* Ralph Martire of the pro-union Center for Tax and Budget Accountability has correctly identified the pension funding problem…
The vast majority of the unfunded liability is made up of the third contributing factor: debt. Indeed, for more than 40 years. the state used the pension systems like a credit card, borrowing against what it owed them to cover the cost of providing current services, which effectively allowed constituents to consume public services without having to pay the full cost thereof in taxes.
This irresponsible fiscal practice became such a crutch that it was codified into law in 1994 (P.A. 88-0593). That act implemented such aggressive borrowing against pension contributions to fund services that it grew the unfunded liability by more than 350 percent from 1995 to 2010 — by design. Worse, the repayment schedule it created was so back-loaded that it resembles a ski slope, with payments jumping at annual rates no fiscal system could accommodate. Want proof? This year the total pension payment under the ramp is $5.1 billion — more than $3.5 billion of which is debt service. By 2045, that annual payment is scheduled to exceed $17 billion, with all growth being debt service.
* To solve the problem, Martire wants to reamortize that debt. Basically, it’s a refinancing plan…
Simply re-amortizing $85 billion of the unfunded liability into flat, annual debt payments of around $6.9 billion each through 2057 does the trick. After inflation, this new, flat, annual payment structure creates a financial obligation for the state that decreases in real terms over time, in place of the dramatically increasing structure under current law. Moreover, because some principal would be front- rather than back-loaded, this re-amortization would cost taxpayers $35 billion less than current law.
This makes a lot of sense on numerous levels. It’s like refinancing a mortgage that had been stupidly rigged with expensive balloon payments.
* However, Wall Street will hate it. Why? Because as soon as you move back the payoff date, the total unfunded liability will skyrocket. And Wall St. is concentrating almost solely right now on that unfunded liability number. If Illinois does this, a big credit rating cut will likely happen.
The Tribune and some big business groups will also hate it. Why? Because it causes no real pain for public employees and retirees. And that’s really what they want.
And others who depend on the state budget will probably hate it, at least in the short term. Why? Because the Martire plan requires a big increase in current pension spending, from $5.1 billion to $6.9 billion. And, remember, the income tax hike is scheduled to sunset two years from now.
* On the other hand, if policy makers could incorporate Martire’s refinancing idea with some other cost-cutting and revenue (requiring higher employee contributions, cost shift, etc.) moves, it might just work.