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Wednesday, February 15, 2006 | In San Diego, the city’s $2 billion pension deficit is a big deal. As a direct result of this deficit, recently elected Mayor Jerry Sanders demanded the letters of resignation of more than 200 city government managers and is considering dramatically outsourcing many city operations. Talk of declaring bankruptcy has leaped from occupying merely the city’s political chattering classes to dominating discussions at the city’s bars and beaches. Again, pensions-of all things-are a really big deal here.
There is, however, another way to look at this whole pension problem. Take the state of Illinois, for example.
Currently, the state that prides itself as being the “Land of Lincoln” is currently sitting on a $38.6 billion pension deficit. That’s right, Billion, as in with a “B”! The state government’s pension system is now funded at about 60 percent. The city of San Diego’s pension system, last year, was funded at about 67 percent. The general standard is to have pension systems funded at levels higher than 80 percent.
But it’s not the funding level that matters to taxpayers. It’s the stress of improving that funding level that really hurts. A retirement system can have a pathetic funding ratio, but it’s only when you try to fix it down that a government gets squeezed.
And Illinois is not trying anything of the sort.
So for now, the government operations in Illinois have not reached a standstill. The governor has not demanded resignations. The state has not decided to turn over public school management to large corporations that test their latest double-stuffed cookies on third graders to avoid paying the pension of a government-employed teacher.
No, in fact, things are pretty quiet over the whole $38.2 billion deficit in the halls of the state capitol in Springfield.
“State pensions have been underfunded here for more than 20 years. It’s been going on for years. We got up to around 70 percent funding in the late 1990s thanks to the stock market, but haven’t done well since,” says Bob Knox, the Executive Director of the State Employees Retirement System (SERS), which represents more than 100,000 current state employees and retirees.
The state government itself has a similarly blasé response to its mammoth pension deficit.
“This past fiscal year, (Governor Rod Blagojevich) and the legislature took a holiday from funding the pension system,” says Carol Knowles, the spokesperson for Illinois Comptroller Daniel W. Hynes. Knowles added that the holiday will be extended to this upcoming fiscal year as well.
In other words, the leaders of Illinois have decided to simply let their pension deficit grow. In fact, in 2003 the state took out $10 billion in bonds to pay down the pension deficit and two years later the Governor took more than $2 billion of that money out of the pension system and fed it into the state budget to pay down rising Medicare costs.
This move is acutely reminiscent of numerous actions taken by the San Diego City Council in the 1990s that lead to the city’s own pension deficit. A tried-and-true formula: Take money out of the pension system, use it to pay for today’s services and worry about tomorrow’s pension debts later.
And as we know in San Diego, times are never quite as good as they are when you get to ignore your pension deficit.
Even the people paid to care about Illinois pension shortfall aren’t so moved. How did SERS boss Bob Knox respond to the governor taking back more than $2 billion that had been originally intended to pay for the pension checks of his large membership?
“We were happy to get the additional $7.3 billion (in bonds) into the fund. It could have been worse,” Knox says, adding that his organization officially opposed the governor’s proposal to take the holidays from funding the pension system.
Knox said that he and his membership can live with the governor’s underfunding of the system so long as the state continues to operate according to a 1995 law that requires the state to operate under a 50-year funding model – or amortization schedule – which should bring the pension system up to ninety percent funding by the year 2045.
Voters in the city of San Diego last year passed a law requiring the city to never extend the deadline for paying down its pension debt by more than 15 years. The county of San Diego, another entity with a big pension debt, has a 20-year schedule and it’s getting sued by somebody who says that’s too long.
If Illinois had a 20-year timeline for paying down its pension debt, well, let’s just say they couldn’t take any more payment holidays. Gathering enough money to pay that annual pension bill would paralyze Illinois government functions.
Illinois’ pension deficit eclipses the gross domestic product of most of the globe’s nations. And it’s carrying that burden in an era when skyrocketing Medicare costs are crippling nearly every state budget in the United States. That “90 percent funding by 2045” sounds like a heck of an empty promise. Not to mention that the pension deficit is going to cost the state a tremendous amount in high interest payments stemming from lowered bond ratings.
Governor Blagojevich hasn’t exactly taken an active role in reducing the state’s pension deficit. In fact, in his January 18th State of the State Address, the governor mentioned the pension deficit exactly zero times. Not once. In the speech, the governor proposed tax credits for parents paying their children’s college tuition, decried mercury emissions and how they damage the human nervous system and lauded his proposal to build a new treatment facility for methamphetamine addicts.
A noble agenda, but not necessarily a realistic one with a $38.2 billion barrel staring your administration directly in the nose.
In San Diego, we can learn a few things from what’s going on in Illinois.
First, at least our elected leaders and, more importantly, city residents are talking about as unsexy an issue as public pensions.
And, third, at least we don’t live in Illinois.
Ramsey Green, a native San Diegan, is a graduate student at the Fels Institute of Government at the University of Pennsylvania in Philadelphia. He is working on a project to increase accountability within the Philadelphia School District. Reach him at