A “Pension Crisis” Mentality Won’t Help

A "Pension Crisis" Mentality won't Help

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A "Pension Crisis" Mentality Won't Help:

Thinking Differently About Illinois' Retirement Systems

February 19, 2019

Robert Bruno, PhD

Professor and Director Labor Education Program Project for Middle Class Renewal University of Illinois at Urbana-Champaign

Amanda Kass

Associate Director Government Finance Research Center College of Urban Planning and Public Affairs

University of Illinois at Chicago

David Merriman, PhD

Director Fiscal Futures Project, Institute of Government & Public Affairs James J. Stukel Presidential Professor

College of Urban Planning and Public Affairs University of Illinois at Chicago

PROJECT FOR MIDDLE CLASS RENEWAL

A "Pension Crisis" Mentality won't Help

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AUTHOR BIOS

Robert Bruno is the Director of the Labor Education Program which hosts the Project for Middle Class Renewal. He is also a Professor for the School of Labor and Employment Relations at the University of Illinois at Urbana-Champaign.

Amanda Kass is the Associate Director of the Government Finance Research Center in the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. As Associate Director she designs, conducts, and manages research in the GFRC's priority areas. Amanda also works with the faculty and external advisory panels to advance the GFRC's goals and disseminate its research.

David Merriman is the Stukel Presidential Professor in the Department of Public Administration, University of Illinois at Chicago and a Senior Scholar at the Institute of Government and Public Affairs, University of Illinois. He co-founded and directs the University of Illinois' Fiscal Futures Project, which monitors the fiscal condition of the State of Illinois. He has published many research articles on various aspects of state and local public finance.

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ABOUT THE PROJECT FOR MIDDLE CLASS RENEWAL

The Project for Middle Class Renewal's mission is to investigate the working conditions of workers in today's economy and elevate public discourse on issues affecting workers with research, analysis and education in order to develop and propose public policies that will reduce poverty, provide forms of representation to all workers, prevent gender, race, and LGBTQ+ discrimination, create more stable forms of employment, and promote middle-class paying jobs. Each year, the Project will be dedicated to a number of critical research studies and education forums on contemporary public policies and practices impacting labor and workplace issues. The report that follows, along with all other PMCR reports, may be found at go.illinois.edu/pmcr

ABOUT THE GOVERNMENT FINANCE RESEARCH CENTER

The purpose of the Government Finance Research Center at the University of Illinois at Chicago (UIC) College of Urban Planning and Public Affairs (CUPPA) is to shape and inform public policy and scholarly discourse on government and public finance by identifying, planning and executing research, providing periodic reports and informed analyses, and offering venues at which to convene national and local discussion on fiscal and governmental issues. More information may be found at gfrc.uic.edu

ABOUT THE INSTITUTE FOR GOVERNMENT AND PUBLIC AFFAIRS

The University of Illinois Institute of Government and Public Affairs (IGPA) has a unique and valuable role to play in Illinois' public policy discussions. The cornerstone of the IGPA Idea is that evidence-based and objective information, generated using the most advanced and appropriate social scientific techniques in disciplines including economics, sociology, psychology, and political science, should have an important place in all policy debates. More information may be found at igpa.uillinois.edu

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EXECUTIVE SUMMARY

The near ubiquitous claim that Illinois is facing a "pension crisis" has rarely been challenged. The failure to examine this customary framing of the fiscal condition of Illinois' five state pension systems limits how policymakers conceptualize their funding strategy. This white paper, jointly authored by researchers from the Project for Middle Class Renewal at the School of Labor and Employment Relations, the Government Finance Research Center and the Institute of Government and Public Affairs (all at the University of Illinois), argues that the "pension crisis" framework negatively influences discussions of policy options.

Our goal with this paper is to rethink the conversation about pensions and the state's finances in several ways. First, we argue that the funded ratio and unfunded liabilities, conventional ways of assessing a pension system's fiscal health, are inadequate metrics that reinforce short-term thinking. We argue that the focus should be on long-term trends and peer comparison. In addition, attention should be paid to identifying what the drivers are of negative trends and carefully assessing whether action is needed.

Second, we argue that a "pension crisis" is a situation in which the pension system is insolvent and unable to make benefit payments to current retirees. This is not the present scenario in Illinois. Nonetheless, we recognize that both the state and the pension systems face significant fiscal challenges. Third, rather than a singular problem, we contend that there are actually two, interrelated and in-conflict issues:

concern over the pension systems' finances, and operating budgets where expenses regularly exceed revenues.

We note that a tension exists between a desire to rapidly improve the finances of the pension systems (which would necessitate higher state contributions), and an interest in preventing pension contributions from crowding out other areas of the state budget.

Illinois lawmakers have long sought a silver bullet solution that will not increase (or even lower) the state's required contributions while simultaneously shoring up the pension systems' finances. We view such a scenario as unattainable and its pursuit as a distraction from the job of responsible policymaking. Moreover, because the two issues are interrelated, a policy designed to address one issue will necessarily worsen the other.

In this paper, we recommend abandoning the "crisis" narrative and moving away from only assessing the pension systems' finances with a single point-in-time measurement. Last, we urge lawmakers to shed the common practice of reducing the state's pension payments to balance the operating budget.

A "Pension Crisis" Mentality won't Help

TABLE OF CONTENTS Executive Summary I. Introduction II. Why is the Crisis Framework Bad? III. What are the Underlying Issues?

a. Restoring the Retirements Systems' Fiscal Health b. Pension payment in Context of the State Budget IV. The Pension "Crisis Bias" V. Conclusion Bibliography

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