How Large Is Illinois' Pension Debt? Depends On Who You Ask

Feb 7, 2014

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The controversial new law that overhauls pensions for Illinois public workers is now facing legal challenges.

But even before it was passed, experts had been fighting over exactly how big the state’s pension crisis really is. The answer to that math problem could have a big impact on your wallet.

When pundits and politicians and reporters talk about Illinois’ monster pension problem...there’s this number that keeps coming up.

MONTAGE: The pension debt stands at 100-billion dollars...what is now a 100-billion dollar crisis statewide...the state’s 100-billion dollar pension problem.

This is what the state says is it’s unfunded pension liability - a fancy way of saying Illinois will have 100-billion dollars LESS than it needs to pay out future retirement benefits.

But there’s a school of folks who think the real amount of this pension debt - is way, way bigger than that - folks like Jeffrey Brown.

BROWN: I would say it’s on the order of a quarter of a trillion dollars, so about 250-billion.

Brown is a financial economist at the University of Illinois.

He says Illinois pension funds - and really, all American public pensions - are fudging their math to make things look better than they really are.

Now, the main reason for Illinois’ crisis is not bad investments - it’s politicians who didn’t pay enough into the pension funds.  But this academic squabble has real implications for your wallet - because the bigger Illinois’ the pension problem is - the more painful the solutions will be for Illinoisans.

Think higher taxes and deeper budget cuts.

Brown says it boils down to the assumptions pension funds make when they invest the money they get from the government, and from workers’ paychecks.

BROWN: They’re being too optimistic because they are failing to account for risk.

Okay - so I wanna slow down here a second.  Because the thing you gotta understand is that running a public pension fund is basically like being a fortune-teller - with a calculator instead of a crystal ball.

See, the pension fund people try to predict how much of today’s dollars they’ll need in order to pay retirement benefits twenty, thirty, forty years down the road.

To do that, they also try to predict how much money they’re gonna make off their investments down the road. When they assume their investments will grow - they also assume their future pension debt is gonna shrink.

Right now, Illinois’ state pension funds assume those investments will bring in 7 to 8 percent a year - and pension fund leaders proudly say, on average, they’ve hit that mark over the last three decades.

But folks like Jeffrey Brown say that assumption is too optimistic - too risky - regardless of what happened in the past.

BROWN: If I go to Las Vegas, and I bet my house, and I actually win, it doesn’t mean that it was a smart thing to go to Las Vegas and gamble my house, because I could have just as easily lost.

Brown says pension funds should assume a more conservative rate like, say, four percent a year off investments.

BRAINARD: What you’ve just described is pure finance theory. ... However, public pension plans are not operating in a world of theory.

This is Keith Brainard. He’s with the National Association of State Retirement Administrators - which represents the people who run public pensions.  And Brainard says their math is realistic.

He says their predictions aren’t only based on past investments - but also on what they think will happen in the future with interest rates, inflation and other assets.  Besides, Brainard says if pension funds really started using the more conservative math - Illinois’ pension problem would double in size, overnight - and the taxpayers who are on the hook for it might start reaching for their torches and pitchforks.

BRAINARD: It would make the cost of providing that benefit so prohibitive that state legislatures and city councils by and large would be forced to close those pension plans.

State Senator Daniel Biss - a pension expert in Springfield - says, in the real world, Illinois can’t afford to be conservative and pay more than it might need toward pensions - because that extra money would come from taxpayers.

BISS: If we had enough money as a state to - in addition to funding schools and health care and human services and infrastructure - ALSO create a Scrooge McDuck-style vault of coins for the pension systems to play in for no reason, I think that might be a cool tourist attraction.

...But not a practical one.  Still, for financial economists like Jeffrey Brown - from the U of I - this whole debate is about transparency.

BROWN: If you’re gonna have those discussions, regardless of where you come down, you need to be working with accurate numbers. And you don’t want to hide the true cost of things.

And it seems the true cost of Illinois’ pension crisis - depends on who you ask.