Editorial: The great Illinois pension reckoning is drawing closer

Like many individual investors, public pension funds enjoyed a stretch of good returns over the last decade. Between 2011 and 2021, these retirement plans for public sector employees generated a 7.8% annualized gain. The better-than-expected performance combined with federal pandemic relief to provide fiscal breathing room for Illinois Gov. J.B. Pritzker and other politicians who continue to preside over grossly underfunded retirement systems.

This year, however, financial markets are putting pension underfunding back at the top of the agenda, where it belongs

The median U.S. pension fund lost 9.7% in the second quarter, according to the Pensions & Investments trade book, and the first quarter was weak as well. Though markets have staged a modest summer comeback, 2022 is shaping up as a reminder of the time bomb embedded in state finances.

The bottom line: Illinois’ major pension systems have nowhere near the money needed to pay promised benefits, despite booking a decade of positive investment results.

The latest audit of the state’s five biggest pensions, conducted before this year’s market volatility, showed they have just 42.4% of the needed funds. At the same time, benefit obligations have kept accruing, and the state is doing nothing substantial to fix this miserable imbalance.

Pritzker evidently is hoping, like Democratic governors before him, to tax his way out of a mess that is, alas, far too big and fast-growing for the state to cover it with tax revenues, even if taxes were increased.

Those fantasizing about a federal bailout need to understand that Illinois has allowed its pension problem to get so much worse than most other states; a bailout would be unfair to the rest of the country. What’s left in this state are public pension systems on track to fail, and political leaders too cowardly to confront public employee unions with the truth.

Governor, where is your grand plan to fix this slow-motion disaster? As of now, nowhere.

Since the Illinois Supreme Court rejected the last big pension-reform effort in 2015, the state has seen only small-scale changes that help on the margin, but don’t come close to solving the problem. What’s needed is a deal that funds the benefits earned so far but relieves the state from piling up more obligations it can’t afford.

Billionaire Ken Griffin revealed in these pages that he pitched Pritzker with a plan to move public employees into the federal Social Security system (they currently don’t participate). That would require a change to the Illinois Constitution’s pension protections, which no union would support without assurances the promised money would be there for their members. It sure isn’t there now.

Even if the funds were available for the deal Griffin had in mind, union leaders are no less cowardly about telling their members the truth than Pritzker and his accomplices in Springfield. For evidence, look no further than the modest reform that Pritzker championed in 2019, when the General Assembly passed a bill to consolidate more than 600 police and firefighter pension funds into two statewide funds.

We welcomed the law, despite its relatively small impact, because it was obvious that consolidation would save money and increase efficiency. The vested interests behind those police and firefighter pensions treated the law as an existential threat and, predictably, challenged it by invoking the Illinois Constitution.

In late May, a Kane County judge ruled decisively in favor of the state. Finally, three years after the law was passed, some of the hometown pension funds reportedly are taking steps to turn over assets to the two state funds, which will be better positioned to professionally manage the portfolio. Even with that, appeals can continue to tie up the consolidation measure, and no doubt some fund administrators will hold on to their little fiefdoms as long as they can.

One of the most depressing aspects of this situation is how Illinois’ position keeps getting worse compared to most other states. If its pension funds were more fully funded, with more money to invest, that money would have grown: The yearslong stretch of solid investment returns would have significantly reduced the state’s mammoth unfunded liabilities.

Instead, a recent report from the Reason Foundation predicts the Illinois’ pension hole will grow from $121 billion in 2021 to $143 billion this year — and that dollar amount is less than other credible estimates of what is really owed.

“The well-funded plans were able to rebound much faster,” Reason Foundation policy analyst Ryan Frost told The Center Square, “They flattened out their funding throughout the 2010′s, whereas some of the more poor(ly) funded plans like Illinois, they never flattened out and their debt just kept rising, even during the period of the best market performance in our country’s history,”

This should be red-alert time in Springfield. Illinois’ taxpayers — and the state’s public employees — need solutions.

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