A tale of two state pension crises

The national debt—$19 trillion and growing—gets most of the attention, but America’s march towards a fiscal cliff is by no means confined to Washington, D.C. Taxpayers across the country are facing state-created financial crises of their own. Our neighboring home states of Kentucky and Illinois epitomize this crisis.                                        

Our states hold the dubious honor of being the 46th and 47th least-solvent states in America, according to the Mercatus Center. There are many causes behind our fiscal crises, but some of the biggest—if not the biggest—are our broken public-sector pension systems.

{mosads}State legislators have spent the past half-century making pricey promises that we can’t possible keep to government retirees. The gap between the available funds and the promised payouts is known as an “unfunded liability,” and the sums are mind-boggling. Without reform, our pensions systems will eat up more and more of our state budgets, crowding out even the most basic functions of government.

Kentucky’s situation is increasingly desperate. We have five state-run pensions and over a dozen more managed on the local level. Most of these funds are hopelessly unprepared to pay what they owe.

For example, Kentucky’s Employees Retirement System is the most underfunded pension plan in America, with only 18 percent of nearly $10 billion in obligations covered. Altogether, our pension funds ended last fiscal year owing $36 billion that they have no means of paying back.

Even if Frankfort spent every tax dollar it took in to pay off these pensions, it still would not make a dent—the pension shortfall is 269 percent larger than all of the tax dollars Kentucky collected in 2015.

Illinois is in an even worse position. The Land of Lincoln faces $113 billion in unfunded pension liabilities. The largest of these is the teacher’s pension, which owes over $62 billion. Even former politicians get a piece of the pension pie—the state fund for retired members of the General Assembly is currently underfunded to the tune of $280 million.

These are more than just numbers on the page. They have a deeply human cost that affect all of our states’ citizens—including those who depend on their pensions.

What’s happening in Illinois is a perfect example. Pension payments are already crowding other state services. For example, pensions for Illinoisan teachers now consume almost 90 cents out of every dollar spent on education, with Chicago’s teacher pension benefits growing 6 percent per year, on average, between 1997 and 2014. And as of 2014, the number of employees receiving pensions is greater than the number actually working in the Chicago school system. Our state school system might as well be reclassified as a retirement program.

Worse yet, the sheer size of our pension liabilities makes it more expensive for government to operate. Unsustainable and growing pension liabilities understandably cause credit rating agencies to lose confidence in our states’ ability to pay their bills. A downgrade of our credit rating, which Kentucky suffered last year and Illinois just recently, means taxpayers have to pay millions more when government borrows money. That’s money that could be spent on other, more worthwhile projects—or better yet, kept in taxpayers’ wallets.

The effects will only get worse with time, too. Pension payouts grow with every passing year, and as they do, the money has to come from somewhere. The only two options are higher taxes—which harm the economy and hardworking families—or diminished funding for key state and local services, such as fire departments, police, and education.

Meanwhile, well-connected interest groups—especially public-sector unions—have a stranglehold on policy, threatening to derail any politician who tries to change the pension status quo. That’s why a bill proposed in the Kentucky Senate earlier this year, which would have required a major state pension fund to publicly report its investment strategies, was dead on arrival in the State House.  

Even those who make honest attempts to reform our underfunded pensions have more work to do. Here in Kentucky a recently-signed bill pledges $1 billion in contributions toward our pension plans—an unprecedented and long-overdue step toward addressing funding challenges. But as one Stanford economics professor noted, governments have tried spending more to pay off pension liabilities for years now. Besides devoting more money to paying off pension debts, we need to fight the underlying costs that drive them.

Unfortunately, this is something lawmakers in both of our states are less willing to tackle. The citizens of both Illinois and Kentucky are already feeling the effects of this looming catastrophe. How much do we have to suffer before our legislators recognize what needs to be done?

Julia Crigler and David From are, respectively, the Kentucky and Illinois state directors of Americans for Prosperity

The views expressed by authors are their own and not the views of The Hill.


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