An income tax hike enacted in early 2011 that will raise $6.8 billion in new revenue annually helped ease the state’s cash flow and budget woes, but its unfunded pension obligations still pose a daunting challenge to efforts to stabilize its fiscal house. The state’s funded ratios were the lowest among states last year based on fiscal 2010 results.
The latest review based on fiscal 2011 figures shows Illinois’ unfunded liabilities rose to $82.9 billion for a funded ratio of 43.4% from $75.7 billion for a funded ratio of 45.4% in fiscal 2010. The review was based on a model in which investment returns are smoothed over a five-year period. Asset growth helped stave off larger declines in the funded ratio.
The state shifted several years ago to the smoothing model. On a fair market valuation, the funded ratio actually improved. Unfunded liabilities fell in fiscal 2011 to $83.1 billion for a funded ratio of 43.3% from $85.6 billion and a funded ratio of just 38.3% in fiscal 2010.
Based on actuarial results, the funded ratios of the five systems range from a low of 21.2 % to a high of 46.5%. The funds have shifted their projected return rates on investments which impact the unfunded ratios. Recently, most funds have trimmed their annual return rates to between 7% and 7.75% from the 8% range. Charts in the offering statement show a 3% to 5% five-year average return rate and between 4.5% and 6.1% over 10 years.
Kelly Kraft, a spokeswoman for Gov. Pat Quinn, said he plans to soon convene a pension work group that will seek to “stabilize and strengthen the pension system with further reforms.” Changes passed in 2010 are expected to reduce the actuarially accrued liability by more than $200 billion by 2045.
Wells Fargo Securities senior analyst Natalie Cohen said decent returns may fend off further damage for local and state pension funds based on fiscal 2011 results, but she expects that reforms will remain on legislative agendas. “Some states and local governments are making headway with reforms and I think they will continue this year. It’s an issue that’s definitely on governments’ radar,” she said.
The state will sell the new-money bonds for capital projects on Jan. 11, according to the state’s director of capital markets John Sinsheimer. Acacia Financial Group is serving as financial advisor and Mayer Brown LLP and Pugh Jones & Johnson PC are bond counsel. The deal includes $525 million of tax-exempt bonds and $275 million of taxable bonds. They mature serially between 2013 and 2037 and may include terms. Rating agencies have not yet released updated reports. Illinois’ $31 billion of GOs are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings. The pension funds cover 750,000 active members, retirees and beneficiaries.
The state’s 30 pages of pension and other post-employment benefits disclosure note that while the method used for figuring the state’s contribution rate complies with state statutes, it does not meet guidelines established by the Government Accounting Standards Board. The contributions fall short of the actuarially required contribution, or ARC.
Illinois contributed $4.3 billion in fiscal 2011 to the funds, short of the $5.9 billion ARC payment based on GASB guidelines. The state will contribute $4.9 billion in the current fiscal year, and $5.8 billion in fiscal 2013. The state funded its 2010 and 2011 payments with borrowing, but it ended that practice this year.
The systems’ unfunded liabilities “increased between the end of fiscal year 2010 and the end of fiscal year 2011 primarily as a result of insufficient state contributions, as compared to the actuarially required contribution,” the offering statement notes. Other factors include assumption changes by some of the systems.
Under the current plan to bring systems to a 90% level by 2045, funded ratios won’t rise above 50% until 2025, and without reforms the state faces huge increases to reach the 2045 goal.
The state last year hired Chapman and Cutler LLP to help it update and significantly broaden its pension disclosure from just a few pages to more than two dozen. Mayer Brown now assists a special state disclosure committee in keeping the section up to date. The state last year disclosed statements made on the impact of previously approved pension reforms that cut benefits for new employoees were the subject of an inquiry by the Securities and Exchange Commission.
Pending pension reform legislation aimed at cutting the state’s longterm liabilities and improving the health of the pension systems is among g the major issues facing Illinois lawmakers as they return to work this month. SB 512 was headed towards approval last spring before it stalled amid union opposition. The bill would protect the accrued benefits already earned by current employees.