March 24, 2014

Ralph Martire of Center for Tax and Budget Accountability Proposes Pension Financing Solution

Ralph Martire of the Center for Tax and Budget Accountability has proposed
a workable solution to the State’s pension financing problem.
By Neal Lorenzi

RALPH MARTIRE, Executive Director of the Center for Tax and Budget Accountability (CTBA), has proposed a multi-year solution to the State’s pension financing problem that would replace the current 30-year full-funding plan with a 44-year payment plan. Essentially, he wants to refinance the pension “mortgage” to lower the annual payment. The Center is a bipartisan fiscal policy think tank based in Chicago.

MARTIRE’S PROPOSAL would “restructure” 90 percent of the $93 billion unfunded liability, or roughly $85 billion. All but ten percent of the unfunded liability would be paid off by 2057, through equal annual contributions from State government. Martire estimates the payment would be approximately $6.9 billion every year for 44 years.

CURRENTLY, STATE law requires the State government to pay off the pension systems’ unfunded liability by 2044 in annual contributions. These contributions, however, increase in size annually between 2013 and 2044. For the Teachers’ Retirement System, for example, the annual State contribution in 2014 is scheduled to be $3.4 billion, and will increase over the next 31 years to $9.31 billion.

LEGISLATORS OF both parties say that this continually rising “ramp” payment is too expensive and will be unaffordable in the future because it will re-direct money from other State budget priorities. The pension systems are left with just 40 percent of the funding they should currently have, which is well below the 80 percent generally deemed healthy for public systems.

“SIMPLY RE-AMORTIZING $85 billion of the unfunded liability into flat, annual debt payments of around $6.9 billion each through 2057 would solve the problem,” explained Martire. “After inflation, this new, flat, annual payment structure creates a financial obligation for the State that decreases in real terms over time, in place of the dramatically increasing structure under current law. Moreover, because some principal would be front-loaded, this re-amortization would cost taxpayers $35 billion less than current law. It solves the problem by dealing with the cause.”

THE CURRENT crisis, he added, is the direct result of a 1995 law intended to bring the retirement systems to 90 percent funding by 2045. That legislation so back-loaded the payment schedule that the unfunded liability will continue to grow until FY 2030, topping out at $133.4 billion, while the required annual State contribution will continue rising to reach $17.6 billion in 2045.

THE STATE’S fiscal system has a structural imbalance and therein lays the problem, according to Martire. Even in a normal economy, the system cannot keep pace with the cost of delivering the same level of services every year, much less meet a back-loaded repayment schedule for unfunded liability in a pension system. The fiscal structures needed to fund the current plan do not exist.

“THE CURRENT repayment structure is not a creature of actuarial assumptions or actuarial requirements but is purely a legal fiction the State imposed upon itself to kick the funding can down the road,” Martire said. “So, to solve the real problem that is creating pressure on the State’s fiscal system, the State has to re-amortize the debt repayment schedule or the fiscal pressure will not be alleviated.

“WE’VE GOT to live within an existing fiscal system and find a practical approach to solving this problem,” he added. “We still have to maintain the fiscal capacity to pay for State services as well as our other debt. Also, the State has to share its income tax revenue with local government.”

THE DEMANDS being made on the State fiscal system go well beyond paying for pensions, he added. The majority of the State’s money is used to pay for education, healthcare, and public safety.

MARTIRE URGES UIC employees to prevail upon their State representatives and State senators to do the right thing, which in this case is take a realistic approach to funding the pension system.

FOR MORE information about the CTBA, see

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