Four reasons why the state pension buyout program is problematic for taxpayers – Wirepoints

By: Ted Dabrowski and John Klingner

A bipartisan group of legislators in the Illinois House and Senate has agreed to borrow another $1 billion to continue funding the state’s pension buyout program. The program gives state workers the option to give up some or all of their pension benefits in exchange for a discounted lump-sum in cash. The current program has purportedly saved the state some $270 million.

On its face, the buyout plan is hard to criticize. Anything that saves the state some money is worth it, you might think. 

But the more you look at the program, the more problems crop up. The buyout program’s savings are small and non-transparent. More borrowing means more gambling with taxpayer dollars. And, worst of all, the buyout lets lawmakers claim they’ve enacted real reform.

Pritzker should veto the bill, but he won’t. Instead he’ll sign it and sell it to the public as a continuation of Illinois’ “momentous” pension reforms.

The buyout program is split into two parts. Inactive workers (people no longer working for the state but are not yet retired) can give up their entire pension in exchange for a lump-sum equal to 60 percent of the present value of what they would have received from their pension during retirement.  

The buyout for retiring workers is different. They maintain their pensions, but their 3 percent annual Cost-of-Living Adjustment is cut in half. In exchange, they receive a lump-sum worth 70 percent of the difference in value.

Officials say the new $1 billion borrowing will be enough to eliminate up to $1.3 to $1.4 billion of the state’s pension shortfall – assuming enough members take the buyout – ultimately saving the state another $300 to $400 million.

Pension fund officials say the state’s original $1 billion buyout program passed in 2019 has already cut the state’s pension shortfall by some $270 million.

Here are four reasons why Illinois’ pension buyout program is problematic.

1. We don’t know if the pension buyout program actually saves Illinois taxpayers money.  Wirepoints has seen a short, summary document from Segal, the state’s actuarial firm, that says the buyouts save money, but no actuarial evidence that we know of has ever been presented to the public. Wirepoints’ own requests for answers have been stonewalled repeatedly

We have no idea if the program works as intended, if the actuarial assumptions are reasonable or if the program could end up actually costing money due to self-selection by unhealthy workers. That’s where those who don’t expect to live long take the lump sum payment, potentially costing the state more than it would have paid out in retirement.

2. More borrowing means more gambling with taxpayer money. Another issue with the program is that money from the pension system’s existing assets isn’t used for the buyouts. Instead, lawmakers are borrowing money.

Just like with pension obligation bonds, more cash in the funds means more gambling with taxpayer dollars. That adds unneeded risk compared to simply using existing pension assets to make the lump-sum payments.

Sen. Robert Martwick admitted as much: “By using bonds to pay for the buyouts we are leveraging those returns even further because we are getting low cost bonds and we are leaving assets in the pension system.”

3. Borrowing pushes more risk directly onto taxpayers. By borrowing the money for buyouts instead of using the pension funds’ existing assets, lawmakers are effectively converting “soft” pension debt – the responsibility of both pensioners and taxpayers – into “hard” bonded debt that’s owed solely by taxpayers.

4. The buyout program gives politicians an excuse to avoid structural pension reforms. Most lawmakers don’t want to talk about real pension reform. Governor J.B. Pritzker even outright dismisses the structural changes Illinois needs as a “fantasy.”

That’s why lawmakers praise initiatives like the buyout program or local police/fire pension fund asset consolidation as “momentous.” After all, if “reforms” have already been done, then there’s nothing more to talk about. 

The problem is the buyout program will have almost no impact on Illinois’ worst-in-nation pension crisis. Illinoisans are officially burdened with $130 billion in state pension debts alone – or more according to Moody’s calculations.

************

In the end, we simply don’t have enough information to tell if the buyouts are worth it.

But what we do know is Illinois lawmakers could have used the time they spent crafting the buyout program to create a 401k-style plan for new workers and to draft a pension amendment referendum. Wirepoints has laid out a framework for a DC plan and the 50 words that can be used for the amendment.

Instead, they’ll have added $2 billion more in debt, a non-transparent buyout program, and small, unproven savings.

Read more from Wirepoints:

23 Comments
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Chatty Cathy
1 year ago

Just heard you (Ted) on the radio with Shaun Thompson on am560theanswer. Thank you so much for the work you do for those of us still here! Whether we will be able to get out of the toilet around here is questionable, at least to me, but you will have done your part, that’s for sure.

By the way, can the parties that are not responding to the foia’s be sued to act?

Pensions Paid First
1 year ago

The risk of this debt is transferred from taxpayers and pensioners to taxpayers and bondholders. It’s not solely by taxpayers. The only way one can believe that is if you don’t believe pensioners have a contractual right to their money. The main difference is the bondholders are willingly taking on this debt and risk. Bondholders want this debt otherwise it wouldn’t sell. You just don’t like it because it makes it that much harder to steal from retirees.

nixit
1 year ago

The risk of this debt is transferred from taxpayers and pensioners…

Since when did pensioners assume risk?

…to taxpayers and bondholders.

Transfer risk from myself to myself? That just sounds like slavery with extra steps.

Pensions Paid First
1 year ago
Reply to  nixit

Ted and John wrote that in point 3. Those were their words.

“the responsibility of both pensioners and taxpayers“

I agree that ultimately it is all taxpayer risk but was following their logic.

jajujon
1 year ago

Pensions Paid First, where have you been? I’ve missed you’re insightful counterpoints, though they are usually heavily subjective. Nixit has it right. To whom do you think the bond holders will look for repayment? A Federal government bailout? No. A bond refunding? No. Correct answer: the taxpayers! And trust me, the bond holders will put up a fight to ensure that happens. Their risk isn’t quite what you assume it to be because they know Illinois pols aren’t shy about going to the well (taxpayers) again and again and again. Stealing from retirees – is that your view of your… Read more »

Pensions Paid First
1 year ago
Reply to  jajujon

The authors of the article attempt to make the point that risk is somehow transferred from “taxpayers and pensioners” to somehow just taxpayers. My point is that if you believe that pensioners had any risk before then the only difference now is that you’ve replaced pensioners with bondholders in this scenario. People that actually signed up for that risks and are compensated accordingly.

I don’t disagree that ultimately all of this falls on the taxpayers. I just think reason 3 above doesn’t hold any merit.

James
1 year ago
Reply to  jajujon

That 0.0008% figure is the lowest I’ve ever encountered and enough so as to make me ponder your level of real knowledge about it. As a tax-preparer you’d have no direct, immediate knowledge of how much money he/she personally would have contributed other than by looking at some website for it. Still, I don’t know that such things are even available there for someone not having a security code as the actual pensioner. So, that makes me wonder if its guess-work on your part or maybe a flippant remark by your client. In short, without divulging the client’s name or… Read more »

Pensions Paid First
1 year ago
Reply to  James

The percentage contributed is absolutely meaningless. Mentioning it is somehow an attempt to make it seem like pensioners didn’t earn their pension. It absolutely does not matter. They traded their labor for deferred compensation. When an employee receives restricted shares from their company nobody states “hey, they didn’t contribute anything to purchase that stock”. They received those shares through their agreed upon labor and they met the other time requirements for vesting. Also, no conciliatory tone is necessary. It’s the pensioners money. When I pull money out of fidelity I expect it to be delivered to my account regardless of… Read more »

James
1 year ago

I agree wholeheartedly. I was simply trying to verify or at least understand where lajujon came up with that unbelievably low figure. Einstein is credited with saying something to the effect that compounded interest is one of life’s truely miraculous ideas. So, its entirely possible and maybe even likely a person’s personal contribution to his eventual retirement might well be in the range of, say, 3-5% of his eventual benefit if he has made heavy contributions and for a really long time to make that compounded-interest grow to truly huge figures along with a really long time of pension payments… Read more »

JimBob
1 year ago

When you state as a fact that “they traded their labor for deferred compensation” you pick up on a rationale that is essentially after the fact — a sort of historical revisionism much like what we all do when we look back in time. When contracts are for a year or some other duration, a worker trades labor for what the employer agrees to pay for that interval. A young teacher with a spouse and perhaps a family and some education loans trades labor for current compensation and benefits and perhaps a pension accrual which may or may not be… Read more »

James
1 year ago
Reply to  JimBob

Your argument does make a LOT of sense, but the reality is that the legislature has the right to make whatever law makes sense to them given the political realities at the time and any limitations imposed by the fed and IL constutions. Such laws can be challenged, of course. I don’t know if your argument carries enough legal weight, but I’m reasonably sure if you and a few like-minded people would pony up a quarter million bucks to get the ball rolling a few hungy legal eagles would be happy to plead your case. Okay, Wirepoints readers, here’s your… Read more »

Pensions Paid First
1 year ago
Reply to  JimBob

It’s not me stating it as fact JImBob. It’s the Illinois Supreme Court in unanimous fashion. The percentage a pensioner contributed means absolutely nothing. I’m not trying to convince you of anything because it has already been established by the courts. I’m stating facts so that people can accept that pensioners are getting their money even if you or others don’t think they earned it or deserve it. Bringing up how much they contribute is pointless. Pensioners traded their labor to have their pension calculated as promised on their first day of employment (minimum) or greater with enhancements. They traded… Read more »

debtsor
1 year ago

The only way one can believe that is if you don’t believe pensioners have a contractual right to their money.

Yes, you’re finally coming to see the light!

Pensions Paid First
1 year ago
Reply to  debtsor

Unfortunately for you the US Constitution, Illinois Constitution and the Illinois Supreme Court disagree with you. It’s a contract and the state owes the money. Get over it.

debtsor
1 year ago

All three of those institutions once wrongly believed that black were property, interracial marriage was illegal, and forced sterilization of disabled people was for the greater good of society.

They too will soon enough realize the pension grift is not a ‘contract’ in the normal sense of the term and can be invalidated.

Last edited 1 year ago by debtsor
David F
1 year ago

Eventually pensions will go belly up, no reason to buy people out before it goes into the toilet anyhow. State needs to be looking to the fed for bankruptcy or the constitution has to be changed. All the state does is keep digging, they need to stop.

Honest Jerk
1 year ago

More borrowing means more gambling with taxpayer money.

I hope they bet it on red.

Tough Love
1 year ago

No surprise. The gov’t Unions/workers/retirees would LYNCH the Gov. if he even proposed REAL pension reform..

Chatty Cathy
1 year ago
Reply to  Tough Love

What’s not to like about this comment? It’s why we are where we are!

Pensions Paid First
1 year ago
Reply to  Tough Love

No need to “Lynch” the Gov. They would merely go to the courts and prove those reforms unconstitutional. These pensioners have contractual rights and the courts have sided with pensioners time and time again. There is nothing the Governor can do but you can keep on dreaming of your theft fantasy.

JimBob
1 year ago

How hard would it be to make the buy-out conditional upon the estimated economics being achieved? Give people a 30-day window to decide and once the elections have been received either go foward or forget-about-it. This is done all the time with force reductions and similar programs — even in public employer contexts that I have seen. Example: 15 high seniority teachers have to accept the early retirement incentive or it’s off the table. These seem to be at the point of economic negotiations with individuals. I understand that the union has a role in the terms of the overall… Read more »

Old Spartan
1 year ago

Excellent analysis, Wirepoints, as usual. And one highly important point– the State’s consultant, Segal, is hired by and paid for –by whom? The State of course. So how likely is it that the report, from a firm hired by, and paid by, the client, is going to find any problem with the plan? Are they getting paid to find problems with the program? Anyone who has worked in this business knows that the result you get depends on the assumptions– realistic or unrealistic– you make. But once again, the public will be fooled by a bunch of technical gobbledygook statistical… Read more »

jajujon
1 year ago
Reply to  Old Spartan

I’ve never seen the Office of the Auditor General weigh in on this topic. It’s supposed to be an arms length organization. We all think the long term financial viability of the state is at risk by this $200B+ obligation. Someone of that caliber could ring alarm bells within the General Assembly. I worked there years ago. Its findings carried substantial weight. But maybe it’s now become as inconsequential as Chicago’s inspector general.

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