Courtesy of Mish.
The highly touted Illinois plan to fix its pension system is largely hot air. I was waiting for details to prove just that and they came out today. Let’s flashback to the initial claim.
A headline from six days ago reads Illinois lawmakers approve fix for $100b pension crisis
The Illinois Legislature approved a historic plan Tuesday to eliminate the state’s $100 billion pension shortfall, a vote that proponents described as critical to repairing the state’s deeply troubled finances but that faces the immediate threat of a legal challenge from labor unions.
The measure approved Tuesday emerged last week following negotiations by a bipartisan pension conference committee and then meetings of Illinois’ legislative leaders. They say it will save the state $160 billion over 30 years and fully fund the systems by 2044.
It would push back the retirement age for workers ages 45 and younger, on a sliding scale. The annual 3 percent cost-of-living increases for retirees would be replaced with a system that only provides the increases on a portion of benefits, based on how many years a beneficiary was in their job. Some workers would have the option of freezing their pension and starting a 401(k)-style defined contribution plan.
Workers will contribute 1 percent less to their own retirement under the plan. Legislative leaders say they included that provision, as well as language that says the retirement systems may sue the state if it does not make its annual payments, in hopes of boosting the measure’s odds of surviving the unions’ anticipated court challenge.
Actuarially Unsound
Unions are opposed to the plan, as always, and will file lawsuits, as always. But the plan does not even work.
Via email, Jonathan Ingram, at the Illinois Policy Institute explains…
House Speaker Mike Madigan and proponents of the temporary pension “fix” enacted last week promised taxpayers that it would immediately reduce the state’s unfunded pension liability by about $20 billion. But despite these promises, the credit rating agencies have indicated that they would be waiting for actuarial analyses before making any decisions on how the new law will affect Illinois’ worst-in-the-nation credit rating.
They’re wise to wait. It turns out that somewhere between $6 billion and $8 billion of Madigan’s promised reduction is solely the result of accounting gimmicks.
Part of the “fix” Madigan’s bill offers is to eventually move to what’s called the “Entry Age Normal” cost method for calculating how much the state should be contributing to pensions each year. That’s actually a good idea. This new accounting method helps make the pension ramp a little less steep. It’s also required by the new pension accounting rules promulgated by the Governmental Accounting Standards Board.
But here’s the problem: switching to this new accounting method actually increases the state’s unfunded liability by approximately $6 billion to $8 billion in the short term, because it attempts to spread the costs over the course of employees’ careers, rather than having them backloaded like we do now.
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