Report: Political Motivation on Public Pension Boards Leads to Bad Decisions, Higher Taxes

Report: Political Motivation on Public Pension Boards Leads to Bad Decisions, Higher Taxes

ILLINOIS (IRN) — The politicians and retirees who serve on taxpayer-subsidized pension boards have made irresponsible decisions that have furthered pension woes, according to a new report.

Nationwide, public pension funds account for more than $3.7 trillion in assets. That’s the largest pool of investment money in the country. They’re often managed by boards split between appointed officials and representatives of the retirees. A new report from the nonprofit Manhattan Institute says board members have incentives to make decisions that underfund the accounts.

“On the one hand, political appointees are responsive to constituencies – such as local industry or the governor’s budget – that steer them away from acting in the interest of long-term pension fund performance,” the report said. “On the other hand, public employees and their union representatives are also tempted to trade pension savings tomorrow for higher salaries today.”

Senior fellow and report author Dan DiSalvo said political motivation to underfund pensions will persist because the more money that’s in the budget, the more room for employee raises and governmental programs, if not tax cuts.

“For Democrats, holding down pension contributions frees up money for other public programs,” the report said. “For Republicans, holding down pension contributions creates the budget space for tax cuts. Voters get more generous programs or tax reductions in the here and now, while future generations will be required to pick up the tab.”

DiSalvo said moving retirees over to a 401(k)-style retirement plans would virtually eliminate the chance for politically expedient decisions that would hurt fund health. Others warn that removing all contributors from the defined pension system would bring employee contributions to a halt and further underfund them.

Illinois has one of the worst-funded pension systems in the country. A quarter of the state’s annual budget is devoted to pension payments.

Illinois’ Teachers Retirement System manages the state’s largest pension fund, with $51.5 billion in assets. That fund is expected to pay the retirement of all vested teachers outside of Chicago. If Illinois lawmakers were to fully pay the required amount into the fund in fiscal 2019, they’d be on the hook for $7.4 billion, not the $4.47 they budgeted. TRS officials say this is the real problem.

“Over the last 80 years, a succession of laws that artificially lower the state’s annual contribution to TRS have been enacted because of political expediency in the governor’s office and the General Assembly,” TRS spokesman Dave Urbanek said. “State government always has diverted money from TRS to other spending priorities. As a result, those artificially low contributions to the System created the unfunded liability.”

TRS announced last week that it had an 8.45 percent return on investments, slightly higher than the expected rate.