The Illinois Public Pension Crisis A DePaul Student Case Competition Presenting: Jay Choi, Lauren McDermott, & Paul Kuligowski

Three Step Process Contain Alleviate Sustainability

Part 1 Contain To contain the problem, we will: Recognize what the problem is and where it came from consolidate the funds to cut inefficiency change asset allocations restructure the Illinois state budget.

Illinois stringent pension laws. Misleading accounting standards. Poor funding in the wake of financial disaster. Three Major Factors

Illinois stringent pension laws These laws create challenges far greater then any other state. Illinois has the strictest pension laws of any state. Many case studies do not apply. “Benefits may in no way be impaired or diminished.” -

Misleading Accounting standards. Current accounting practices are not reflective of current market conditions These practices have masked the current pension liability. Illinois's financial budget shows that the pension is “only” $20 billion under funded. It’s actually closer to $111 billion.

Poor funding in the wake of financial disaster. Many investments went bad. Cause the state to run a deficit.

How do we Contain the Problem?

Consolidation We recommend that the six Chicago pension funds be consolidated into one large fund. By Consolidating we would gain 2.58B in savings Recommendation 1

Actuarial Practices Recommendation 2 We recommend that modifying the actuarial practices in accordance with State Law and Actuarial Standards reflective of reality and the current economic conditions of low interest rates.

We recommend that the pension fund, once consolidated, is audited semiannually for discrepancies in reporting and proper asset allocation Auditing Practices Recommendation 3

Part 2 Alleviate To alleviate the problem: Budget Reallocation o FY2015 o Capital Outlays Revenue Generation Program

Purpose Allocating a percentage of the budget makes up for lack of State contributions Beneficiaries have restored confidence in pension security Lawmakers gain favor with public workers and unions Reduces pension related bankruptcy risk Provides the new consolidated pension fund with creditability and accountability

Much will it cost annually? $4.36B

Budget Reallocation After evaluating the liability and recognizing the drain carrying such a liability has on the state budget We propose reallocating 4% of the FY2015 Governors proposed budget to the pension liability.

Revenue Generation Program The purpose of this is to generate consistent enough revenue to offset the 4% budget reallocation that we recommended to pay off the pension liability by 2045.

Viability To elaborate our plan of reallocation, we have gone through the Governors FY2015 proposed budget to show what a 4% reduction would mean. We acknowledge that there are certain aspects of the proposal that may not be entirely feasible.

Solution to Reallocation We would allow departments to determine where the 4% reduction of their departments budget would come from. Ex. If a department cannot cut travel expenses by 4%, they can cut printing expenses by whatever would equal 4% of travel and reallocate that way. * The question of how to fund the expenses and capital outlays that are being cut are answered in our revenue generation program.

Impact Below is a report of the Illinois 2015 proposed finances and a new proposed budget showing where these reallocations will come from. Governors Proposed: 96,864,880, FY2015 Proposed: 92,990,284, Difference: 3,874,595,202.56

Reasoning Carrying a pension liability increases the state’s financial instability and harms their economic health. There are over 675,000 people receiving pensions, a significant part of consumption for the state.

Capital Outlays We recommend that 25% of the capital outlays budget is reallocated to the IL state pension fund. Difference between important infrastructure and capital projects that are able to wait until the state finances have normalized. The purpose of this is to provide economic risk capital to absorb restructuring costs.

Stipulations All capital outlays projects must be evaluated based on priority and there risk to the general public. The priority of the project and a risk assessment must be included in the request for funding. High benefit and low dollar projects are given priority. All requests for state funding must include an extensive cost benefit analysis of the project and its projected impact on the community. *We recognize that many of these infrastructure allocations are important to have a well functioning state.

Impact Using the Governors projected Fiscal Year 2015 budget, we have restructured the Fiscal Year 2015 budget to show what a 25% decrease in budget allocation would due to each of the allocations. Yearly Savings Total Budget: $1,450,752, ($1.45B) Reduction: 25% Savings: $362,688, ($362M)

Budget Reallocation Recap 4% Reallocation: $4B per year Capital Outlays Reduction: $362M Total: $4.36B

1.We propose that the budget cuts created by this plan are offset in the implementation of the revenue generation program.

Part 3 Sustainability To create sustainability of the Illinois public pension:

Who

What

When

How