Pritzker's budget and the public pension debt.
Fred Klonsky in Retirement is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
There is no question that the state is in a better way financially than when Bruce Rauner was running things.
This is no small thing given over two years of the pandemic and the economic fallout resulting from it.
With an election coming up this year and right-wing billionaire Ken Griffin backing any Republican, yesterday’s Pritzker budget address was a preview of the campaign.
Of course, I was paying special attention to pension funding.
First, a quick review.
Teacher pension funding in Illinois stands on three legs.
Active teachers and other members of the Teacher Retirement System (TRS) pay 9% of their paycheck and we do not pay or receive anything to and from Social Security. If we did pay into Social Security it would be roughly 6%.
The state of Illinois is supposed to pay the largest share into our pension fund, but years of pension holidays and underpayment has led to a whopping $150 billion or so pension liability for the various state public pension systems.
The third leg is return on investments that TRS makes by investing through private investment firms. Here the results can vary widely. Some years the Market does well. Other years it does less well.
This past year was a good year.
The state’s contribution is based on a statutory amount. That means the legislature has picked an arbitrary amount to pay. That number has very little to do with paying off the debt. In fact, it adds to the debt.
Paying off the debt would require the legislature paying an actuarial amount. The actuarial amount is what professional experts have calculated what the full payment should be.
The state always pays less than the actuarial amount.
Underfunding our pensions has a compounding effect. More debt means we don’t have the invested dollars to earn the return in a good year. And the loss of earnings lasts for year after year.
In Governor Pritzker’s proposed budget he is asking for the statutory amount plus an additional $500 million.
My first reaction to the Governor’s proposal was to laugh.
$500 million when the debt is $150 billion?
On the other hand I figure any additional money towards our pensions is a good thing.
It is a good thing now and for the future due to double compounding interest. Less debt means compounding interest. More assets generates greater compounding return.
But it’s no permanent solution.