Illinois state capitol; https://commons.wikimedia.org/wiki/File:Illinoiscapitol2.jpg

Imagine if your local school district promised its teachers generous raises — well in excess of what its property tax revenue could fund. Knowing that they’d all get voted out of office if they raised tax rates, the school board decided instead to fund it with a bond issue, coming due a generation or two in the future, after they’re all retired and living in Florida.

“That’s absurd,” you say? “Government bonds are only for infrastructure-type uses, say, building a new school that’ll be around for generations to come,” you say?

But that’s exactly what happens when schools, or state or local governments in general, promise teachers and other government workers pensions that are unfunded. That’s also the case when pensions are underfunded, or when they’re deemed “fully funded” only according to a optimistic projection, or when they’re well-funded in principle but can be gamed by local governments or employees, or, really, any time the government is on the hook to make up for investment losses, longer-than-forecast life expectancy, and so on.

We’ve all seen reports about the tremendous impact that pension contributions are having on state and local budgets. Every property tax bill informs us of the portion of our taxes that are going just to pay for pensions, to make up for failure to fund pensions in prior years. Earlier this year, prior to the state education funding deal, Forrest Claypool and the Chicago Public Schools even filed a lawsuit seeking pension bailout money from the state.

At the same time, pro-state-pension groups are organizing in defense of defined benefit pensions for state and local pensions. They provide good value for the money, they write, because a defined benefit pension is, on average, less costly to provide than a defined contribution (e.g., 401(k)) contribution that produces the same level of retirement income. A website called ProtectPensions.org, sponsored by the National Public Pension Coalition, makes the pitch that pensions are cost-efficient and provide a dignified retirement for “nurses, firefighters, teachers and librarians” in a way that 401(k) plans couldn’t. The National Institute on Retirement Security produced a report, “Win-Win: Pensions Efficiently Serve American Schools and Teachers,” which, as its title suggests, defends traditional pensions for teachers, as a win for the teachers and the schools both, because they encourage teachers to stay on the job. And Americans have become accustomed to the idea that teachers and state workers accept lower pay than they otherwise would, because it’s made up for a more generous retirement benefit than the rest of us receive.

But that’s missing the point.

Eliminating defined benefit pensions for public workers, pensions in which the state itself is on the hook for future benefit payments, is a matter of good governance. It’s a matter of Illinoisians paying for what they purchase, in this case, the work of the employees, now, rather than borrowing and leaving the bill for their children and grandchildren. And it’s key for eliminating opportunities for legislators, local school boards, and everyone in-between to game the system by deferring contributions, finding loopholes to grow pension benefits, and the like.

I am not saying that Illinois should eliminate benefits that workers have already earned. But the legislature should give us the ability to vote on whether to amend the constitution to eliminate the guarantee that state and local workers, even 20 year olds who have just been hired, are guaranteed the same generous pension formula that is in existence upon their hire, all the way to retirement age. And it’s one thing for teachers and other state workers to have reasonable and appropriate retirement benefits; it’s quite another to have far more generous provisions, including very generous early retirement benefits, than the rest of us.

(Note: the above was an article that I had originally intended to submit for publication; hence, the brevity and general lack of links.)

Image: Illinois state capitol; https://commons.wikimedia.org/wiki/File:Illinoiscapitol2.jpg

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