Pension crises in Chicago, in Illinois and in cities and states throughout the nation threaten the retirement security of public employees, investors' confidence in public securities and, ultimately, the economic recovery on which businesses, consumers, homeowners and workers are counting.
Illinois' General Assembly deserves all the heat it's feeling. Members fled the Capitol last month after the Senate failed to muster enough votes for Gov. Pat Quinn's bid to borrow $3.7 billion to fund a required payment to the state's public pensions, rated the most troubled in the country by the Pew Center on the States.
Granted, public borrowing was an unpopular choice, but after lawmakers declined to increase the income tax, incur Draconian cost cuts or reform the Medicaid or pension systems, they left themselves no other option. Reneging on the payment, which would have cost the state about $1 billion over the next eight years, is instead likely to cost taxpayers $20 billion or more over the next 20 years, according to the governor's office.
The choices Chicago faces are just as tough. The city has failed to fully fund previous pension contributions, and its pensions have suffered from underperforming investments, quickly escalating benefits and ill-conceived retirement policies.
As of Dec. 31, Chicago's public pensions had unfunded liabilities totaling an unimaginable $14.6 billion. Mayor Richard M. Daley's blue-ribbon Commission to Strengthen Chicago's Pension Plans predicts that the firefighters' and police officers' funds, the sickest of the four pensions, might be depleted within 10 years.
The commission wisely recommends that funding decisions for the city's pensions be based on sound actuarial principles and that employees' contributions shouldn't be simplistically tied to their salaries, as is now the policy. But the commission offers little practical guidance on how best to fill the gaping funding hole.
Although the commission encourages an increase in employer contributions, it neglects to identify a single source of new revenue. Despite the pain that deferring real action has already inflicted, it even suggests the possibility of issuing pension obligation bonds.
The commission doesn't go nearly far enough.
This spring, the General Assembly reduced pension benefits for future government employees, including city workers. But the commission, unwilling to take on the unions, won't entertain a cut in the future benefits of current workers. As other states are raising their pensions' retirement age, boosting employee contributions and forcing workers to contribute more to their health care plans after retirement, policymakers in Chicago and Springfield must come together and enact sustainable pension reform, lest our public pensions break the bank.
Reprinted with permission from Crain Communication Inc., Copyright 2010.