By: Ted Dabrowski and John Klingner

You can trust public pension apologists to deflect any critique that calls out the failure of defined benefit plans. Unsurprisingly, their response to a recent Wall Street Journal editorial highlighting Wirepoints’ research was just that – deflection via misdirection and victim playing.

Wirepoints found that a skyrocketing growth in pension benefits, what are known as accrued liabilities, is behind most of the state pension crises playing out across the country. Uncontrolled pension benefit growth is swamping many state economies and the residents who pay for those benefits.

The apologists find the facts inconvenient, so they deflect. They revert to their standard narrative that state governments, and by extension taxpayers, are to blame for “failing to fully fund their public pension commitments.” Or that public employees are the only “victims.” Or they criticize unessential details to distract from the undeniable growth in benefits.

But the apologists don’t disprove the core findings of our research: that unrestrained benefit growth is behind many state fiscal crises.

That was the subject of our two most recent reports: Illinois state pensions: Overpromised, not underfunded and Overpromising has crippled public pensions: A 50-state survey.

The numbers are undeniable. And it’s not just the growth rate of accrued liabilities that’s daunting. It’s how they’re crowding out everything in their path.

Pensions are a drag

Some public pension apologists took issue with the following graphic. They complained that comparing the growth of total pension benefits (accrued liabilities) to the growth in other economic indicators like GDP is “illogical and has no theoretical basis.”

That’s an absurd argument.

The fact is accrued liabilities are a debt – they are the sum of every pension obligation made to all workers and retirees. The growth in that debt over time matters since taxpayers are liable for a large chunk of those promises. If the sum of those promises grows too fast year after year – far faster than an economy (GDP) and its taxpayers (household incomes) can keep up with – a shortfall will invariably occur.

Any person who’s managed a business knows you can’t let a significant debt grow uncontrollably – regardless of why it grows or the math behind it. Left unchallenged, it will bring insolvency. Same goes for a family and its credit card debt.

Yet that’s precisely what’s happening to some states like Illinois, New Jersey and Kentucky.

For example, look at the below chart of Illinois, where Wirepoints has gathered 30 years of pension and state budget data.

It compares the total of Illinois’ state pension promises to the state’s operating budget over time. You’ll quickly see why those promises are swallowing the budget and crowding out spending for everything else.

In 1987, total promises made to active workers and retirees were 1.6 times, or 162%, the size of the state’s yearly operating budget.

By 2016, those total promises had jumped to 6.8 times that of state general fund revenues. That’s outrageous any way you measure it.

How did that happen? The answer lies in the massive growth in the state’s total pension promises – some due to a growth in perks and some due to a more honest reporting of what those promises are really worth.

In 1987, total pension benefits promised to the state’s active workers and retirees was just $18 billion. That’s the total amount of benefits the state’s actuaries calculated were owed by the state.

By 2016, total pension benefits owed had ballooned to $208 billion, according to the Commission on Government Finances and Accounting, the state’s official number crunchers. That’s an increase of 8.8 percent, compounded annually.

In contrast, the state’s tax revenues grew to $30.5 billion in 2016 from $11 billion in 1987. That growth rate was about 3.6 percent a year, or about 36 percent faster than the inflation rate of 2.6 percent annually.

The bottom line: Total pension benefits owed by the state grew 2.5 times faster than state revenues, year after year, for nearly 30 years.

Illinois’ pension growth has dwarfed the growth of everything else in the economy – the state’s GDP (using state personal income as a proxy), the state’s tax revenues and its residents’ ability to pay for them.

It’s little wonder that Illinois pensions are dramatically underfunded. Taxpayer contributions could never keep up with that kind of growth. It’s left Illinois with an officially-reported pension shortfall of $129 billion. And a credit rating that’s just one notch above junk.

While Illinois may be the extreme, other states aren’t far behind.

It’s time to stop blaming taxpayers for the pension mess across the country.

In too many cases, it’s overpromising, and not underfunding, that’s the real cause.

 

For more information on Illinois pensions:

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Nicholas Maduro
1 year ago

Not to worry. Chicago will soon experiment with Universal Basic Income. This will stimulate the local economy (more sales tax revenue) and soon the rest of the state will adopt it. UBI has worked so great in my country and I’m sure it will work great in the USA.

Stephen Douglas
1 year ago

WP: “Some public pension apologists took issue with the following graphic. They complained that comparing the growth of total pension benefits (accrued liabilities) to the growth in other economic indicators like GDP is “illogical and has no theoretical basis.” I’m not sure what a pension apologist is, but on this part they are correct. It is not a logical comparison. There are plenty of actual pension problems without making stuff up. From TRS 2017 CAFR “Since TRS was founded in 1939, the State of Illinois has never, in any year, funded the System at a level that standard actuarial practice… Read more »

Mike xyz
1 year ago

In the quote above, there is no mention that the benefits were hiked while the pensions were underfunded. That is troubling, because in doing so pertinent information is omitted resulting in an incomplete and skewed story. Bluntly put, it’s misleading. Any conversation about TRS funding should include a conversation that TRS benefits were hiked by state legislators and governors while pensions were underfunded. Here is a partial list of benefit hikes from TRS: https://www.trsil.org/sites/default/files/documents/history.pdf That is 14 PAGES of benefit hikes since 1939. That is government at its worst. And yet, the story above is, the problem is not enough… Read more »

Stephen Douglas
1 year ago
Reply to  Mike xyz

Mike xyz: “benefits were hiked while the pensions were underfunded.” SD: I do not disagree. “There are plenty of actual pension problems without making stuff up.” That does not negate the fact that the accrued liability comparison is specious. And grossly misleading. Mike xyz: “In SERS, just as in TRS, benefits were hiked while pensions were underfunded.” Hello, Mr. Obvious. The pensions have always been underfunded: TRS: “Since TRS was founded in 1939, the State of Illinois has never, in any year, funded the System at a level that standard actuarial practice would define as sufficient to pay its full… Read more »

Mike xyz
1 year ago

Wrong because the pensions were repeatedly hiked wile they were underfunded. Which is like charging a credit card when the balance is not paid off monthly, and doing that since 1939. And TRS is misleading the public because they do not tell the public that in plain straight forward English. No attempt was made to first fully fund the pensions, then hike the benefits. That would have been the responsible course of action. Irresponsible is carrying a balance on the credit card since 1939, charging more to the credit card every month, and then placing the primary problem on not… Read more »

James
1 year ago
Reply to  Mike xyz

I guess the implication that you’re making here as has been the case for others citing this argument is that the public employees should have clamored for full funding of their pension systems. Well, yes, that seems logical. But, there was a case some 15 years ago where a suit was brought to do require the state of IL to do that very thing and breek its long-standing patterns of less-than-actuarially-required funding of its public employee pension systems each year. I can’t recall which pension system was involved, but its fairly famous in this realm of law. The court denied… Read more »

Mike xyz
1 year ago
Reply to  James

The water (pension interest) is over the dam. 77 years of damage has been done. Massive pension interest has accrued. The state does not even cover the pension interest on the pension debt, as the unfunded liability keeps growing. It will be real fun to see if enough taxpayers stay in the state so politicians can squeeze enough money out of them to cover this and other debt that state and local governments in Illinois have accrued, not to mention the Federal government which hangs over everyone’s heads regardless of the state in which one resides. The point here is… Read more »

Stephen Douglas
1 year ago
Reply to  Mike xyz

Mike xyz:
“Wrong because the pensions were repeatedly hiked wile they were underfunded.”

Precisely. Why were they never funded?

comment image

It would have been cheaper to properly fund in the first place. Without that, even with no increases, negative amortization would eventually bankrupt the system.

Mike xyz:

“Can you imagine the interest that would accrue on a credit card carrying a balance every month since 1939?”

I don’t have to imagine it, Mike. I can see it.

Stephen Douglas
1 year ago

We get it, Mike. You are implying the same thing Wirepoints is; pensions are too high. Therefore, the only way to solve the problem is to reduce, or eliminate, defined benefit pensions. That is not pension reform, that is pension reduction. If pensions are reduced by 50 percent, but are not properly funded, the deficit will continue to grow.

For Illinois, and several other states, it’s already too late. You can eliminate all future accruals, but the debt is still there, and it is caused primarily by failure to contribute the ARC… consistently… for decades.

Mike xyz
1 year ago

Pensions would be 100% funded today if the benefits were lower. Instead of fully funding existing pension benefits, state lawmakers and governors hiked the pension benefits, which causes hiked contributions. The taxpayers are financing via pension interest all the benefit hikes since 1939 that took place while pensions were underfunded. TRS has always been underfunded as have the other 4 “state” pension systems, that being SERS, SURS, GARS, & JRS.. The resulting compound pension interest is the result of benefit hikes being repeatedly granted while pensions were underfunded. Show any pension actuary the 14 pages of benefit hikes (that’s a… Read more »

Stephen Douglas
1 year ago
Reply to  Mike xyz

Mike xyz: “That’s 78 years, over 7 decades, of taxpayers financing pension benefit hikes.” Exactly how high are these pensions (or pension promises) now, after 78 years of hikes? Pay and pensions have been collectively bargained for years, and before that, legislated. According to the so-called research… pension benefits… or pension promises… or accrued liabilities… Come on, guys. Define your terms and be consistent. They are not the same thing… have increased by 1,061 percent. Enquiring minds want to know; how much of that was due to actual increases in benefit formulas, or other hikes, and how much was due,… Read more »

Mike xyz
1 year ago

Almost everyone has the capacity to figure out not to charge more to a credit card when one is not making the monthly payment in full.. Making the monthly payment in full is akin to fully funding pensions. Mr. Douglas would like you to believe charging more to the credit card (legislatively hiking pension benefits) is not the primary problem. Mr. Douglas would like you to believe that after charging more to the credit card (hiking benefits), even though the full credit card payment is not made every month, the state not making an appropriate contribution to the pension fund… Read more »

Stephen Douglas
1 year ago
Reply to  Mike xyz

Money is fungible. Are you saying that the state (or city) can continually fail to contribute adequately to the fund, then tell the employees “sorry, you can never have an increase in benefits “because we are underfunded.”? That’s near the classic definition of chutzpah. It is common knowledge that benefit enhancements are often given in lieu of wage increases because, face it, it’s a chronic condition in virtually every state that there is never enough revenue. There is no subtle undertone in this article, or in most comments. There is an 800 pound Gorilla screaming that the problem is… public… Read more »

Mike xyz
1 year ago

Legislative benefits hikes should never occur when when pensions are underfunded. Just as a credit card should never be charged if one cannot pay off the monthly balance. You call that practice, “near the classic definition of “chutzpah.”” Meaning what? That’s audacious? To not to buy or obligate when when is not caught up on payments, thus creating hiked interest payments? What a joke. Unions lobbied for sweeteners (legislative benefit hikes) to underfunded pensions, which does not protect pensions, and it worsened the underfunded problem, and obligated the state and thus taxpayers (not employees or pensioners) to more interest. Here… Read more »

Freddy
1 year ago

For those who are not familiar on how we got into this mess look into the 86th General Assembly transcripts from Senate Bill 95 – June 30,1989 pages 326-333 also called the Omnibus Pension Bill. Then Sen. Calvin Schuneman who voted against this warned of the coming future pension crisis. Also good article in Dispatch-Argus from May 29, 2012. Would be interested on thoughts how to change this if possible?

Mike xyx
1 year ago
Reply to  Freddy

SB 95 in the 86th GA, while one of the biggest causes, was one of many pension bills that became law that got us into this mess. In the 86th GA, Michael Madigan was House Speaker and Philip J Rock was Senate President. The bill included Emil Jones and Dawn Clark Netsch as Senate Sponsors, and Sam Wolf as a House sponsor. John Cullerton, Michael Madigan’s floor leader at the time, was on the 10 person pension committee created to reconcile differences between the House and Senate version of the bill. It was signed into law as PA 86-0273 by… Read more »

Freddy
1 year ago
Reply to  Mike xyx

Mike -Thank You for the great info. According to an old Imprimis article Gov Chris Christie NJ -Any school referendum that wanted something like higher wages or new schools were always put on the March primaries which typically has the lowest voter turnout to be put in the November elections. I don’t know if that helped but there were more votes either for or against. Here in Rockford the teachers a few months back just voted themselves a $20.6 million raise over 3 years and pension pickup is in the contracts.Then the Superintendant and non union got raises also. All… Read more »

Mike xyz
1 year ago
Reply to  Freddy

The collective bargaining process in Illinois favors unions over taxpayers for a variety of reasons. There are two ways to go about change. At the state law level in the ILGA, and at the local school district board policy level. The problem is that at both levels the unions are typically a dominant political force over rank and file taxpayers, so change is very difficult. But they are usually less of a political force at the school district level, so that’s probably the best hope for change. But taxpayers have to become organized to recommend change, because most boards won’t… Read more »

Mike xyz
1 year ago
Reply to  Freddy

Here are the URL’s to the June 30, 1989 ILGA transcript (p326 – 333) & the Quad Cities Online / Moline Dispatch / Rock Island Argus article referenced in Freddy’s comment: http://www.ilga.gov/senate/transcripts/strans86/sts.html Quad Cities Online Former state senator warned of the pension problem in 1989 by Stephen Elliott May 29, 2012 https://qconline.com/news/local/former-state-senator-warned-of-the-pension-problem-in/article_66e54cce-616b-59ea-94bc-ed06cf4f722a.html SB 95 was highlighted in the following article that was part of the Chicago Tribune investigative series titled, Pension Games. Chicago Tribune Big pension payouts set in motion years ago by Jason Grotto, David Eads and Heather Billings May 25, 2012 http://media.apps.chicagotribune.com/pensions/document_narrative.html Here is the URL to the… Read more »

Andrew Szakmary
1 year ago

Some public pension apologists took issue with the following graphic. They complained that comparing the growth of total pension benefits (accrued liabilities) to the growth in other economic indicators like GDP is “illogical and has no theoretical basis.” Yes, and they are absolutely right to do so. The flip side of the accrued liabilities of governments offering defined benefit pensions is the accrued assets of the pension plan participants. So let us ask this very simple question: have the accrued assets of participants in Illinois public plans increased more rapidly than the assets of participants in (mostly private sector) employer… Read more »

Mike xyz
1 year ago

Those in IMRF do contribute to Social Security. IMRF is a very big pension fund of about 3,000 employers such as various municipalities, counties, park districts, townships, school districts, library districts, airport authorities, some smaller fire protection districts, some county road districts, some regional offices of educations aka ROEs, etc.) do contribute to Social Security. Cook County and Chicago has some local units of government that do not participate in IMRF. Cook County (the county unit of of government itself), the Cook County Forest Preserve, the City of Chicago (Fire, Police, Laborers, Municipal Workers), the Chicago Park District, MWRD, CTA,… Read more »

Mike xyz
1 year ago
Reply to  Mike xyz

Illinois Pension Scam by Bill Zettler, not Zetter.

P M
1 year ago

“Nevertheless, given this data, it is not at all obvious that the growth in Illinois pensioner assets is out of line with asset growth in defined contribution plans; “ Are you insane? this has to be one of the dumbest comparisons I have yet heard of and their have been a lot of dumb ass statements made by public sector boot-licking lackeys. First of all, 401K plans are subject to a level of risk unparalleled by public sector defined benefit plans. the public sector pension plans are cloaked in an unfortunate constitutional guarantee in Illinois, land of the overpaid, totally… Read more »

Sean
1 year ago
Reply to  P M

Amen. I once worked in the public sector, both at the federal (military, and FDA) and local (public high school teacher) levels, and it is amazing to me how much these individuals live in a bubble. They literally have almost zero clue about the economic realities of the non-protected, non-coddled private citizens who pay for their bubble. Another thing: Why on earth are government employees’ jobs so sacred? Why are these people so protected? It is statistically more likely for a government worker to DIE than lose his or her job. This is nonsense. I think ALL government workers should… Read more »

James
1 year ago
Reply to  Sean

Okay, here’s an obvioius rebuttal. At the federal and state levels we have a change of administration occurring with some frequency, and before civil service laws were enacted any given employee was essentially immediately subject to replacement. So, we know that without any such protection its unlikely people with any set of options would choose a governmental job when they feel its very likely not to be there for a career. Then, even at the level of local school boards it was common many decades ago for school board members to seek employee for their own family members or relatives.… Read more »

Mike xyz
1 year ago
Reply to  James

There was and now is a better way to implement unions in the public sector in Illinois. If IL state and local government jobs had remained right to work (which prohibits mandatory fees to a union as a condition of employment) for covered union positions, just as the Federal Government has always been right to work, Illinois would be in a lot better shape. There may be some exceptions in Federal Government as it is so large it is hard to keep track of all the rules for all the union covered positions. With Janus prevailing over AFSCME, all government… Read more »

P M
1 year ago
Reply to  James

The ideal would be to eliminate direct public sector employees to the bare minimum. Many government functions can be off shored to private companies. And most functions can be replaced by the private sector on a competitive bid basis. There should be no government workers with a defend benefit pension – period.

nixit
1 year ago

Would you have been willing to exchange a fully funded pension for a lower salary (and the resulting smaller pension), more expensive health benefits, and slightly higher taxes? That’s what was needed to make those full pension payments all these years. Trade???