By L. H. "BURNIE" HORTON, JR. President of Kankakee Community College, Kankakee, he was formerly executive director of the Illinois Community College Trustees Association. Is the state paying enough into pension systems?

The place to begin is with the systems themselves. Illinois has 455 state and local government pension systems with more than 500,000 participants. Of these systems, five are financed by state appropriations, namely, the State Universities, State Teachers, Illinois State Employees, Judges and Legislators systems. The remainder are paid for primarily through local taxes such as property taxes. One other system, the Chicago Teachers System, benefits from both local taxes and state appropriations. The people who participate in the state systems include teachers in the state's schools and universities as well as all state government employees. These employees contribute a percentage of their salaries which, together with a percentage contributed by their employer (the state), is collected into retirement funds which will provide money to these employees when they retire. At present, approximately 262,000 people are paying into the five state systems and the Chicago Teachers System. Those in the public schools and universities contribute 8 per cent of their salaries toward retirement and survivors' annuities while the state, as employer, contributes a variable and substantial per cent into the pension systems. At this time, slightly more than 64,000 individuals are drawing pensions from the five state systems and the Chicago Teachers System. Of these, 6,200 are in the university system. There are identical problems, issues and principles in varying degrees in all six systems, but this article is addressed more specifically to the funding of the university system.

Funding
Employees in the Universities Retirement System contribute 8 per cent of their gross salary to the pension system. The state's share of cost amounts to 11.38 per cent of each employee's salary. Because the state has not funded the system at this percentage in the past few years, the actuary of the State Universities Retirement System (SURS) maintains that the minimum employer contribution needed in fiscal year 1977 is 17.12 percent of payroll. This would not make up for low funding in the past but would merely stabilize the system's current deficit at $587 million. Basically, this figure represents the amount of additional funds which the government systems would need to have on hand and invested at this time to pay the pensions earned by employees for services rendered prior to 1975. This is referred to as full funding of the systems.

There are two different ways of funding pension programs. The first is accrual, usually spoken of as "full funding," and the second is payout, or "pay as you go." The accrual method would cover all liabilities by providing enough funds now to cover the present amount of retirement benefits being earned by all employees. Employees now working would know that enough funds would be available to cover all their pension credits. In contrast, the payout method provides funds for pensions actually being paid out during a given year, rather than the pension credits accumulated for future retirement. The payout method pays pension costs as they come due when the employee retires. The accrual method pays them as they are earned each year during active employment. The state of Illinois is following a payout method, but the budget cuts and political actions of recent years have led pension fund authorities to claim that the state is not even appropriating enough money to meet the state's share of payout costs of pension plans. According to Edward Gibala, executive director of the State Universities Retirement System, in a letter written November 1975 to the Illinois Community College Trustees Association ". . . the state has not only failed to appropriate any funds to meet the pension costs earned by active employees of SURS; [in 1976] it isn't even meeting its share of the present pension roll. As a result, the retirement system must dip into its meager reserves to make up the deficit."

The Illinois Pension Code (Illinois Revised Statutes, 1975, Chapter 108½, section 15-159) states that any person serving as trustee of a state retirement system "will diligently and honestly administer the affairs of this retirement system and will not knowingly violate or willfully permit to be violated any of the provisions of this Article." Because of this provision, pension fund officials maintain they must argue in favor of the state providing enough funds to fulfill section 15-155 of the code. This section states: "The contributions of employers from State appropriations for any fiscal year shall not be less than an amount

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which is required to fund fully the current service costs in accordance with actuarial reserve requirements . . . plus interest at the prescribed rate on the unfunded ace rued liabilities." These officials, therefore, maintain that the trustees were obligated to oppose former Gov. Dan Walker's position on funding of pension programs. Walker opposed increases in appropriations for the pension programs, and, in 1974, used his reduction veto to cut $187 million from pension appropriations for university personnel, Chicago teachers and downstate teachers. This decision was challenged in the Illinois Supreme Court (People ex rel. Illinois Federation of Teachers v. George W. Lindberg), and the governor's action was upheld on March 24, 1975, when the judge ruled that pension systems were not entitled by contractual right to "adequate" funding by the state. Despite the decision, Gibala maintains that the decision did not rule that the statutory financing provision " was invalid or that the payout method of financing ... is the proper method of financing." However, Ronald E. Stackler, director of the Department of Registration and Education under Walker and ex-officio trustee of SURS, stated in a letter to Gibala August 11, 1975, "The court specifically held that the 1967 amendment did not evidence legislative intent to establish a vested contractual relationship and ... no existing contractual rights could have been infringed by the governor's action."

Politics
Complicating the differences of opinion on the matter is what some officials maintain was a broken campaign promise by Walker to support full funding of state pension systems. Full funding, in this instance, means funding which would eliminate the unfunded liabilities of the pension systems. In view of the financial situation of the state and nation at large, full funding at this time is considered improbable; but the issue of what state funding should be in order to stabilize or reduce the growing deficit remains. By eliminating these deficits, the state would be switching from its current procedure of funding on a payout basis to a procedure of funding on an accrual basis. The 60,000-member Illinois Education Association gave its first gubernatorial endorsement in its 115-year history to Walker in 1972. The Illinois Federation of Teachers, AFL-CIO (1FT) also backed Walker in 1972, but gave its support to Michael J. Hewlett, Walker's Democratic primary opponent, in 1976. Walker's support of collective bargaining rights for public employees, for increased school funding and full pension funding were key factors in the 1972 endorsements. He responded to an IFT questionnaire concerning pension funding by saying, "As governor I will pledge to insure that the state meet its full obligation with regard to funding all public employees' pension systems and that the budget will reflect that obligation." During an interview with the Illinois Academe, a publication of the Illinois Conference of the American Association of University Professors, he stated: "I believe the state must provide adequate funding of all state employees' retirement systems so that its obligations can be met." But when Walker was interviewed by the Springfield State Journal-Register in September 1973 concerning a veto of increased funding for pensions, he said: "We don't have $260 million to put into the teachers' or anybody else's retirement funds. We're funding on the same basis as Federal Social Security, on a payout basis. I've never heard anybody suggest there's any danger of the Social Security system going under." Walker's statements appear to be contradictory and his faith in the Social Security system may be unfounded. Chairman Arthur Burns of the Federal Reserve Board says "a terrible day of reckoning" may be ahead unless a thorough study is made of government retirement programs, including Social Security. Some authorities have maintained that the Social Security program may soon have to be funded from the general treasury. In fact. President Jimmy Carter in early May proposed that very solution.

Concern about government pension programs is also reflected in federal pension reform legislation. U.S. Rep. John N. Erlenborn(R., Illinois) is one of the congressmen who introduced House of Representatives Bill 9155, which concerned pension reform for state and local government employees. This bill would have required public pension plans to meet the same financial requirements that govern private retirement plans. This means that Illinois would have been required to gradually eliminate the unfunded liabilities that now exist. In other words, the state would have been required to switch from the payout method to the accrual method of pension funding. However, H.R. 9155, which was introduced in 1975, was not seriously considered by Congress. A substitute bill, H.R. 13040, which was introduced in 1976, does not require that government pension plans meet specific funding requirements. However, H.R. 13040 does provide that the "pay as you go" cost method shall not be considered an acceptable actuarial cost method and authorizes the secretary of labor to issue regulations to further define acceptable actuarial cost methods. It also provides that every benefit plan shall "provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan and the requirements of this Act." If this legislation is approved by Congress, participants in Illinois pension plans may be able to challenge in the federal courts the method of financing which has been followed in the past by the state. No action was taken on H.R. 13040 in the 94th Congress. The bill must be introduced to the 95th Congress or it will be dead. Although it is questionable whether Congress could actually require states to appropriate money to meet federal financing requirements, the federal government would have authority to declare nonconforming pension plans ineligible for tax benefits now applicable. This authority would impose such severe tax penalties on the members of nonconforming plans that it would "be politically inexpedient for state and local officials to ignore the funding standards established by Congress," according to Gibala.

Deficits
For the State Universities Retirement System (SURS) the employer (state) share of the cost to cover pensions earned by active employees each year should be 11.38 per cent of total salaries. That is the full funded cost of benefits earned by active employees. In recent years the amount has been only about 5.5 to 6.5 per cent. The result has been a drop from about 51 to 45 per cent funding for future needs. Consequently, the annual appropriations required to cover the unfunded portions on the pay as you go practice are rising sharply and will continue to do so until more money

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is appropriated. The five Illinois systems were found to have funding deficits totaling about $3 billion, according to a recent report by the First National Bank of Chicago. On top of this, the state is not even providing enough money to fund current payouts. Gibala says that for fiscal year 1976 "the state's share of the estimated payout (for the SURS) was $31,069,700, but the appropriations for that year amounted to only $29,020,100," a $2 million deficit that had to be met from the pension system reserves.

In a more recent report Gibala asserts that in making its recommendations for fiscal year 1978, the Board of Higher Education initially included enough funds to meet the Illinois Pension Laws Commission's suggestion for financing pension costs — the estimated net benefit payout plus 2 per cent of the total payroll. However, the board reversed its position when Gov. James R. Thompson's fiscal 1978 budget limited the increase in appropriations for all of higher education to $50 million. The increase in the pension deficit for fiscal 1978 will be about $74 million, an amount well in excess of the total increase allowed to higher education for all of fiscal 1978 and quite an addition to the burden already placed on future taxpayers by annual pension deficits. The payout for 1975 by the state for all systems was $265 million. Projected needs for the year 2000 are $ 1,542 million. The estimated share for the annual university system payout alone will exceed $420 million by the year 2000. "If the state cannot meet a $31 million payout as the university share in 1976, how can we realistically expect it to meet a $420 million per year payout after the year 2000?" asks Gibala. If the state continues to appropriate between 5.5 and 6.5 per cent of payroll to cover pension costs under the SURS, Gibala says, "taxpayers in the year 2000 likely will be forced to pay in excess of 30 per cent of payroll to cover the pension costs."

In addition to these problems the state must also examine the effect of the pension deficit on the rating of bonds issued by the state and the resulting increase in the interest cost of such bonds. In a recent Moody, Standard and Poors Municipal Report on the State of North Carolina the pension deficit was considered in rating state and municipal obligations. Illinois presently has the highest rating (AAA) and pays a low interest cost because of its relatively low ratio of bonded debt to revenues. This rating could plummet if investment advisors add the billions of dollars in pension debt to the bonded debt rating for future state bond issues.

Solutions
What are the solutions to the problems forecast for Illinois retirement systems? The obvious answer is money, but taxpayers are bitterly aware of how much — or little — they have left after taxes. State officials in Illinois, as well as in other states, find it difficult to sympathize with the pension fund administrators who refuse to allow the pension reserve funds to be used as collateral for state financing. State officials are more aware of the short-term needs of pensioners. They don't like the accrual method which requires large appropriations for money which will then be invested by the retirement systems. Such outlays of tax money do not yield immediate, visible results, which is something politicians worry about when election time rolls around. Both the legislative and executive branches of government tend to favor the use of tax dollars to meet immediate rather than future demands. But use of state funds is seen as the only alternative by administrators of pension plans. They point out that employees contribute 8 per cent of their pay, which is high in comparison to other states' public pension systems. Rather than insisting on full funding, the Illinois Public Employee Pension Laws Commission recommends that state systems be funded at about two-thirds of full funding. The commission proposes that the state move toward this goal by a staggered step-up in appropriations which would accumulate reserves approximating a reasonable financing level without imposing unrealistic burdens on state revenues.

Part of the responsibility for improving the situation lies with the members of the system, that is, the Illinois Board of Higher Education (IBHE), Illinois Community College Board (ICCB), the governing boards of the universities and community colleges, as well as administrators and faculties. If "employer's contribution" is to increase, the above named members of the system must give higher priority to these appropriations than has been their practice and refrain from placing all responsibility or blame on the governor and the legislators, Now and in the past, the boards, administrators and even faculty members have regularly acquiesced in reductions of the pension appropriations during the closing days of the General Assembly in favor of larger operating budgets. A very necessary move to head off potential trouble — maybe even disaster — requires that the monies needed to fund the pension program be handled as a "fixed charge" and written into the budgets of each of the universities, colleges, IBHE, ICCB, and such.

Just how much the state, as employer, must legally contribute is open to debate. The court in the previously mentioned case ruled "the question of the specific fiscal appropriations necessary to meet these deficiencies is one which, at this time, should be directed to the legislature." Where the money will come from is another question. Gov. Walker maintained that "we can't spend money we don't have," yet the political consequences of an increase in state income tax are demonstrably lethal. As one alternative Gibala points out that "there is a glaring loophole in the Illinois Revenue Code which, if plugged, could eventually generate a substantial amount of additional revenue . . . ." This loophole is the total exemption from state income tax of all benefit and retirement plan monies, public and private, received by residents of Illinois regardless of amount (Public Act 77-2062). "Why should a senior citizen with a $50,000 or $100,000 annual pension escape taxation and be given a free ride while the head of a young family with income near the poverty level must bear his or her share of the burden of operating state government?" Gibala asks.

Finally, the questions to be resolved are three: (1) should pension plans be funded on a payout or an accrual basis, or a combination of the two at least for the present; (2) how much should state and local governments, as employers, be required to contribute; and (3) where will the money for these shares be found? The answers to these questions must be found or the "serious demoralizing effect," feared by Gibala and others will begin to affect employee recruitment, not to mention morale of present employees and the pocketbooks of future taxpayers. 

12 / July 1977 / Illinois Issues

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