Why pensions matter even to those who aren't collecting them

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You may not be one of the thousands left to worry about whether or not your pension will be funded come retirement, but that doesn’t mean your paycheck won’t be affected. By one estimate, more than $31 billion in pension liability stands unfunded by the majority of Cook County taxing districts. And Sheila Weinberg of the Chicago-based non-partisan group, Truth in Accounting, says there is a risk that taxpayers could be the ones to shoulder that financial burden — to the tune of $15,799 per household.

We sat down with Weinberg, a certified public accountant and founder of the nonprofit, to find out how the situation turned so grim and to better understand the hidden costs of the pension crisis.


How did we get to this pension imbalance?

Sheila Weinberg: One of the problems is that governments are not required to report their pensions as a liability on their balance sheet. When corporations had to start doing that, in the 1980s, then people understood how much they cost, and then they were able to evaluate those programs. Most of them went away from the type of plans they had because they thought they were too expensive.

[In] accounting, we have an adage of, “If you don’t measure it, you can’t manage it.” So what happens is they – the governments – usually do their books on a cash basis, so it’s only your checkbook. That’s all you need to worry about. In Illinois, in the City of Chicago, they will do refinancing, or they will take out a loan, and that money goes into their checkbook so they can spend it.

If that’s the case, how can they call it a truly balanced budget?

SW: Well, it’s because they set the rules. So, in Illinois, for example, the state constitution says that you have to balance the budget, but then what it says in essence is: “Your funds available have to equal your expenditures.” So, again, any money that goes into your checking account becomes “funds available.”

Why do you have a balanced budget requirement? So you don’t spend more than you’re getting. And the major reason that this is so critical is because it takes away accountability. There’s a great quote by a guy named Frank Kavanaugh — he used to be with Treasury: “The politicians shouldn’t have the ability to spend, i.e. I’m going to get votes. Without the pain of taxing, i.e. I’m going to lose votes.” By not using truthful, accurate numbers when they calculate the budget, they (elected leaders) have been able to spend and not have to deal with the pain of taxing.

So where do pensions fall in the budget?

SW: Now with the pensions… they don’t even really include them as part of the main budget. But when you work for somebody, you work for them for a piece of compensation. So now if I write you a check – obviously that gets included in the budget. But if I want to give you more, then I have to write you a higher payroll check and then that stupid balanced budget requirement gets in the way, so I’m going to have to cut somewhere else, or I’m going to have to raise taxes. I’m really not in favor of those if I’m an elected official, so they started offering other forms of compensation. It’s still part of current compensation cost, but they don’t have to pay those checks right now. So they started offering pensions, and they started offering retiree health care benefits. I can give those to my employees, keep them satisfied, without having to raise taxes or cut services somewhere else.

Unless the city can’t make good on what they owe you?

SW: Right, but they should because they have a balanced budget requirement. So they should either have to raise taxes or cut elsewhere if they’re going to increase your compensation. But this is a way they skirted around that.

How long ago did we start getting in trouble? Was there something major that set us down this path?

SW: No. I think it was more of slow policies just deferring these costs. Also, governments used to only provide current goods and services. They did their accounting, and that’s how they set up their budgeting, where you have to balance your budget because you only provided. You might have built a building, but then you issued a bond for that, and you paid it off right away. But now, they don’t just provide current.

And so that’s the mindset. Where it was like, “Oh, we went away from just providing for current services, where we could promise people current things,” [to,] “Oh, I could promise things to them in the future.” So once the governments got into that mindset, then some of them abused it. The federal government abused it with social security and Medicare. The state government abused it and the city abused it. Some governments don’t abuse it, but most of them – it’s that political temptation of, “Oh, not in my term of office. We’ll just kick that can down the road until I’m not in office anymore.”

Like handing a 16-year-old a credit card without explaining the ramifications.

SW: Right. And previously, they didn’t know they were doing anything wrong. They’re just like, “Yeah, we’re balancing our budget.” They (legislators) didn’t quite understand this concept that, well, “We’re incurring costs right now that are going to have to be paid in the future.” They’re just like, “Well, those are pension costs that, you know, we’re going to pay those.” They didn’t understand that, no, it’s current compensation costs that need to be handled right now. And again, when their leadership told them we’re balancing their budget, they took them for their word that they were balancing their budget.

At a certain point, will the state be unable to get loans, grants, etc.?

SW: They’ve already experienced difficulty in borrowing money. In January 2013 the state pulled back a bond offering because they could not get enough buyers at a reasonable interest rate. Also, they got pressure from the lenders, and the rating agencies understood how bad they were. Remember a few years ago and even this year they (elected leaders) they did pension reform, and I believe that one of the major reasons they did that was because they were having trouble borrowing money. Especially at an interest rate that they could afford.

Jasculca Terman, an independent strategic communications firm specializing in public affairs, event management, crisis communications and digital strategies, is the sponsor of this article.

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