Ever set out to make an $80,000 investment and wind up spending $200,000 instead? Didn’t think so.
With that kind of money at stake, anyone but the Blair Hulls of the world would take a little extra time to ensure that they knew exactly what they were getting into.
Not the Illinois legislature, however.
In a boondoggle that only looks worse upon closer examination, the pension cost of 2002’s massive early-retirement program for state workers is turning out to be far, far more than advertised.
Instead of an average cost of $80,000 per employee, as originally projected, funding the pensions of the thousands who rushed for the exits will cost the state $200,000 apiece. That’s $120,000 more than the initial estimate.
This would be less terrible if Illinois could afford it. After all, by reducing its head count, the state saves on payroll costs over time. But this handout piled more obligations on top of an unmanageable burden.
Illinois has the biggest deficit of any state pension plan in the nation, and even after Gov. Rod Blagojevich’s successful effort last year to secure $10 billion in pension bonds, the shortfall is growing as the obligations increase.
At $43.1 billion, up from $34.9 billion in the previous year, the state’s overall unfunded pension obligation is running 30 percent ahead of Ohio’s, the next-worst state, according to the Wilshire Associates consultancy.
Further, Wilshire says the long-term investment return on state pension assets will be way under the 8.5 percent being assumed now. On top of that, the governor has proposed slashing the state’s scheduled contributions to the pension plans in the future.
Talk about putting the “fall” in “shortfall.”
Behind this boondoggle is the spend-now-pay-later mentality that has held sway in Springfield for more than two decades. The great pension giveaway of 2002 is but one egregious example. It came about in the waning days of Republican rule, when plenty of state employees wanted out.
Expensive technical changes
Given the state’s swollen bureaucracy, an early retirement plan made perfect sense, until legislators imposed a pair of technical but unbelievably expensive changes in the formula that determines how much each participant gets paid.
Those sweeteners turned a reasonable plan into an offer that more than 10,000 state employees couldn’t refuse.
Sweetener No. 1 boosted the amount of pension credit that certain workers were awarded for each year on the job.
Instead of accruing a benefit equal to 1.67 percent of their final paycheck for the first 10 years of service, for instance, the early retirees got credited with a 2.5 percent accrual rate. As a result, their pensions added up much faster.
That bit of honey applied only to the roughly one-quarter of state workers who held jobs deemed high-stress, such as those in corrections and public safety.
Not to worry, though. The other three-quarters of state employees got sweetener No. 2.
For them, state legislators waived a penalty that would have reduced their annual pension payments by 6 percent for each year they were less than age 60 at the time of their retirement. So a 50-year-old got a chance to grab the same benefits originally envisioned for a 60-year-old.
Those two changes alone raised the cost of pension benefits per early retiree by an average of $62,000 beyond the original $80,000 estimate, according to Michael Kivi of Gabriel, Roeder, Smith & Co., an actuary for the State Employees’ Retirement System.
Those same two changes had another costly effect as well: They encouraged younger-than-expected state employees to embrace the deal.
Many were 55 or younger
Of the 10,301 workers taking advantage of the main early-retirement plan in 2002, almost half were age 55 or younger.
Since those folks naturally have higher life expectancies, the state is obligated to pay their benefits for a longer time–a huge expense.
Less costly but still significant were provisions allowing retirees to purchase additional years of service to boost their pensions, as well as the higher-than-expected salaries of those attracted to the sweet deal.
Together, those factors added $58,000 per person to the original $80,000 estimate, Kivi said, bringing the total cost of the package per retiree to the $200,000 level.
Naturally, this turned out to be fabulous for the workers. Thousands who retired from those jobs designated high stress will get to collect a stress-free 80 percent of their final salaries for the rest of their lives.
The formula for those with lower-stress jobs is generous, too, offering up to 75 percent of the average pay earned in their last four years. In addition, anyone with 20 years of service gets health, dental and vision insurance at taxpayer expense. On top of that, the pension benefits rise 3 percent a year to keep up with the cost of living.
As pensions go, Kivi concludes, “It’s rich.”
Unfortunately, the state is looking mighty poor. Payouts from the major state-employee retirement plan are expected to rise from $640 million in 2002 to $1.06 billion next year, up more than 60 percent. That’s a lot of cash out the door.
What to do? It’s too late to take back the benefits already awarded. The Illinois Constitution forbids it, anyway.
Benefits could be trimmed for new workers, and current workers could be asked to pay more money into the funds–both politically unpopular options.
Raising taxes would be even less popular, though it’s probably inevitable. Perhaps the economy and financial markets will boom again, as they did in the late 1990s, and the state will put the windfall toward its pension obligations, as it failed to do last time around.
One temptation remains: Changing the actuarial assumptions to make the pensions appear on the surface to be better-funded.
The impulse to play hide-and-seek with the truth helps explain why Illinois taxpayers are finding out now, almost two years after the fact, just how much the early retirement plan of 2002 really cost them.
So watch out. Given the pay-later mentality in Springfield, gaming the pension system to reduce current obligations might be just the ticket–and a ticket to disaster for future generations.
