The powerpoint used for the DePaul Pension Case Competition winning team in 2016.

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

2. Three Step Process
•Contain
•Alleviate
•Sustainability

3. Part 1
Contain
To contain the problem, we will:
• Recognize what the problem is and where it came from
• Recommendations for change

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

5. 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.” -
Section 5. Pension and Retirement

6. Misleading accounting practices.
• Current practices are not reflective of current market conditions
• These have masked the current pension liability.
• Illinois's financial budget shows that the pension is “only” $40 billion
under funded.
• It’s actually closer to $111 billion.

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

8. How do we Contain the Problem?

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

10. Accounting Practices
Recommendation 2
• We recommend that modifying the accounting practices in accordance with
State Law and practices reflective of reality and the current economic
conditions of low interest rates.
“Be open minded but not so much that your brain falls out.”
- Richard Dawkins

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

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

13. 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

14. Much will it cost annually?
$4.36B

15. Budget Reallocation
• After evaluating the liability and recognizing the drain carrying such a
liability has on the state budget
• We propose reallocating 4.13% of the FY2015 Governors proposed
budget to the pension liability.

16. Revenue Generation Program
• The purpose of this is to generate consistent enough revenue to
offset the 4.13% budget reallocation that we recommended to pay off
the pension liability by 2045.

17. Viability
• To elaborate our plan of reallocation, we have gone through the
Governors FY2015 proposed budget to show what a 4.13% reduction
would mean.
• We acknowledge that there are certain aspects of the proposal that
may not be entirely feasible.

18. Solution to Reallocation
• We would allow departments to determine where the 4.13%
reduction of their departments budget would come from.
• Ex. If a department cannot cut travel expenses by 4.13%, they can cut
printing expenses by whatever would equal 4.13% 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.

19. 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: 96,864,880,063.90
• FY2015 Proposed: 92,864,880,063.90
• Difference: 4,000,000,000.00

20. 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.

21. 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.

22. 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.

23. Impact
• Using the projected Fiscal Year 2015 budget capital outlays, we have
restructured the budget to show what a 25% decrease in budget
allocation would due to each of the allocations.
Yearly Savings
Total Budget: $1,450,752,865.00 ($1.45B)
Reduction: 25%
Savings: $362,688,216.25 ($362M)

24. Budget Reallocation Recap
• 4.13% Reallocation: $4B per year
• Capital Outlays Reduction: $362M
• Total: $4.36B

25. Revenue Generation Program
• Goal: Generate consistent enough revenue to offset the 4% budget
reallocation that we recommended

26. Reasoning
• We recognize that the pension liability being paid will take revenues
from other government functions.
• This program will allow taxpayers to shoulder less of the burden that
the pension liability has created and will allow for an increase in the
tax revenue for the state of Illinois without an increase in individual
tax rates.
• Inducing an influx of business into the state will increase jobs and the
economic viability of the state of Illinois.

27. RGP Phase 1
• For the first phase of the revenue generation program, we propose
that the State of Illinois choose some of its public lands and natural
resources to engage in repurchase agreements that provide them
with medium term collateralized loans.

28. Reasoning
• Currently, state assets sit at $76.6 billion while state liabilities total
$213.8 billion.
• Liquidating nonessential assets with allow the state to regain
solvency.
• In order to fund the short-term gap without increasing taxes, we
propose to sell some of the public land and natural resources that the
State of Illinois owns in repurchase agreements with limitations on
how these sales can be used in the time that they are privatized.

29. Impact
Asset Market Value Sale Terms
Bohm Woods $94M Sell under conditions to
real estate developers
4 Gas Storage Wells $250M Sell to natural gas
companies in repo
agreements
Weldon Springs $100M Sell interstate in medium
term repo agreements
Gebhard Woods $100M Sell in medium term repo
agreements
Oil Wells in Illinois Basin $200M Sell to private companies
under stringent terms

30. RGP Phase 2
Federal Grant Think Tank
• We think the most effective way to improve the state and generate
revenue is to create a non-partisan, non-political think tank that
would focus solely on making Illinois eligible for more federal grants
as well as functional issues and operational inefficiencies within the
state.

31. • By functional issues, we mean a type of “customer pain” for public
goods. Ideally this think tank would find two things:
• First, they would modernize and improve Illinois systems in order to increase
the revenue generated by them for the long term, at the lowest cost per
implementation.
• Second, the functional issues that are currently holding Illinois back in
education, public welfare and systematic issues for residents would be
improved to encourage and make Illinois eligible for an increase in Federal
Grants

32. Main Purpose
• This is the main purpose of the think tank. They would focus on
examining where our budget cuts have had the most impact and
match those with available Federal grants.
• Illinois would have to make operational and strategic changes to
meet eligibility criteria for many of theses grants, which would be the
secondary purpose of this think tank.

33. Minimize Resource Drain
• Another purpose of their work would be to minimize the drain on
Illinois resources in order to offset the reallocation of the budget into
the pension system.
• The last branch of the think tank would search for operational
inefficiencies within the different state departments. This is feasible
since it would fall under the category of research and development,
which is tax deferrable.

34. Impact
Yearly Cost: $1.5M
(funded through Federal Research Grants)
Annual Benefit to IL After 2018: $3B

35. RGP Phase 3
• We propose that as part of the long term revenue generation strategy
for the State of Illinois, the state legislature change Illinois business
and tax policy to favor small and medium sized companies in order to
induce an influx of business into the state to generate increases in tax
revenue.

36. Reasoning
• By pulling business revenue into Illinois instead of simply increasing
taxes, we can come to a long-term solution for the pension liability
instead of unfairly forcing taxpayers to shoulder the burden.
• Creates jobs for residents, effectively decreasing the state responsibility for
public welfare
• Constituencies support legislators who pass a bill supporting job growth
• Long term revenue generation from an increase in tax revenue as opposed to
increase in tax rates

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

39. Problems of Defined Benefit Plan:
• Districts, Precincts, and Unions purposely raise salary for “soon-to-
be” retired employees for the eligibility of a larger pension paid for by
the State of Illinois
• Average lifespan increases to 78.96
• Retirement age is 62, 17 years of pension
• More than 30% of the retirees do not live IL
• Taxpayer contributions increases 427% over the past 25 years

40. Defined Contribution Plan: Breakdown
Teachers State University Judiciary General
Assembly
State Employee
Average
Yearly Salary
$43,591.00 $34,959.00 $117,558.00 $52,193.00 $29,063.00
5% Bi-monthly
Employee
Contribution
$90.81 $72.83 $244.91 $108.74 $60.55
12% Bi-Monthly
IL State Vest
$217.96 $174.80 $587.79 $260.97 $145.32
Total Yearly
Contribution
$7,410.47 $5,943.03 $19,984.86 $8,872.81 $4,940.71
5%
“Moderate
Investment”
$492,343.09 $394,848.06 $1,327,771.07 $589,499.27 $328,255.08

41. Defined Benefit VS. Defined Contribution
Teachers State University Judiciary General
Assembly
State Employee
17 yrs of D.B.P
of Retirement
w/COLA
$830,115.76 $665,734.14 $2,238,690.30 $993,926.09 $553,454.94
Sum of 17 yrs on
D.C.P Lump Sum
after 30 years
3% “Risk
Adverse Inv”
$813,768.10 $652,623.69 $2,194,603.26 $974,352.47 $542,555.63

42. Upsides of Defined Contribution Plan
State of Illinois
• Proper allocation of Taxpayer Dollars

43. Upsides of Defined Contribution Plan
• Employee
• Tax Deferrable
• Tax-Free Lump Sum
• Vests are more competitive than Private Sector

44. Social Risks
• Lower Quality of State Employees
• Unhappy State Employees
Short Run: Competitive vests, Salary Raise
Long Run: Less taxpayer dollars to fund the pension
More money in IL economy