By: Mitchell I. Serota, Ph.D., Fellow of the Society of Actuaries

Last night, a group of concerned citizens of all political inclinations attended a Town Hall meeting which allowed Ralph Martire of the CTBA, the Center for Tax and Budget Accountability, to present his ideas on how to save the pension system of the State of Illinois.  I was afforded the opportunity to ask a respectful question, which I repeat here for those who were not able to attend.

As a pension actuary for 40 years, I asked Mr. Martire if he was aware that if Illinois were a private corporation subject to the requirements of corporate accounting (rather than the more lax public accounting requirements), the pension plans would be required to use a discount rate close to 4% rather than the 6.75% to 7.25% that they are using currently.  He replied that yes, he was aware, but that doing so would render the budget requirements for funding the pension plans untenable. Thank you, Mr. Martire, you made my point for me.  I explained that the Unfunded Liabilities would no longer be $133 billion, but closer to $250 billion.

That’s a quarter of a TRILLION dollars.

Of course funding toward such a number would upset any of his plans to balance the budget.  The quarter of a Trillion dollar figure has been corroborated by Moody’s, who, as a bond rating firm, uses the market value of liabilities to determine the economic viability of the State.  We are talking about the market value, as distinguished from the higher discount rates currently approved by the Boards of the five State pension plans. The higher discount rates implicitly assume that the return on investment of that high a level is sustainable indefinitely.  In other words, it is based on wishful thinking or worse. (Recreational marijuana is not yet legal in Illinois, is it?)

But even the wishful-thinking-discount rate generated a liability that was too high for Mr. Martire to deal with.  He arbitrarily decided to target 72% of this liability as a funding goal.  This after telling us that his “think tank” uses factual analysis as a basis for its conclusions. He cited a statement made by the GAO in which unnamed “experts” believe 80% funding is an adequate target. The actuarial profession, represented by the American Academy of Actuaries (“AAA”), long ago put paid to the notion that anything less than 100% was a suitable target for funding. But Mr. Martire, who is clearly not an actuary, declares that his 72% target is just fine.

The attached AAA Issue Brief, published in July 2012, explains the untenability of the 80% target. But for the reader who needs a quick understanding, consider the following application of the 80% standard to a life insurance company.  If you take out a life insurance policy with a face value of $1 million and die, the life insurance company tells your estate that, “Sorry, we can only pay out $800,000 because our reserves are inadequate.”  Alternatively, the life insurance company tells your estate, “Sorry, but there were 80 people ahead of you in line, so you and the next 20 will get no payment whatsoever.”  This last response probably relates more closely to the situation at hand.  The funds will run out of money and some very innocent people will have no, or very little retirement benefits.

Please do not blame me for alerting Mr. Martire that using a market-based approach, commonly referred to as Financial Economics, will upset his preposterous proposal. What he offers not only does not solve the problem, it kicks our proverbial can down the road further than even the Edgar Ramp would dictate. Kicking the can down the road is a metaphor for transferring the debts incurred by a previous generation of legislators to our unborn children and grandchildren. In my opinion, his proposal is more intellectually bankrupt than our State’s finances.

My solution? Let’s spread the fiscal pain of funding the public plan pensions a bit more evenly across the residents of the State.  I start with the notion that the Governor and the General Assembly are proposing to ask the general public to amend the Constitution of the State to allow for a graduated income tax.  I want to take this referendum one step further.  I call upon the Governor and General Assembly to add that the Constitution will be amended to rescind Article XIII, Section 5, commonly referred to as the “Pension Clause.”  One referendum for both—it cannot be split into two referenda.

Rather than go into a lengthy rationale, consider the following. If the Federal Government allows for a graduated income tax, the Federal Government also allows pension plan sponsors to amend their pension plan benefit structure. The ERISA law has built into place the understanding that times change and that the plan sponsor must be given the flexibility to adapt to the exigencies of new economic dynamics. So if the citizens of the State are called upon to pay more taxes for pension benefits, the recipients of exorbitant pension benefits should be willing to take a reduction.  If the state employees are unwilling to bend, they may very well lose everything.

We have a crisis to deal with in this State. It is time to stop the nonsense of the past 24 years of putting a band-aid® on a life threatening fiscal wound. And what we really don’t need is to replace the band-aid® with a Post-it® note that a 72% funding target is good enough.

More on the unsuitability of Martire’s Pension Obligation Bonds in a forthcoming letter.

NOTE TO READERS: Regarding the Town Hall meeting discussed above, also see Wirepoints’ separate article, “Legislators’ ‘Town Hall’ Becomes Metaphor For Failing Illinois.”

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S and P 500

I just saw the Redbox dvd “The Mercy”, which is the worst case of somebody being in over their head that I have ever seen. It is the story of Donald Crowhurst who in 1969, entered a sailboat race to circle the globe with no stops. In a few weeks he realized he couldn’t succeed. He couldn’t go back and face financial ruin, so he began to fake his log entries. Does Pritzker think he’s over his head with the state’s debts, and are his colleagues trying to fake the numbers, or are the union people really that bad with… Read more »

Jeanne Lomax

Great analysis! This is a great issue for We The People to be talking about. I’m in!!


Here’s a hypothetical. I’m Bill Gates or Bezos or Buffett and I write a check or transfer stock to fully fund (100%) to any pension fund I want. Does that mean taxpayers are off the hook for current or future taxes for that fund? Seems like any fund with only 50% funding should be adequate for 1/2 of lifetime benefits. Will 100% funding NOW yield the necessary returns to take care of retirees for life? I doubt it. Remember health care for life is pay as you go year after year. Also would Medicare for all as touted by some… Read more »


Mitch – Thoughts on the absurdity of projecting a 72% (not 70% or 75%) funding level 25 years out? I call this pseudo-precision: get people to believe your numbers because they are so exact. How can it be wrong?

Given their history, I’m surprised Ralph didn’t predict 71.9%. CTBA has a habit of throwing decimals and documenting billion dollar numbers down to the ones. Numbers not digestible to the masses.


Taxing retirement income over a certain level is still never mentioned. I wonder why every possible form of taxation is considered except this one. I think it’s a mentality, govt workers for their entire careers go to work each day thinking of retiring instead of needing to create value like any ther business needs to do to survive. Retirement and the daily longing for retirement to the public sector worker is a sacrament. Every day for 35 years they longed for retirement instead of enjoying their work. Retiremt taxation will never happen here.

Mitchell Serota

Taxing retirement income over a certain level is an excellent idea. I have suggested it in the past and it is certainly on my list to do so again. Of course, to be perfectly cynical, you do realize that there is likely a high correlation between the retirees with the highest retirement income to the retirees with the most political influence. But why should ERISA restrict the benefits in a qualified pension plan while the State of Illinois has not until the advent of Tier II and some token salary increase caps in the final years of employment?


Actually, taxing retirement income over a certain level is brought up a lot. I think even Martire advocates taxing retirement income above $100K. IMO, that exemption is too high. I think Social Security should be exempt, and maybe non-deductible IRAs too. I also think any exemptions, if offered, should be phased out. In other words, a millionaire retiree shouldn’t be able to deduct a flat $50,000 exemption given on retirement income. What’s funny is those govt workers are dead set against changing the rules now when they just retired (or are near retirement) but have no qualms moving to a… Read more »


We are playing right into the liberal/socialists hands when we (non liberal/socialists) also start trying to find new ways to tax, or start agreeing with their new tax ideas. Do you guys really want Madigan and Pritzker to have yet even more money?


I like the idea of linking the referenda. Our governor and legislature an deliver the constitutional amendment permitting a graduated income tax to fund the pension bailout, but they can’t make Illinoisans stay to pay those new taxes. Without some givebacks by labor, our population flight will continue.

Redfaced actuary

Great job Mitch. This proposal is preposterous. Targeting 100% of the market liability is the only correct answer. Pretending that 72% of the underpriced liability is sufficient is fraud.

Ask him if taxpayers can take the same approach with their state tax liability, and start remitting 72% of what they owe, calculated under another state’s tax law. I’d pick Florida.


“The funds will run out of money and some very innocent people will have no, or very little retirement benefits.”

“If the state employees are unwilling to bend, they may very well lose everything.”

Mitchell, I’ve always been one to believe that the Illinois Democrats will choose the “Scorched Earth Death Spiral” route. You actually think the pension plans would be allowed to go broke before dramatically raising taxes via “Scorched Earth.”

Mitchell Serota

During the last Gubernatorial election, when neither candidate would honestly discuss the pension crisis, it dawned on me that the Republican preferred to bankrupt the State while the Democrat preferred to bankrupt the taxpayers of the State. Refresh my memory–which side won?


My question is which comes first, bk pension plan assets or try to bk taxpayers?



Here’s the Link to the American Academy of Actuary’s July 2012 brief titled, “The 80% Pension Funding Standard Myth.”


Seriously, how is any pension funding level other than 100% even debatable? Personally, I do not feel bound to honor an unreasonable financial promise to Illinois pensioners by corrupt politicians and unions. As for being fair and spreading the pain, my solution was to simply avoid the pain. I left. Now I don’t care if the discount rate is 1% or 99%. It’s all good. Perhaps not here, but so many times I see commenters begin with something like, “Of course, what was promised to them (Illinois public sector pensioners) should be honored.” Commenters feel they must say this to… Read more »

Tom Paine's Ghost

“A Pension is a Promise” is the slogan that the AFSCME vermin cry but here’s my opinion: AFSCME, SEIU and CTU pensions are mostly the result of criminal bribery of Illinois politicians. These public sector unions made massive “contributions” and provide election campaign labor to mostly Democrat politicians in exchange for absurd pensions and wages. It is a quid-pro-quo bribery and a crime and it has gone on for decades. I see little reason for the public sector union members to profit from their criminal activity. While I don’t want to see these criminal co-conspirators to the politicians destitute, I… Read more »


I agree with your argument superficially at least. But, isn’t politics at the national level just as “dirty” with money influencing how congressmen vote? If you agree, then its not restricted to IL alone, nor even like-minded states alone; no, its a systemic problem. “Money talks” is an old saying that applies here and about everywhere else in life actually. I’m saddened to say that, but its a fact of life, isn’t it? Don’t have a coronary over it.