Pension fund sticks taxpayers with added costs of state’s previous bad management

Gov. JB Pritzker got an unwelcome – but apparently not unexpected – message this month from a study of Illinois state employee pensions. It’s going to take a little longer than previously thought to catch up the state’s unfunded pension liability.

The deficit between what’s available for pension payouts and what is needed to pay the system’s obligations, now estimated at around $140 billion, could grow by an additional $5.6 billion in order to correct a systemic shortfall in funding contributions the state has been making for employees covered under Tier 2 of its pension plan.

Since 2011, new employees covered by three state pension plans – the Teachers’ Retirement System, the State Employees Retirement System and the State University Retirement System – as well as certain Cook County and other public employees have been operating under rules that were significantly modified in an effort to keep from eventually bankrupting the system. The new system, however, apparently did not accommodate regulations affecting some higher-income employees that require their pension income to at least match what they would receive from Social Security, a policy referred to as “safe harbor.”

Because neither the employees nor the state make payments to the Social Security system, the discrepancy violates federal law, so it must be addressed, as the Daily Herald’s tax watchdog Jake Griffin explained in a report Sunday. The study produced for the state by the Segal consulting firm estimated it will about a quarter of a billion dollars a year for the next 22 years to cover the difference, Griffin reported.

In order to shore up the troubled pension system, Pritzker has for years been diverting to pensions an extra few hundred million dollars a year more than required by law. The new demands will make catching up even more difficult and send state lawmakers back to the drawing board to create a stable fix.

State Rep. Stephanie Kifowit , an Oswego Democrat and chair of the House Personnel & Pensions Committee, introduced legislation for just that purpose during the previous session, but her bill never made it out of committee, apparently because lawmakers were waiting to find out how big a hit the system was taking.

“Everybody knew Tier 2 was in violation of safe harbor. It was kind of like Captain Obvious. But now we have a number,” said Kifowit. “And it’s a small part of the unfunded liability that already exists in those pension systems because of fiscal mismanagement of the past.”

It’s a commentary on the many years of that fiscal mismanagement that the 4% increase to the estimated $140 billion pension deficit warrants barely a shrug in the massive demand facing the state. But it’s no insignificant shrug. It represents, first, a failure of planning in the setup of Tier 2 from the beginning and, second, around $5.6 billion more that the state won’t have to cover other needs over the next two-plus decades.

This doesn’t necessarily suggest the need for a wholesale revision of Tier 2, but it does punctuate the importance of making strong, reliable financial plans and sticking to them.

The Daily Herald

https://www.dailyherald.com/discuss/20230627/daily-herald-opinion-pension-fund-news-sticks-taxpayers-with-added-costs-of-states-previous-bad-management