State pension payments eating into services

Doug Finke

When Illinois lawmakers finally approved a new state budget last month, supporters kept repeating two key phrases.

The new spending plan gave education its biggest funding increase ever. And the state’s pension programs were fully funded.

But some critics contend that the pension spending came only at the expense of underfunding other state services. And even lawmakers acknowledge that the problem of finding money to pay state pensions hasn’t been solved. Paying for pensions will take an even bigger chunk of state revenues over the next two years, leaving less money for education, health care and other services.

“The fact it was fully funded (in the budget) is encouraging, but there is still a lot of work to be done,” said Rep. John Bradley, D-Marion, who chaired a daylong Illinois House session on pensions in July. “It just keeps ramping up unless you put a big infusion of money in there some way.”

When lawmakers talk about fully funding the five state-backed pension systems – for downstate teachers, state employees, judges, university workers and lawmakers – they don’t mean they wiped out the $40 billion debt owed to the plans. They mean only that the current budget includes all of the money required under an installment plan that is supposed to result in the pension systems being 90 percent funded by 2045.

That was a far cry from the previous two budgets, for budget years 2006 and 2007, in which a total of $2.3 billion was diverted from scheduled pension payments to cover other state expenses.

“That caused a great amount of concern among annuitants,” said Rep. Gary Hannig, D-Litchfield, a top budget negotiator for the House Democrats. “We needed to reassure people that ‘06 and ‘07 was a slight deviation, not a permanent loss. That was something both parties and both chambers wanted to do. It calmed people down.”

However, devoting an additional $641 million in state money into pension systems puts a strain on the rest of the budget.

Ralph Martire of the Center for Budget and Tax Accountability said the idea of fully funding the pensions is an illusion. The budget is balanced -- and pensions fully funded – only because the state underfunds Medicaid payments and other costs, he said.

“Our base estimate is this budget has $2.5 billion to $3 billion in deficit spending,” Martire said. “It is financed off the backs of health care providers and human services.”

Martire’s group has pushed for an income tax increase to pay for more school funding, pensions and property tax relief.

The pension funding problem will only get worse over the next two years. If lawmakers stick to the payment schedule, they will have to find an additional $721 million for pensions when they work on a new state budget next spring. The year after, the increase for pensions is expected to be $759 million.

After that, however, the increases required by the payment schedule moderate significantly, ranging from $143 million to $181 million.

Hannig said it is fair to say that meeting pension obligations will eat up almost all of the natural revenue growth the state can expect, and it will “hamstring any effort to do anything beyond paying the pensions.”

“If we use up all of the available revenues on the pension plan, it doesn’t help us move up on (education spending) and health care and other things,” Hannig said. “It becomes the sole thing we address.”

“You are going to have so many problems the next two or three years,” said Rep. Mark Beaubien, R-Barrington Hills, Hannig’s counterpart among House Republicans. “The increased revenue will just barely cover the cost of the additional pension payment.”

Earlier this year, Gov. Rod Blagojevich proposed leasing the state lottery and using those receipts to pay down pension debts. Lawmakers rejected that approach.

“The most overriding problem you had with the whole idea of selling the lottery and putting it into the pension system was just the lack of trust of the administration...that there wouldn’t be some huge amount of money skimmed off of it,” Bradley said.

In a written statement, Blagojevich Deputy chief of Staff Becky Carroll said the administration has made “tremendous progress” in reducing state pension debt.

“However, costs will continue to escalate in the future and threaten the state’s ability to make new investments in education and health care, which is why we need to take significant steps to further reduce long-term liability,” Carroll said.

The Civic Federation, an influential group of Chicago-area business leaders, did support part of Blagojevich’s plan to lease the lottery. However, the group also called for a series of pension reforms to control costs, including requiring public employees to pay 1 percent more toward their pensions, raising the retirement age and controlling retiree health costs.

Federation president Laurence Msall said the group still believes those reforms are necessary.

“It is hard to imagine a tax increase large enough to sustain the runaway health care and pension costs of the state of Illinois right now,” Msall said.

Doug Finke can be reached at (217) 788-1527 or doug.finke@sj-r.com.