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Illinois’ fiscal cliff is public pensions; reform must happen

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In Washington, the talk has turned from the election to the “fiscal cliff” now facing our nation. We have our own cliff in Illinois, and as our pension debt mounts and our credit ratings plummet, we are speeding faster and faster toward the edge.

The legislative session in January will be the time to slam on the brakes.

Pension reform won’t be easy. The debate itself already has generated a great deal of anger. A recent poll by the Chicago Tribune shows that the majority of voters blame politicians, not workers, for the state’s pension fiasco. Their anger is well-placed.

According to a recent report by the Civic Committee of the Commercial Club of Chicago, inadequate state funding caused 44 percent of the growth in unfunded pension liabilities from 1996 to 2011. However, it is important to note that the other 56 percent was caused by a combination of lower-than-expected returns on pension fund investments and changes that affected actuarial assumptions, such as improvements in life expectancies and benefit enhancements.

While we can’t get back those skipped pension payments, we can and should work to address other factors within our control that affect Illinois’ $85 billion unfunded public employee pension liability. Of those, one of the most important is ensuring our state’s retirement systems project realistic rates of return on their investments.

A common misconception is that public employees shoulder the burden of funding public pension systems. In fact, investment income accounts for the majority of Illinois state retirement funding.

For instance, according to the State University Retirement System’s 2011 Annual Report, the average SURS employee who retires after 20 years will get back his “share” of his pension fund within three years of retirement. After that, he receives a combination of the state’s contributions and investment income.

So when pension fund investments do not meet expectations, we get into deep water very quickly. While the nation went through the worst recession in modern history, Illinois’ public pension funds still were projecting healthy returns with their heads firmly in the sand. Those projections continue to remain too high today.

For example, the Illinois Teachers Retirement Fund (TRS), the state’s largest public pension fund, just reported a return on investment of only 0.76 percent for this past fiscal year despite an 8.5 percent predicted rate of return. We can’t continue down that path.

While TRS recently agreed to lower its rate by 0.5 percent, it remains excessively high.

We need to look to best practices from the private sector and industry experts to gauge a realistic rate of return. The Center for Retirement Research at Boston College uses a 5 percent rate of return when evaluating assets held in pension funds. Others have suggested projecting rate of return numbers based on 15-year Treasury bonds – closer to 3 percent.

Public pension fund administrators historically have projected high rates of return from investments because the higher the promised returns, the lower the amount of taxpayer dollars required to satisfy the employer’s contribution. A more accurate picture is necessary to honestly reflect the solvency of the retirees’ benefit payments.

To achieve real reform, the General Assembly must also address the structural flaws within the pension systems. The annual cost-of-living adjustments must be reined in, future benefits adjusted and early retirement policies re-evaluated.

Life expectancies have improved. To keep the systems healthy, the retirement age and employee contributions must be increased accordingly. The fact that most public retirees recoup the sum of their pension contributions after only a few years suggest the systems are woefully out of balance.

Our legislators’ refusal to restructure and restrain these costs has saddled taxpayers with the largest debt obligation of all the states.

Illinois is on the brink of fiscal insolvency. The public employee pensions cannot be sustained and must be recalibrated for the sake of the pensioners and taxpayers.

• Doug Whitley is president and CEO of the Illinois Chamber of Commerce.

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