April 8, 2012
Surprise! You owe another $54 billion
A new report forces the question:
How could Illinois pols do this to taxpayers?
—Gov. Pat Quinn, Feb. 22, 2012
“All told, state government is on pace to spend nearly $1 billion on retiree health care benefits in fiscal year 2013, more than double what it spent in 2003. Worse yet, these liabilities are growing more than twice as fast as tax revenues.”
—Illinois Policy Institute, April 9, 2012
The state of Illinois admits to $83 billion in pension underfunding, a staggering weight on today’s and tomorrow’s taxpayers. Add to that the as yet uncalculated billions in unfunded pension obligations for city, county and other local governments. During a Tribune forum Wednesday, Mayor Rahm Emanuel explained how that overhang — some estimates run far higher — deters businesses from locating in Chicago: Companies don’t want to buy shares in a phenomenal tax burden that will unfold over decades.
One nice thing about pension obligations: When you know the number of employees and their ages, the actuarial estimates start falling into place. The mystery is the investment return a pension fund will earn over time.
A second, often overlooked time bomb merrily ticking for governments nationwide is the cost of health insurance for all those retirees. That number, too, is hard to gauge, because health care costs — like future investment returns — are unknowable. Yet governments typically don’t put aside money for future health care, as they do for future pensions. The culture is to pay-as-you-go.
In Illinois, that means pay-as-you-go-even-more-broke. The Illinois Policy Institute, a right-leaning think tank, now is releasing 133 pages of frightening data — we obtained a copy Thursday — that project yet another devastating hit to taxpayers: Beyond that $83 billion in unfunded pensions, state government alone faces an unfunded liability of more than $54 billion in retiree health liabilities over the next 30 years.
Illinois lawmakers haven’t yet seen that startling number, but they do know they have to confront a retiree health debacle. Last year Illinois Senate legislation to begin addressing that debacle didn’t make it to a floor vote. Gov. Pat Quinn’s pointed words on the subject in his February budget address both encourage us and make us hope he sticks to his word that something has to happen.
Opinions differ on whether lawmakers can reduce current employees’ pension benefits going forward. (Our view is that lawmakers definitely can do that, and we hope Illinois courts agree if and when legislators pass pension reforms.) But there’s no dispute on this: While pensions have some state constitutional protection, retiree health benefits do not.
The IPI says that only 8 percent of private-sector retirees are offered health insurance benefits, and those retirees pay an average of 54 percent of the cost. Similarly requiring Illinois retirees to pay an average of 54 percent of insurance costs would save Illinois $500 million a year. Over the next 30 years, that change by itself would shrink the anticipated $54 billion shortfall by $21 billion. IPI suggests leaving benefits essentially intact for retired state and university employees with household incomes below $70,000 a year. Those with incomes between $70,000 and $200,000 a year would receive monthly subsidies of $302 and pay $369 themselves. And “retired union heads or university executives collecting pensions nearing $200,000 would be required to cover their own health insurance costs.”
That’s one option; lawmakers surely can consider others. But think of this issue as the Legislature’s test case for meaningful pension reform: If Springfield won’t ask six-figure pension beneficiaries to pick up a portion of their health premiums, what are the odds that legislators will confront their pension monster?
During the 2011 deliberations, two groups helped block retiree health reform: lawmakers of both parties who have state institutions (and thus state retirees) in their districts, and well-paid lobbyists whose prior careers in government entitle them to, yes, fat public pensions. If that happens this year, we want to read names.
We’ve noted before that many states similarly fund unaffordably generous retiree health benefits on a pay-as-you-go basis. But those states don’t rank worst in the nation in their preparedness to meet pension obligations. Nor do most of those states expect to finish this fiscal year with a budget deficit and a malingering $9 billion in unpaid bills. As a result, then, most states are better prepared to meet these retiree health costs than is the insolvent state of Illinois.
By the last of the IPI’s 133 pages, we conjured one question, then a follow-up:
How could Illinois pols do this to taxpayers?
And come November, will voters finally exact some consequences?