Expert: Illinois lacks discipline, dollars for pension plans
lllinois state government and most of its municipal governments are not up to the task of running a pension plan, a policy expert said recently.
Andrew Biggs, resident scholar at the American Enterprise Institute, a think tank, believes that ideally, governments would get out of the plan altogether.
“The reality is, you just need to have a lot of money and a lot of discipline in order to run one of these plans," Biggs told the Sangamon Sun. "Illinois has neither. I think the smarter thing for them to do is design a well-run, well-designed, 401k-type plan for employees.”
Biggs said the problem with the funding model is the type of investments.
“Pensions today, in the public sector, run on a lot of very risky assets, and what that means is the value of those assets are going to go up and down,” he said. “The contributions required for the pension are going to go up and down as well.”
That does not work well for government budget plans, Biggs argued.
“To run one of these pensions, you need to have a lot of space in your budget in the sense that if this year the pension contribution is a lot heavier than last year, you have to have enough space in your budget that you can make the contribution," he said. "If you can’t, then you’ve got problems. Neither Illinois nor most other states have that fiscal space. They just don’t have the flexibility to dig up extra money in the years in which they need it."
Biggs also said it was a matter of fiscal discipline for pension plan owners.
“If you are a private company that is running a pension plan, you are heavily regulated by the federal government in a variety of different ways,” he said. “You have almost no discretion on how you fund your pension. You are told how to do it. So in that sense you either run the pension plan or you don’t. If you are running a pension plan, you have to fund it as the federal government says."
But things change in the public sector, he said.
“In the state and local government, there are no federal regulations," Biggs said. "The states effectively regulate themselves, which means they don’t do a very good job of it. Illinois and many other states just lack that discipline.”
But he added that all is not lost -- yet.
“Illinois pension plans do still have money in their funds, even if they are not well-funded," Biggs said. "They have a little bit of time to try and figure something out, but if they just try and kick the can off into the future, their eventual choices are going to be really ugly.”