The Illinois Public Pension Crisis

A DePaul Student Case Competition

Presenting: Jay Choi, Lauren McDermott, & Paul Kuligowski

Three Step Process•Contain•Alleviate•Sustainability

Part 1ContainTo contain the problem, we will: • Recognize what the problem is and where it came from• Recommendations for change

•Illinois stringent pension laws.•Misleading accounting standards.•Poor funding in the wake of financial disaster.

Three Major Factors

Illinois stringent pension laws• These laws create challenges far greater then any other state.• Illinois has the strictest pension laws of any state.• Many case studies do not apply.

“Benefits may in no way be impaired or diminished.” - Section 5. Pension and Retirement

Misleading accounting practices.• Current practices are not reflective of current market conditions• These have masked the current pension liability. • Illinois's financial budget shows that the pension is “only” $40 billion

under funded.• It’s actually closer to $111 billion.

Poor funding in the wake of financial disaster.• Many investments went bad.• Cause the state to run a deficit.

How do we Contain the Problem?

Consolidation• We recommend that the state pension funds be consolidated into one

large fund. • By Consolidating we would gain 2.58B in savings

Recommendation 1

Accounting PracticesRecommendation 2

• We recommend that modifying the accounting practices in accordance with State Law and practices reflective of reality and the current economic conditions of low interest rates.

“Be open minded but not so much that your brain falls out.”- Richard Dawkins

Auditing Practices• We recommend that the pension fund, once consolidated, is audited

semiannually for discrepancies in reporting and proper asset allocation

Recommendation 3

Part 2AlleviateTo alleviate the problem:

• Budget Reallocationo FY2015 o Capital Outlays

• Revenue Generation Program

Purpose• Allocating a percentage of the budget makes up for lack of State

contributions• Beneficiaries have restored confidence in pension security • Lawmakers gain favor with public workers and unions• Reduces pension related bankruptcy risk • Provides the new consolidated pension fund with creditability and

accountability

Much will it cost annually?

$4.36B

Budget Reallocation• After evaluating the liability and recognizing the drain carrying such a

liability has on the state budget• We propose reallocating 4.13% of the FY2015 Governors proposed

budget to the pension liability.

Revenue Generation Program• The purpose of this is to generate consistent enough revenue to offset

the 4.13% budget reallocation that we recommended to pay off the pension liability by 2045.

Viability• To elaborate our plan of reallocation, we have gone through the

Governors FY2015 proposed budget to show what a 4.13% reduction would mean. • We acknowledge that there are certain aspects of the proposal that

may not be entirely feasible.

Solution to Reallocation • We would allow departments to determine where the 4.13%

reduction of their departments budget would come from.• Ex. If a department cannot cut travel expenses by 4.13%, they can cut

printing expenses by whatever would equal 4.13% of travel and reallocate that way.

* The question of how to fund the expenses and capital outlays that are being cut are answered in our revenue generation program.

Impact• Below is a report of the Illinois 2015 proposed finances and a new

proposed budget showing where these reallocations will come from.

• Governors Proposed: 96,864,880,063.90• FY2015 Proposed: 92,864,880,063.90

• Difference: 4,000,000,000.00

Reasoning• Carrying a pension liability increases the state’s financial instability

and harms their economic health. • There are over 675,000 people receiving pensions, a significant part

of consumption for the state.

Capital Outlays• We recommend that 25% of the capital outlays budget is reallocated

to the IL state pension fund. • Difference between important infrastructure and capital projects that

are able to wait until the state finances have normalized. • The purpose of this is to provide economic risk capital to absorb

restructuring costs.

Stipulations• All capital outlays projects must be evaluated based on priority and

there risk to the general public. The priority of the project and a risk assessment must be included in the request for funding. • High benefit and low dollar projects are given priority. • All requests for state funding must include an extensive cost benefit

analysis of the project and its projected impact on the community.

*We recognize that many of these infrastructure allocations are important to have a well functioning state.

Impact• Using the projected Fiscal Year 2015 budget capital outlays, we have

restructured the budget to show what a 25% decrease in budget allocation would due to each of the allocations.

Yearly SavingsTotal Budget: $1,450,752,865.00 ($1.45B)

Reduction: 25% Savings: $362,688,216.25 ($362M)

Budget Reallocation Recap

• 4.13% Reallocation: $4B per year • Capital Outlays Reduction: $362M

• Total: $4.36B

Revenue Generation Program• Goal: Generate consistent enough revenue to offset the 4% budget

reallocation that we recommended

Reasoning• We recognize that the pension liability being paid will take revenues

from other government functions.• This program will allow taxpayers to shoulder less of the burden that

the pension liability has created and will allow for an increase in the tax revenue for the state of Illinois without an increase in individual tax rates. • Inducing an influx of business into the state will increase jobs and the

economic viability of the state of Illinois.

RGP Phase 1• For the first phase of the revenue generation program, we propose

that the State of Illinois choose some of its public lands and natural resources to engage in repurchase agreements that provide them with medium term collateralized loans.

Reasoning• Currently, state assets sit at $76.6 billion while state liabilities total

$213.8 billion.• Liquidating nonessential assets with allow the state to regain

solvency. • In order to fund the short-term gap without increasing taxes, we

propose to sell some of the public land and natural resources that the State of Illinois owns in repurchase agreements with limitations on how these sales can be used in the time that they are privatized.

ImpactAsset Market Value Sale Terms

Bohm Woods $94M Sell under conditions to real estate developers

4 Gas Storage Wells $250M Sell to natural gas companies in repo agreements

Weldon Springs $100M Sell interstate in medium term repo agreements

Gebhard Woods $100M Sell in medium term repo agreements

Oil Wells in Illinois Basin $200M Sell to private companies under stringent terms

RGP Phase 2Federal Grant Think Tank• We think the most effective way to improve the state and generate

revenue is to create a non-partisan, non-political think tank that would focus solely on making Illinois eligible for more federal grants as well as functional issues and operational inefficiencies within the state.

• By functional issues, we mean a type of “customer pain” for public goods. Ideally this think tank would find two things: • First, they would modernize and improve Illinois systems in order to increase

the revenue generated by them for the long term, at the lowest cost per implementation. • Second, the functional issues that are currently holding Illinois back in

education, public welfare and systematic issues for residents would be improved to encourage and make Illinois eligible for an increase in Federal Grants

Main Purpose• This is the main purpose of the think tank. They would focus on

examining where our budget cuts have had the most impact and match those with available Federal grants. • Illinois would have to make operational and strategic changes to

meet eligibility criteria for many of theses grants, which would be the secondary purpose of this think tank.

Minimize Resource Drain• Another purpose of their work would be to minimize the drain on

Illinois resources in order to offset the reallocation of the budget into the pension system. • The last branch of the think tank would search for operational

inefficiencies within the different state departments. This is feasible since it would fall under the category of research and development, which is tax deferrable.

ImpactYearly Cost: $1.5M

(funded through Federal Research Grants)Annual Benefit to IL After 2018: $3B

RGP Phase 3• We propose that as part of the long term revenue generation strategy

for the State of Illinois, the state legislature change Illinois business and tax policy to favor small and medium sized companies in order to induce an influx of business into the state to generate increases in tax revenue.

Reasoning• By pulling business revenue into Illinois instead of simply increasing

taxes, we can come to a long-term solution for the pension liability instead of unfairly forcing taxpayers to shoulder the burden. • Creates jobs for residents, effectively decreasing the state responsibility for

public welfare• Constituencies support legislators who pass a bill supporting job growth • Long term revenue generation from an increase in tax revenue as opposed to

increase in tax rates

Part 3SustainabilityTo create sustainability of the Illinois public pension:

Problems of Defined Benefit Plan:• Districts, Precincts, and Unions purposely raise salary for “soon-to-be”

retired employees for the eligibility of a larger pension paid for by the State of Illinois • Average lifespan increases to 78.96• Retirement age is 62, 17 years of pension

• More than 30% of the retirees do not live IL • Taxpayer contributions increases 427% over the past 25 years

Defined Contribution Plan: Breakdown

Teachers State University Judiciary General Assembly

State Employee

Average Yearly Salary

$43,591.00 $34,959.00 $117,558.00 $52,193.00 $29,063.00

5% Bi-monthly Employee Contribution

$90.81 $72.83 $244.91 $108.74 $60.55

12% Bi-Monthly IL State Vest

$217.96 $174.80 $587.79 $260.97 $145.32

Total Yearly Contribution

$7,410.47 $5,943.03 $19,984.86 $8,872.81 $4,940.71

5% “Moderate Investment”

$492,343.09 $394,848.06 $1,327,771.07 $589,499.27 $328,255.08

Defined Benefit VS. Defined Contribution

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State Employee

17 yrs of D.B.P of Retirement w/COLA

$830,115.76 $665,734.14 $2,238,690.30 $993,926.09 $553,454.94

Sum of 17 yrs on D.C.P Lump Sum after 30 years 3% “Risk Adverse Inv”

$813,768.10 $652,623.69 $2,194,603.26 $974,352.47 $542,555.63

Upsides of Defined Contribution Plan State of Illinois• Proper allocation of Taxpayer Dollars

Upsides of Defined Contribution Plan • Employee• Tax Deferrable • Tax-Free Lump Sum• Vests are more competitive than Private Sector

Social Risks• Lower Quality of State Employees• Unhappy State Employees

Short Run: Competitive vests, Salary RaiseLong Run: Less taxpayer dollars to fund the pension

More money in IL economy