By: Mark Glennon*
“The solution to Illinois pension problem may be in state’s own backyard.” That’s the headline in a Forbes article last week.
The solution offered, however is simply to fund the pensions adequately. The author doesn’t use those words but that’s precisely the implication of her article. And she doesn’t say how much that would cost or where the money would come from, which was probably wise because the futility of the solution would have been obvious.
Making this article particularly troubling is that the author, Caitlin Devitt, is a senior reporter for Debtwire Municipals, a very reputable firm. She’s among the few financial reporters specializing in Illinois pensions and public finance — somebody we should be counting on for realism and candor.
Her case is straightforward: Use IMRF, the Illinois Municipal Retirement Fund, as a model for all pensions. It’s among the healthiest pensions in the state, having a funded ratio of 93%. IMRF, she says, “offers a model for how defined benefit plans can work well.”
IMRF’s high funded status results from its power, unique among Illinois pensions, that works, in effect, to force tax increases. It does so whenever necessary to fund annual contributions, in whatever-it-takes amounts, to keep its funded status healthy. Other pensions get shorted almost every year because their cost is unaffordable, despite Illinois’ exceptionally high tax burden. Why are Illinois property taxes among the highest in the country and nearly twice the national average? Lots of reasons, but one is forced IMRF funding.
So, to say IMRF should be copied is simply to say tax increases should be automatically enforced each year to adequately fund all our pensions. It’s a “model” for itself only, ensuring that it is kept whole ahead of all the others. That’s no surprise because IMRF is the pension that covers mayors and other municipal leadership. Pensions for cops, firefighters, teachers and all the rest get no such funding priority.
Had Devitt told us how much that would cost and how to do it, she’d have met the same fate as three Chicago Federal Reserve Bank economists who tried to do just that last month: She’d have been ridiculed nationally.
They proposed a new, statewide property tax just to properly fund just the five state pensions (never mind Illinois’ 650 other pensions). They concluded Illinois would have to levy, for about 30 years, an additional tax of 1% of property value, which would mean an average property tax increase of about 45%. The proposal was widely mocked. Just one of our articles on it, including republications, was viewed by over a million readers.
Devitt may have something other than property taxes in mind, but the result would be the same. If Illinois ever tried to force annual tax increases to adequately fund all its pensions, as IMRF does, Illinoisans would be grabbing the pitchforks.
Looking back, it would have been nice to implement Devitt’s idea decades ago when all pensions were fairly healthy. That way, it would have become obvious long ago that they were unaffordable and that taxpayers wouldn’t put up with the true cost. The crisis would have sparked sooner when it would have been manageable.
Even then, however, IMRF wouldn’t have been a model to emulate. There’s been much to criticize at IMRF over the years. They offer to members an additional benefit in the form of a savings account, of sorts, with a guaranteed return of 7.5% per year. A guaranteed return that high obviously requires a subsidy, and the subsidy is provided by (you guessed it) taxpayers. IMRF members can also get a “13th payment,” notorious in the pension world. That’s a sort of bonus check once a year in addition to their monthly pension payments, paid entirely by taxpayers, according to IMRF’s site. It has cost taxpayers as much as $42 million per year. See our earlier article on those matters and other IMRF issues.
Devitt is not alone. “We’ll just have to fund them” is the common refrain of public unions and many politicians, including former Governor Jim Edgar. Whenever you hear that, ask “How much will that cost and how we will pay for it?”
Just don’t expect an answer.
*Mark Glennon is founder and Executive Editor of Wirepoints.