Earlier this week, the State Journal-Register asked the candidates contending for their respective Illinois gubernatorial party nominations a series of questions about state pension system. According to the paper, most called it their "high" or "highest" priority. If the pols want to get a better sense of what type of shape the system is in, they should flip through the report released today by the Pension Modernization Task Force, a 19-member group assembled by Gov. Quinn earlier this year.

Some members of the media have already maligned the 19-member coalition. Most notably, the Tribune called the report a "less than candid document" even before it was released. But as the debate moves forward about how to crawl out from under the staggering accumulated debt, it will be essential reading. Here's what the panel concluded:

Unfunded liability growth:

Between the FY 1996 and FY 2008, Illinois' total unfunded pension liability ballooned by $35.7 billion. The primary cause was insufficient contributions from the state, which added $18.8 billion to the shortfall.  From the paper:

The deadly combination of nearly 30 years of systematic State underfunding of its employer contributions to the pension systems, followed by the cataclysmic decline in asset values caused by the national meltdown in financial markets over the last year, combined to create an all-time high in the State's unfunded pension liability. (Page 44)

Other factors -- including "more retirements than expected, rates of mortality that did not meet actuarial projections, and terminations that did not meet actuarial projections" -- added $8.5 billion to the tally.  The size of the pension benefits played only a marginal role, according to the report. "In sum," the task force writes, "the main culprit is the State’s inability to fund its pension systems according to actuarial [sic] principals."

Benefit size:

Now to those benefit packages. On this issue, the committee first explored whether the Illinois' current level of benefits is in line with other states in the region. According to their research, total retirement costs as a percentage of payroll were higher in Indiana (12.85 percent), Iowa (14.24 percent), Kentucky (7.25 percent), Michigan (11.8 percent), Missouri (8.71 percent), and Wisconsin (10.6 percent) than here in the Land of Lincoln (6.63 percent).

The panel also compared the cost of public defined-benefit pensions (in which the pensioners is guaranteed a certain amount each year) as compared to the contributions made by private employers to private 401k retirement plans (in which the benefit level depends on the performance of the plan). When the average employer contribution to Social Security (6.2 percent) is factored in -- a cost the state does not incur for many of its employees -- the task force found that "the private sector retirement costs are more expensive."

Investment returns

An analysis by Aon Senior Vice President William B. Fornia suggested that the projection the state makes on the future investment returns of its pension funds is "not unreasonable," although lowering the assumption from 8.5 percent to 8 or 8.25 percent "might be considered more reasonable."

Reform savings

Here's the real meat of the study. The task force asked the Commission on Government Forecasting and Accountability to study the two-tiered pension proposal that Gov. Quinn announced during his FY 2010 budget address and assess how much the state could shave off our pension debt between 2010 and 2045 by implementing the proposed reforms.

Increasing the retirement age to 67 would have the greatest impact, saving $88.3 billion over this 35-year period. Next they considered capping pensionable income at $150,000, which would save $33.1 billion. As opposed to awarding an annual 3 percent cost-of-living adjustment (COLA), Illinois could save $12.3 billion if it instead pegged the COLA to 50 percent of each year's annual consumer price index (with a maximum of 3 percent).  Reducing the retirement benefit formula would only save $9.98 billion.

It should be noted that most of these savings would not be realized for another 25 or 30 years, when the first batch of new public employees retire.

Funding

As with most of the state's other fiscal problems, the task force recognized that generating new revenue is crucial to getting the pension system back on track:

Given that the State's poorly designed revenue system created the structural deficit that in turn incentivized elected officials to shortchange the State's employer contributions to its pension systems, pension funding reform is not possible without enhancing State revenue. (In theory, the State budget also could be balanced by an enormous reduction in expenditures, but there is little likelihood that the General Assembly could make such cuts without reducing social services and programs to politically unacceptable levels). If State revenue is to be enhanced, it should be done in a manner that: (i) reforms major aspects of Illinois’s flawed revenue system; and (ii) modernizes the fiscal system to both comport with the State's economy and support long-term economic growth. As a final note, the unfunded liability has grown to such a significant size that a new, rational payment schedule, one that front-loads costs, should also be considered. (Page 44)

The report also appeared to offer lukewarm support for the continued use of Pension Obligation Bonds, "but only when market conditions are favorable and only as a debt swap to refinance a portion of the existing unfunded liability."

It's worth mentioning that the report in its entirety was not approved by a majority of the members. To that end, there are lots of letters and minority reports offering counterpoints, including a long response from the Civic Committee of the Commercial Club of Chicago and its supporters.  We'll update the post with any interesting insights from those materials.

(H/T Illinois Federation of Teachers)