By: Mark Glennon*
In the October 9 gubernatorial debate Governor Quinn said repeatedly that his administration has been making all appropriate payments into the state pensions. “I paid the proper amount in order to be actuarially sound,” Governor Quinn said.
Here is what the state’s own actuary said about that. It’s in the State’s Actuary Report (the “Report”) released in December 2013 by the Illinois Auditor General which incorporates materials from the state’s actuary, Cheiron. On the first one or two pages of each particular section of the Report, for all five of the state’s pensions, in bold face, the actuary says,
In our opinion, the statutory mandated minimum funding requirements [which is what the administration has been paying] call for inadequate funding, and do not meet generally accepted actuarial standards of practice. Report, pages 19, 56, 86, 117, 145.
What makes this particular lie so pernicious is that most Illinoisans likely are unaware that pension deficits are still worsening rapidly. It’s being hidden from them, and the deception is working. Quinn’s statements went unchallenged in the debate and not a single piece in the press raised a question afterwards. Most in the media also seem to think that it’s just past administrations that caused the pension problem through various “pension holidays,” the “Edgar Ramp,” and Governor Blagojevich’s pension borrowing. Indeed, Quinn made that point, too, blaming his predecessors alone for the pension crisis.
No, an ever-worsening crisis is deeply carved into Illinois pensions — in many ways. The Chicago Tribune recently used a wonderful term, booby-trapped, to describe the gimmicks in the state budget that will become apparent only after the election. The pensions, too, are booby-trapped, and growth in unfunded pension liabilities is not reflected in government budgets.
Those booby-traps go beyond just outright falsehoods like Governor Quinn’s. Even if Illinois’ current contributions to its pensions met actuarial standards they would still worsen because those standards are inadequate. That inadequacy is most apparent in the assumptions actuaries accept as reasonable for Illinois pensions, especially about rates of return that pensions can expect, which no reputable financial economist says are reasonable.
Still more fundamentally, even if the assumptions used by actuaries ultimately turn out to be correct for Illinois, unfunded liabilities would still worsen. The reasons for that were described nicely by Tia Goss Sawhney in her article last week. As Dr. Sawhney showed, “negative amortization” is built into them. It’s like we are not even paying enough on our credit card bill even to cover interest as it accrues. Dr. Sawhney’s article was relinked nationally in widely read Pension Tsunami. They saw the significance of her point. Not in Illinois, which remains unaware that even “full” pension payments aren’t full. Nobody has ever explained that to voters.
We don’t yet know exactly how much worse pension deficits in Illinois are now compared to when the last official numbers were reported, which was as of June 30, 2013. Updated reports won’t come out until after the election, as you might have expected. And it makes little difference whether SB1, the pension reform bill, is upheld by the courts, as explained in detail here. But here’s a prediction: Total state unfunded liabilities today will prove to be at least 50 – 100 % higher than last officially reported (depending on whether healthcare benefits are now included, which the recent Kanerva decisions says should be).
*Mark Glennon is founder of WirePoints